In Hume’s spirit, I will attempt to serve as an ambassador from my world of economics, and help in “finding topics of conversation fit for the entertainment of rational creatures.”
Since 1970, the Brookings Institution has been publishing the Brookings Papers on Economic Activity twice a year. The papers are invited and policy-relevant, and although they often contain a dose of statistical and theoretical analysis, some effort is made to keep the main themes readable to the patient generalist reader. It is fairly common that themes from BPEA articles become the conventional economic wisdom for a few years after publication.
\”[N]eutral real interest rates would have declined by far more than what has been observed in the industrial world and would in all likelihood be significantly negative but for offsetting fiscal policies over the last generation. Their findings support the idea that mature industrial economies are prone to secular stagnation, underscoring the urgent need for governments to find new sustainable ways of promoting investment and long-term strategies to rekindle private demand.\”
\”[N]ew research from a team of economists investigating China’s GDP accounting framework and the data the national account is built on has found that the true growth rate of Chinese GDP has been overstated by almost 2 percentage points annually from 2008 to 2016. Incentives at the local level to report growth have skewed statistics and officials at the national level have failed to rectify this over-reporting.\”
\”The ever-rising accumulation of greenhouse gases in the Earth’s atmosphere—the most prominent of which is carbon dioxide—is costing the US. The damage from a one-degree Celsius increase in temperature is estimated to equal about 1.2 percent of GDP. Gilbert Metcalf argues that a carbon tax would help reduce US emissions and offers examples from the British Columbian carbon tax to show that a well-designed carbon tax can actually boost jobs and GDP, while reducing carbon emissions.\”
\”In 1973, economist Arthur Okun asked whether a `high-pressure economy\’ could contribute to the upward mobility of U.S. workers. Over forty years later, Brookings’ Stephanie Aaronson and the Federal Reserve’s Mary Daly, William Wascher, and David Wilcox revisit his central question to ask who the U.S. economy is benefiting today. In particular, how is it benefitting less advantaged and marginalized groups, such as African-Americans, Hispanics, and women?\”
\”Based on data from 30 OECD countries since 1980, their research finds that the debt ratio does not matter simply because of its impact on current market access or because it is a proxy for market access, but also because of its impact on policymaker choices. Countries with lower debt-to-GDP ratios responded to financial distress with much more expansionary fiscal policy than countries that face a crisis with higher debt.\”
\”The unemployment rate in the United States peaked at 10% in October 2009. Since then, it has declined gradually, reaching below 4% for the first time in almost twenty years— igniting a debate about how sustainable these low levels are and how monetary policy should respond. Much of this debate centers around determining the natural rate of unemployment, u*t, or the unemployment rate at which inflation is stable. Bridging two popular measurement approaches, new research … found that the natural rate of unemployment in the United States stood at 4.1% as of the third quarter of 2018.\”
When it comes to urban mass transit, economists often find themselves arguing that, the ratio of benefits to costs in most is far better for buses than for rail-based system–unless there is a densely populated urban core where nearly-full trains can run a very frequent intervals. Matthew Turner explains why in \”Local Transportation Policy and Economic Opportunity,\” written for the Hamilton Project at the Brookings Institution (January 31, 2019).
The main theme of the paper is to think about the current status of U.S. highways, public transit buses, and urban rail cars, and offer some policy suggestions. I\’ll mention a few of those thoughts in a moment, but here\’s what Turner has to say about the opinions of economists on light rail and subways (citations omitted):
Economists have long argued against subways and light rail except as a last resort. This argument follows from the high cost of building fixed-rail urban transport. The following example will illustrate this logic. In 2015 the city of Providence, Rhode Island, considered a short, light rail line. Construction of the track and purchase of the rail cars was forecast at about $100 million in all. The system was projected to carry about 2,600 riders per day. The city intended to finance the project with bonds that would pay 3.5 percent interest.
For the sake of illustration, suppose the city only paid interest on the cost of the system, and never paid down the principal. In this case, interest on the bonds would be $3.5 million per year. Now suppose that the system achieved its projected ridership and carried 2,600 riders per day for each of the approximately 250 workdays each year. In that case the system would carry about 650,000 people per year. Dividing the annual bond payments by the number of annual riders works out to about $5.40 per rider in interest—and this is before paying to operate the train or maintain the system. If the operating and maintenance costs of this system were the same as for Rhode Island’s bus system, then those costs would be about $5 per rider. (The annual budget of Rhode Island’s bus network is about $100 million and it carries about 20 million passengers per year.) Thus, the proposed system would likely have cost about $10 per rider. With a fare of $2 or $3, most of this cost would have come out of general revenue.
These calculations make clear why economists so often argue against light rail and subway construction projects. They are so expensive that ridership can only begin to cover construction and maintenance costs if the systems operate at close to their physical capacity most of the time; that is, if there are enough riders to fill up the cars when they run on two- to three-minute headways for many hours per day. Since most proposed projects do not meet this standard, economists generally argue against them. Buses can usually move the projected numbers of riders at a fraction of the cost.
My metro area of Minneapolis/St. Paul has been slowly building some light rail lines. When I drive by them, I do a mental comparison to the costs of building dedicated lanes for buses, and shudder a bit. But as Turner points out, the general pattern of urban mass transit in recent decades has tended to be away from buses and in the direction of rail.
The number of urban buses and their average age hasn\’t changed much in the last couple of decades. But the figure on the left shows that the number of passenger trips on urban buses has been falling, and the figure on the right shows average trips per buss have been declining for the last few years and urban buses typically run at about 20% of capacity.
The story for urban rail looks different. The size of the urban rail fleet has been rising. The left-hand figure shows the rise in trips taken by passenger rail. The right-hand side shows that average trips per rail car has been rising, but also that urban rail transit on average runs at less than 20% of capacity.
There are different ways to look at these patterns. One is to just accept that urban mass transit will typically run at 20% of capacity, which means it will run at a financial loss, and provide subsidies as needed. Another approach, which works better with buses, is to review the routes every few years, and do some combination of cutting less-used routes, boosting more-used routes, and experimenting with some altered routes. Personally, I sometimes imagine an alternative future where the money that has gone into light rail systems instead went into better bus stops, including networks networks of small bus terminals where people can easily switch between buses, as well as to subsidizing more frequent bus service, but I fear that ship has sailed in many cities.
What about the urban roads? Turner focuses on US highways, not on all roads and bridges, but offers a couple of thoughts that caught my eye. One is that the quality of urban highways–basically, the number of potholes–seems to be improving over time.
The other thought is to emphasize an old lesson about urban traffic congestion, which is that most congestion is limited to specific time windows. When new road construction untangles a \”hot spot\” where intertwining lanes of traffic get tangled ever day, it can be useful in reducing congestion. But in general, building more lanes for auto traffic tends to bring more people to the highways during those time windows, with little effect on congestion. It doesn\’t pass a cost-benefit economic sense to (say) double the number of highway lanes, but then to make full use of those lanes only a few hours a day for five days out of the week. So the question becomes how to spread out the flow of traffic over more hours. Turner writes (citations omitted)::
At its maximum capacity, an interstate highway lane can carry about 2,200 vehicles per hour. Even if we restrict attention to the period from 5:00 am to midnight, this means that each interstate ighway lane can carry about 37,000 vehicles per day. By comparison, urban interstates near the end of our sample period reach AADT [average annual daily travel] levels of about 13,000. Even this high level is less than 40 percent of the daily maximum capacity of these lanes during waking hours. …
As severe as highway traffic congestion may be, it is not strictly a problem of highway capacity: Daily rates of travel are well below the physical capacity of the interstate. Highway congestion is a problem of having sufficient capacity at peak times. Nearly all interstate highways have surplus, unused capacity at off-peak hours. Obviously, capacity at midnight is not a perfect substitute for capacity at 6:00 p.m. However, capacity at 7:00 p.m. is not so different from capacity at 6:00 p.m., and capacity at 8:00 p.m. is not so different from capacity at 7:00 p.m. Together with the fact that travel speed on a congested highway is highly sensitive to the number of drivers using the road, this means that policies to spread travel out over the day, even slightly, can have large effects on congestion. Thus, policies to exploit slack, off-peak capacity deserve serious attention.
One possible answer for spreading out the traffic to off-peak times is a congestion charge (discussed here and here. for example). Another might be to encourage a number of employers to vary their regular hours, sliding them forward or back in the day. Another might be to enact rules that keep most big trucks off the urban roads during the most congested crunch time.
Nonfinancial corporate debt as a share of GDP is up. It\’s higher than it was at the three previous peaks–each of which preceded a recession. That is, this isn\’t just a matter of banks lending back and forth to each other, or to other financial institutions.
How are companies borrowing? One method is by issuing bonds. the figure shows that the total corporate bonds outstanding is way up in the last 10 years, now at about $5.7 trillion. In particular, bonds rated BBB are way up–the rating that is the lowest possible for a bond to still be treated as \”investment grade\” rather than \”high-yield.\”
Corporations are also taking out more loans. However, many of these loans are called \”leveraged loans.\” A group of banks get together and arrange a loan to a company–often a company with fairly high risks that would prefer not to issue bonds Then the banks combine these leveraged loans into a CLO, a \”collateralized loan obligation.\”
There\’s nothing new about combining a bunch of loans into a financial security, which can then be purchased by a wide variety of investors like pension funds, private equity funds, and others. The twist comes when the CLO is broken into \”tranches.\” As an example, say that a CLO is broken into 100 pieces and sold to investors. However, the deal arranged in advance is that if the pool of loans as a whole suffers losses of up to, say, 10%, all of these losses are carried one group of investors. If the losses exceed 10%, this first group of investors is wiped out, and if losses rise to 15%, then these losses are borne by a second group of investors. When this second group is wiped out, then losses from 15-20% are borne by a third group of investors, and so on. Looking at this from the top of the pyramid, there are a group of investors who will keep getting payments from the CLO as scheduled until losses of 40% or even more are experienced.
If you have invested in a CLO knowing that are on the hook for the first 10% of losses, then that is quite a risky financial security. But if you have invested in a CLO knowing that someone else will bear the first 40% of losses, then your CLO investment is actually rated AAA, based on the likelihood that your money is quite safe.
In this way, it\’s possible for financial institutions to start off with a bunch of fairly risky floating-rate loans to companies, combine them, tranche them, and end up with a situation where 60% or so of the total value of the debt is AAA-rated. This is what happened in the lead-up to the Great Recession with subprime mortgages: combine into what were called \”collateralized debt obligations,\” tranched and sold. But problems arose for the banking and financial sector when it looked as if a certain amount of lending that had been AAA-rated appeared to be running a substantial risk of default.
The other financial issue to which we all became attuned back in 2008 is \”rollover risk.\” Say that a company has borrowed money for a fairly short period, perhaps days or months, with the idea that when the debt comes due, it will just borrow more money to repay the first debt. Again, there\’s nothing fundamentally wrong with taking a strong of short-term loans, rather than one longer-term loan. But it does create rollover risk: What if when a firm go to borrow the latest round of money, its financial situation looks worse (perhaps because of some other negative economic shock), and so it becomes impossible for the firm to borrow (or perhaps to borrow only at a prohibitive interest rate). The firm then cannot repay its earlier loans, and may need to default. The collateralized loan obligations that included loans from that firm start handing out losses. The ratings for bond issued by the firm decline, and all that BBB-rated borrowing just barely into the \”investment grade\” category starts falling into the \”high-yield\” and high risk category.
Here\’s Kaplan (footnotes omitted):
Leveraged loans are loans made to highly indebted companies and are typically originated by commercial banks and then syndicated to nonbank investors, including special-purpose vehicles such as collateralized loan obligations (CLOs), private equity funds and other stand-alone entities. The size of the syndicated leveraged loan market, which is primarily made up of nonfinancial corporate borrowers, has increased from $0.6 trillion at the end of 2008 to $1.2 trillion at year-end 2018. Much of this increase has occurred to fund corporate acquisitions and private-equity-backed transactions.
In addition to the syndicated leveraged loan market, there is also a direct lending market for leveraged loans in the U.S. This market primarily involves nonbank financial firms—such as asset managers, private equity funds, business development corporations (BDCs), hedge funds, insurance companies and pension funds—lending directly to smaller, mid-market companies. While it is difficult to obtain precise information on the size of this market, Standard and Poor’s (S&P) estimates that the amount of outstanding leveraged loans in the U.S. direct lending market has grown significantly over the past several years and now likely exceeds several hundred billion dollars. …
The U.S. CLO market has grown from roughly $300 billion at the end of 2008 to $615 billion at the end of 2018. However, it is important to recognize that CLO loan-credit quality today is estimated to be somewhat weaker than 10 years ago.
S&P estimates that in 2018, CLOs and loan mutual funds purchased approximately 60 percent and 20 percent, respectively, of syndicated leveraged loan volumes. It is estimated that less than 10 percent of new issuance was purchased by banks in the U.S. The remaining volumes were purchased by insurance companies, finance companies and others. Because CLOs are today the largest buyer of these syndicated leveraged loans, disruptions to CLO creation could increase the likelihood that leveraged loans remain on bank balance sheets, which could, in turn, limit the ability of affected banks to extend credit during periods of stress.
The US corporate debt situation is by no means foreordained to turn into a disaster. But by tightening up on regulation of banks, much of the action in US corrporate borrowing has been shifting into bond markets, the leveraged loan market, and collateralized loan obligations. There are plenty of echoes here of what made a bad economic situation so much worse in 2008, and plenty of reasons for financial regulators to watch carefully as this pot boils.For some earlier comments on these themes, see:
Basically, their research strategy was to compare areas where buffalo disappeared more gradually over time with areas where the disappearance was more abrupt, and to compared Native American tribes that had greater or lesser reliance on the buffalo herds. They found data on the the height, gender, and age of over 15,000 Native Americans collected between 1889 and 1903 by a physical anthropologist named Franz Boas.
They suggest that the disappearance of the bison as a meaningful economic resource had both medium-terms and longer-term effects. The medium term effect was a reduction in height. As they write in the abstract: \”We show that the bison’s slaughter led to a reversal of fortunes for the Native Americans who relied on them. Once the tallest people in the world, the generations of bison-reliant people born after the slaughter were among the shortest.\” Changes in the height of a population are often correlated with other measures of health and well-being. (For an overview of research on using health as a measure of well-being, see \”Biological Measures of the Standard of Living.\” by Richard H. Steckel, in the Winter 2008 issue of the Journal of Economic Perspectives.)
But the near-extinction of the buffalo also meant that a well-developed body of human capital became worthless. The authors write (citations omitted):
For many tribes, the bison was used in almost every facet of life, not only as a source of food, but also skin for clothing, lodging, and blankets, and bones for tools. This array of uses for the bison was facilitated by generations of specialized human capital, which was accumulated partly in response to the plentiful and reliable nature of the animal. Historical and anthropometric evidence suggests that these bison-reliant societies were once the richest in North America, with living standards comparable to or better than their average European contemporaries. When the bison were eliminated, the resource that underpinned these societies vanished in an historical blink of the eye. … Arguably, the decline of the bison was one of the largest devaluations of human capital in North American history …
The effects of this shift appear to be long-run. The authors point out: \”Today, formerly bison-reliant societies have between 20-40% less income per capita than the average Native American nation.\” What are some possible reasons that events from the late 19th century could still have such powerful effects more than a century later? The authors suggest three hypotheses. 1) Native Americans were often limited in their ability to move to new areas that would have allowed greater economic opportunity; 2) Some bison-reliant communities has also engaged in agriculture and built up human capital in that area, which made a shift to other production easier, but some did not; and 3) Some historical traumas seem to echo through generations, and the author show that modern suicide rates continue to be \”higher among previously bison-reliant nations, and particularly so for those who were affected by the rapid slaughter.\”
As as society ages, it needs to redraw the common expectations of when work will end and retirement will begin. Of course, from an individual perspective, retirement age isn\’t a one-size-fits-all choice. But from an overall social perspective, Robert L. Clark and John B. Shoven write:
The retirement crisis is in no small measure caused by trying to do the impossible. What we mean by this is that it is nearly impossible to finance 30-year retirements with 40-year careers. Yet with today’s average retirement ages (62 for women and 64 for men), we are trying to do just that. If a 64-/62-year-old couple retired today, the survivor of the couple would have about a 40 percent chance of living an additional 30 years. This division of adult life between work and retirement is at the heart of the financial problems of Social Security and state and local pension plans, and it threatens the adequacy of retirement resources for millions of Americans.
Some of the adjustment in which longer life expectancies are accompanied by rising labor force participation is already underway. For example, the graph shows the share of those 55 and older who remain in the workforce. Back in the 1950s, about 42-43% of over-55s were in the labor force. By the early 1990s, the proportion had dipped below 30%. It then started rising again–although the upward momentum stalled, at least for now, around the Great Recession.
From the Baily and Harris paper, here\’s a figure showing labor force participation for older age groups: 55-59, 60-64, 65-69, 70-74, and 75+. Overall labor force participation is rising for each of these groups.
Indeed, many people continue to work after starting to claim Social Security. Here\’s a figure from the Baily-Harris paper:
Again, a later retirement age isn\’t for everyone, of course. But it\’s worth reconsidering the economic incentives that affect people\’s decision to keep working, and whether a few more years of accumulating assets and postponing Social Security payments, might be a good choice. After all, as Baily and Harris note: \”In July 2018, the Social Security Administration reported that the average monthly benefit paid to retired workers was $1,415 per recipient, a rate of $16,980 a year. This is often insufficient to allow a worker to maintain in retirement the same standard of standard of living enjoyed during their working years. Even if there are two people in a household collecting benefits at this rate, $2,830 a month amounts to a still-modest $33,960 a year. Payments for Medicare coverage and out-of-pocket health costs must be paid for out of this total.\”
The three papers between them have several suggestions that would tend to have the effect of encouraging those who are on the margin to push back retirement a little, while still leaving open the option of earlier retirement.
1) Reframe the message from Social Security. Baily and Harris suggest that one basic step might be just to reframe the message that people receive from Social Security. They write:
When a worker first signs on at the Social Security Administration and discusses their choices for collecting benefits, the framing they are given is about their “full retirement” age. This is 66, rising to 67. Many people take away from this conversation the fact that they should start collecting benefits at the full retirement age, even though they may be much better off to wait until age 70. Waiting increases the level of benefits by about 8 percent for each year until age 70. The message given to older people should be that their maximum benefit comes at age 70 and, though they can collect earlier, this comes at a price in lower benefits for life, and perhaps lower benefits for their spouse.
Munnell and Walters push this theme a little harder by arguing that from a practical and historical perspective: \”A strong case can be made that age 70 is the nation’s real retirement age.18 It is the age that maintains the same ratio of retirement to working years as in 1940, the age at which Social Security provides solid replacement rates, and the age at which most people are assured of retirement security …\”
Consider their table below. Start back in 1940, when the retirement age was 65. Think about the average years remaining of life expectancy at that time. Because of expanding life expectancies, by the year 2000 a retirement age of 70 years would imply the same expected number of retirement years; by 2020 it would be a retirement age of 71 years, and rising. Thus, a retirement age of 70 now actually means slightly more years of expected retirement than a retirement age of 65 did back in 1940. Similarly, if one looks at the ratio of years of expected retirement to working years, that ratio will also rise over time with life expectancy. The second column shows that if one retires at 69 in 2020, the ratio of retirement years to working years is the same as for a person retiring at age 65 back in 1940.
Notice that this particular proposal is all about making public announcements and managing expectations. It\’s just letting people know, in a clear way, that the current retirement system is set up for them to retire at 70, and that retiring earlier comes with costs in terms of Social Security benefits and long-term financial security.
2) Restructure Social Security and Medicare to reduce work disincentives. The current structure of Social Security and Medicare has some features that look like disincentives to work. The overall idea is that when you hit a certain age like 65 or 70, but you decide to keep working, you should be be able to stop paying into Social Security and Medicare. At that point, you can be considered \”paid-up.\” In addition, you should be able to enroll in Medicare even if you are still working, so your employer don\’t have to buy health insurance for older individuals. And if you start getting Social Security payments, those payments should not be scaled back or penalized in any way if you continue working. Clark and Shoven offer a set of three policies along those lines:
With this in mind, we advocate three policies that could be adopted to make working longer more financially attractive. They are (1) eliminating the Social Security earnings test, (2) establishing a paid-up category for the Social Security payroll tax, and (3) also establishing a paid-up category for the Medicare payroll tax and simultaneously switching Medicare from secondary to primary payer status. We think the most obvious of our policy proposals is eliminating the earnings test. It is widely misunderstood and produces no long-run revenue for Social Security. It discourages work, not because of what it actually is but because it appears to be a major tax on work for those between the ERA [Early Retirement Age] and the FRA [Full Retirement Age]. Both the paid-up idea and the MPP [Medicare as a primary payer] idea have major appeal.
We estimate if both our second and third proposals were adopted, the net wage would go up by about 40 percent for workers over age 65. This is exactly the age group that is most responsive to wages. In fact, with the higher wages and the resulting additional labor supply, IRS revenues would increase to substantially offset the cost of these programs to Social Security and Medicare. We think the reasonable range for the IRS offset is between 44 and 116 percent of the cost of these new policies. This means, at a minimum, that the offset is significant. With two reasonable assumptions—a labor supply elasticity of 3.0, and a tax rate of 22 percent—the IRS would collect more than enough revenue to completely offset the cost of the initiatives to Social Security and Medicare. Some of these policies, such as the earnings test, were initially implemented during the Great Depression with the explicit goal of encouraging people to retire. We think it is time to turn this thinking on its head and come up with policies to encourage people to work longer.
3) Training older workers to update their digital skills. The symposium authors disagree on whether this kind training is likely to pay off. Baily and Harris describe the mildly optimistic view for at least trying some pilot programs in this way:
Munnell and Walters are skeptical of the potential value of training for older workers, and they are not alone in their skepticism. They point out that the United States spends almost nothing on worker training and that evaluations of worker training programs are often negative. In what may be a triumph of hope over experience, we respectfully disagree, and we think it is worth trying to provide greater training opportunities for older workers using new teaching technologies. One of the reasons companies give for choosing younger workers is that older workers lack proficiency with digital technologies. This is an area where online instruction can make a difference. With guidance from instructors, older workers can improve their capabilities with the programs necessary for both white- and blue-collar jobs. Given what is at stake, it would be worthwhile to establish pilot programs to test whether older workers are willing to take courses and to see whether their employment outcomes are improved as a result.
4) Re-create a Mandatory Retirement Age at 70. The argument against a mandatory retirement age is that it is a form of age discrimination, and was outlawed (although with a number of exceptions) by amendments passed in 1986 to the Age Discrimination in Employment Act of 1967. But there are also arguments for a mandatory retirement age at age 70: mainly, if employers thinking about hiring someone who is 60 or 65 need to worry that it will be very hard to fire this person without a lawsuite, and in addition that they may be responsible for high health care costs, employers will lean against hiring such workers. Munnell and Walters write:
One tool could be the restoration of some form of mandatory retirement at age 70 (which is substantially higher than mandatory retirement ages in the past), indexed to the age at which Social Security provides the maximum benefit. While employers can dismiss older workers who can no longer do their job, the process is unpleasant and employers worry about age discrimination lawsuits. But employers cannot legally dismiss older workers whose health insurance premiums have risen too high or who have come down with very expensive medical problems. Mandatory retirement would limit the employer’s exposure to the problem of compensation outpacing productivity that typically emerges as workers age. This limit could be key as, given the decline in career employment, hiring decisions have become more important. Putting a lid on tenure could make hiring workers in their 50s and early 60s more attractive, especially for low- and averagewage workers with employers that offer health insurance. …
A default retirement age would have benefits for both retirement planning and workforce management. On the employee side, it would provide a more formal process to enable workers to plan to work longer, begin partial retirement, or enter into full retirement at age 70. On the employer side, a default retirement age would give employers a way to separate from an employee whose compensation outpaces his or her productivity, increasing the attractiveness of hiring older workers.
5) Provide information to employers and the public about the benefits of older workers. Munnell and Walters write:
Older workers today are healthier, better educated, and more computer savvy than in the past and, in terms of these basic characteristics, look very much like younger workers. In addition, they bring more to the job in terms of skills, experience, and professional contacts. Finally, they are more likely to remain with their employer longer, and longer tenure enhances productivity and increases profitability for the employer. All of these benefits more than offset any remaining cost differentials between older and younger workers.
They offer a number of interesting details and figures along these lines. This figure offers some comparisons between those in the 30-35 and 55-60 age group. If you are an employer hoping to hire someone who will contribute immediately and reliably, and then stay with your company for the long run, the differences between these groups in health, college degree, and use of a computer at home are not large. Of course, job experience is likely to be much greater for the older group.
As another example, here\’s a study of the number of severe errors (measured by the cost) made on a Mercedes-Benz assembly line. At least in this study, older workers were much less likely to have severe screw-ups.
Some economic choices can be made frequently, for small stakes, like where to order a pizza. There are plenty of chances for consumers to learn from experience and for producers to have incentives for for efficiency and experimentation. But other economic choices get made only once in a lifetime. The chance to learn from personal experience is close-to-nonexistent. The transition from work to retirement is that kind of choice. It will be heavily shaped by the design of retirement programs, as well as by the norms and common beliefs of employers and workers. But in a time period when life expectancies are rising, then the design of those retirement programs, as well as the common beliefs of employers and the public about retirement, can become out of synch with reality. Time to consider how some adjustments might happen.
Oregon has just become the first to enact a statewide rent control law. Governor Kate Brown said: \”This legislation will provide some immediate relief to Oregonians struggling to keep up with rising rents and a tight rental market.\” That statement is of course literally incorrect, because the Oregonians struggling with rising rents are in exactly the same position now as they were before the passage of the law. The new bill limits future increases in rents for existing renters to 7%, plus inflation, so it is clearly not a rigid limit. It will be interesting to see of that limit on future increases gets ratcheted back in the future.
The city grants landlords and tenants some freedom to negotiate a starting rent, and then caps subsequent rent increases according to agency decree or prescribed formula. This process, called vacancy decontrol, ranges from restrained in New York City and Washington, D.C., to completely unrestricted in California.
There is automatic lease renewal for existing tenants, and landlords usually require “just cause” to evict a tenant. In practice, this means that landlords must prove to a rent board or court that tenants are being evicted for one of a predetermined list of reasons. This prevents landlords from turning over tenants at will and locking in new base rents in response to market shifts.
New buildings are exempt from rent control unless the landlord opts in. Policymakers fear discouraging new supply, so the rules control only existing buildings and commit to not extending controls further.
There are a series of landlord hardship provisions, where landlords may petition to pass certain operating expenses on to tenants in order to cover costs with reasonable profit.
Here\’s a table from Asquith showing how cities compare on these dimensions. As far as I can tell on first acquaintance, Oregon\’s new rent control plan fits right into this general model:
The effects of this kind of moderately flexible rent control are surely less disruptive to housing markets than it would be to have a pure cap on existing rents, the government setting rents for new tenants and new construction, and so on. But supporters of rent control often seem to imply that the such programs are nothing but a way of stopping landlords from exploiting renters. It\’s of course more complex.
The bottom lines from such research are what you might expect. Those who have rent-controlled apartments are more likely to remain there, even when they get jobs that require a longer commute. Landlords try to evade rent control rules, which some success, through methods like converting rental properties to condo ownership and being aggressive about evictions wherever possible. When rent control is in place, both the quantity and quality of rental housing tends to be lower than it would otherwise be. Current renters pay less out of pocket, but future renters have a harder time finding a place and neighborhoods with a higher proportion of renters tend to become run-down. As Asquith writes:
\”These measures were largely intended to be temporary, but like many so-called temporary regimes, rent control is the answer to an emergency situation that never seems to end. One reason for rent control’s persistence is that it redistributes benefits from future tenants to present ones. … rent control is here to stay. The current beneficiaries are well-organized, numerous, and know what they stand to lose from its repeal. The return of rent control to the scholarly agenda is thus propitiously timed to caution policymakers and a frustrated public that while soaring rent burdens are indeed approaching crisis levels in some places, rent control is a policy that has yet to deliver on its promise: affordable rents for all, not just for the few lucky enough to score a controlled apartment.\”
Overdose deaths have increased by more than 1,000 percent since 1980, with each of the past 28 years surpassing the last. With over 70,000 fatal overdoses in 2017 alone — an average of 192 deaths per day — drugs now kill more people than HIV/AIDS at the height of the epidemic in 1995.
When the AIDS epidemic peaked in 1995, it was (appropriately) a major center of public focus and discussion. For example, the best-selling book by Randy Shilts, And the Band Played On: Politics, People, and the AIDS Epidemic, had been published in 1987. Kushner\’s Angels in America had premiered on Broadway four years earlier in 1991, winning a Pulitzer and a Tony. While I\’ve read some insightful writing on America\’s opioid crisis, it does not seem to have led to the same intensity of discussion.
Schnell illustrates some key patterns with this figure. The blue bars show the pattern of opioid prescriptions since 2000. Notice that the sharp rise in prescriptions is also tracked by the red line showing a rise in overdose deaths from commonly prescribed opioids. Then when the level of prescribed opoids levels out around 2010, overdose deaths from heroin start rising quickly, then followed by deaths from synthetic opioids like fentanyl a few years later.
Of course, this rise in deaths is an understatement of the costs of the opioid crisis. Addition has lots of costs other than early death.
As I\’ve argued in the past, the opioid crisis is a problem that was created by the US health care industry. There isn\’t any particular reason in terms of underlying health why opioid prescriptions roughly quadrupled from 2000-2010, and since then have dropped by a quarter. But it seemed like a good idea at the time, and now tens of thousands of people are dying every year.
The rise in overdose deaths from heroin and fentanyl shouldn\’t obscure that deaths from prescription opioids–over overprescribed by the health care industry and then passed along or re-sold–remain part of the problem. Schnell writes:
Non-medical use of prescription opioids remains the second most common type of federally illicit drug use, second only to marijuana, and is over 12 times more common than heroin use (SAMHSA, 2018). And while overdose deaths involving prescription opioids leveled off in 2016, they remain at four-and-a-half times their level from 2000 and account for at least 40 percent of all opioid-related mortality.
Some steps seem to have moderate but real effects. For example, when an average doctor is told that a patient overdosed from their prescription, that doctor cuts back on prescribing opioids by about 10%. Some states have mandatory \”prescription drug monitoring programs.\” which make it harder for someone to take one prescription for an opioid and have it filled at several different pharmacies.
Schnell writes: \”Any single policy in unlikely to be sufficient to address the current crisis. Policies aimed at reducing prescriptions should be paired with broad access to treatment for those with problematic opioid use. And policies must be designed so as to not prevent providers from using opioids as a tool to help manage their patients’ pain.\” All fair enough, btut the rising body count calls for dramatically more, and it\’s not clear what would work.The health care industry dramatically raised its opioid prescriptions, and in doing do has opened Pandora\’s box.
A dynamic and healthy economy will always be undergoing a process of churn: new companies and new jobs starting, but also existing companies and jobs ending. Thus, it\’s been troubling to see articles about \”The Decline in US Entrepreneurship\” (August 4, 2014), a lower rate of business startups, and a decline in how much new firms are offering in terms of job gains.
The Kauffman Foundation does regular surveys of US entrepreneurship. Robert Fairlie, Sameeksha Desai, and A.J. Herrmann wrote up the 2017 National Report on Early Stage Entrepreneuship (February 2019). The report offers some reasons for modest encouragement, but in the end seems overly optimistic to me.
On the positive side, the survey uses data from the nationally representative Current Population Survey conducted by the Census Bureau to calculate the \”rate of new entrepreneurs.\” Specifically: \”The rate of new entrepreneurs captures the percentage of the adult, non-business owner population that starts a business each month. This indicator captures all new business owners, including those who own incorporated or unincorporated businesses, and those who are employers or non-employers.\”
As the report notes: \”The rate of new entrepreneurs in 2017 was 0.33 percent, which reflects that 330 out of every 100,000 adults became new entrepreneurs in an average month.\”
The Census data also lets the authors break down this data in various ways: for example, the rate of new entrepreneurs is about twice as high for immigrants:
Overall, the Kauffman report is optimistic about early-stage entrepreneurship in 2017. But some of the results of the survey, as well as data from the Business Dynamics Statistics produced by the Census Bureau offer some reason for concern.
For example, when one breaks down the rate of new entrepreneurs in more detail, it turns out that those with less than a high school education have a rising rate of starting firms–unlike any other educational group.
In addition: \”Older adults also represent a growing segment of the entrepreneurial population: adults between the ages of 55 and 64 made up 26 percent of new entrepreneurs in 2017, a significant increase over the 19.1 percent they represented in 2007.\” Conversely, these figures suggest that a smaller share of new companies are being started by highly educated workers in their peak earning years.
At least to me, this pattern suggests the possibility that a larger share of new companies are aimed at providing income and independence for their owners, but may be less likely to grow and generate substantial numbers of jobs. Indeed, the Kauffman report also includes this figure, showing that the jobs per 1,000 people from early startups has been declining over time.
The Business Dynamics Statistics is constructed from what is called the Longitudinal Business Database. In turn, this data uses Census data and links the records on individual companies over time. To keep the records of individual companies confidential, the data can only be accessed by qualified researchers through a network of Census Bureau Research Data Centers. However, the website does have a nice data tool for making quick-and-easy graphs of some overall patterns in this data, as well as sector-level and state-level patterns.
Here\’s an example of a figure showing \”Establishment birth rates\” (black line) and \”Establishment exit rate\” (blue line). For example, back in the 1980s it was fairly common for the number of new establishments to be about 15 percent of the total number of firms; now, it\’s about 10%. Both rates of entry and exit have been declining over time, suggesting that new firms are having a harder time getting started and established firms are having an easier time staying in place.
As another example, here a figure for the economy as a whole from the BDS database on the \”job creation rate\” (black line), \”job destruction rate\” (blue line), and \”job creation rate from establishment births\” (orange line). The gap between the job creation rate and the job destruction rate is the overall level of net new jobs for the economy in a year. Fortunately, job creation is above job destruction in most years, except in recessions. But even in years when the US economy is going well, its churning, changing, evolving job market is commonly in a situation where the 13-15% of existing jobs are destroyed, and a slightly higher share of new jobs are being created.
In thinking about US entrepreneurship, the standard concern is that the churning of job market seems to be declining over time. The orange line shows that job creation by new establishments has been declining, too, similar to the finding from the Kauffman data.
A dynamic churning economy is a mixture of benefits for firms and their workers on the rise and costs for firms and their workers who are on the downside. But from an overall perspective, it also represents a shift in resources away from firms producing goods and services that not enough people want to buy, or goods and service that aren\’t being produced at a competitive levels of price and quality. Instead, those resources of workers and capital investment are moving to firms producing the goods and services with the desired mix of price and quality that people do want to purchase. I have argued from time to time that the government could play a larger role in facilitating, or at least not blocking, this process of dynamic movement–especially by assisting workers in transition. But overall, this dynamic process of economic reallocation has been one of the strengths of the US economy, and it is troublesome to see signs that it may be diminishing.
It seems as if there\’s always a majority against the way things are. In a world full of problems and issues, how could it be otherwise? It\’s why politicians are always calling for \”change,\” which strikes me as a slogan that is appealing and concealing in equal measure. Because the real-world problem that arises is when those who are united in their opposition to the way things, and united in favor of \”change,\” need to offer an actual alternative of their own.
When advocating for change, problems and policies are the target. But if you advocate an actual policy, with inevitable costs and tradeoffs, then you become the target.
Consider the mess that has resulted from Brexit — that is, the June 2016 vote in the United Kingdom to leave the European Union. There was (at least at the time) a majority in the UK in favor of leaving the EU. However, there is also apparently a majority against the \”hard exit\” option of crashing out of the EU without a replacement trade agreement in place. And there is a strong majority against Prime Minister Theresa May\’s actual concrete plan for a substitute trade agreement. Sure, there are a variety of other proposals for substitute trade agreement bubbling around. But the EU must also sign on to any substitute agreement. and the EU has an incentive to make it hard and disruptive for any of its members to exit, So it seems plausible to me that there would be a majority against any plausible substitute for May\’s proposal, too.
Easy to be opposed. Easy to advocate \”change.\” But what should the UK do when there is a majority against any achievable policy?
When Democrats controlled the Presidency and Congress in 2010, they managed to wedge through the Patient Protection and Affordable Care Act of 2010. Of course, this new reality immediately became the new target. When Republicans controlled the Presidency and Congress in 2017 and 2018 were unified in expressing their opposition to the 2010 law, but unable to cobble together a bare majority that would wedge through an alternative plan. Meanwhile, most prominent Democrats seem to believe that the flaws of the 2010 legislation are quite sweeping, and thus require enacting a new and substantial set of changes. But when it comes to like whether private health insurance should be shut down in favor of a single-payer government plan like \”Medicare for All,\” my guess is that the Democratic coalition in favor of \”change\” would splinter, too.
Many of the arguments about \”socialism\” have a similar dynamic: it\’s easy to be opposed to the present, but harder to defend concrete alternatives. The political columnist George Will wrote about this dynamic a few weeks back in the Washington Post (available here without a paywall). Will writes:
\”Time was, socialism meant thorough collectivism: state ownership of the means of production (including arable land), distribution, and exchange. When this did not go swimmingly where it was first tried, Lenin said (in 1922) that socialism meant government ownership of the economy’s “commanding heights” — big entities. After many subsequent dilutions, today’s watery conceptions of socialism amount to this: Almost everyone will be nice to almost everyone, using money taken from a few. This means having government distribute, according to its conception of equity, the wealth produced by capitalism. This conception is shaped by muscular factions: the elderly, government employees unions, the steel industry, the sugar growers, and so on and on and on. Some wealth is distributed to the poor; most goes to the “neglected” middle class. Some neglect: The political class talks of little else.\”
The modern attraction of \”socialism\” is typically not that the advocate has a soft spot for Soviet-style or Venezuelan-style economic governance, or even that the advocate knows much about the actual trade-offs and choices of \”socialist\” countries like those of northern Europe. Instead, it\’s a watery notion of \”socialism\” as meaning \”nice.\” This usage has a long tradition. As Will points out:
In his volume in the Oxford History of the United States (The Republic for Which It Stands) covering 1865–1896, Stanford’s Richard White says that John Bates Clark, the leading economist of that era, said “true socialism” is “economic republicanism,” which meant more cooperation and less individualism. Others saw socialism as “a system of social ethics.” All was vagueness.
This lack of clarity becomes a problem when advocates of socialism stop targeting the undoubted ills of society and instead propose actual changes of their own–thus making themselves the target for others. Agreeing on a critique, on opposing, on change, is easy. Agreeing on alternatives is hard. Will quotes an old political proverb: \”Two American socialists equals three factions.\”
It\’s useful to point out social problems. But when those problems are long-standing and fairly well-known, pointing them out again and again offers little additional benefit. In my mind, calling for \”change\” is not very meaningful without saying what change is actually desired. Indeed, when someone points out a problem, I don\’t even know whether they are doing so in a constructive or a destructive spirit until I have some sense of their preferred alternatives. Calls for \”change\” can be intoxicating. But it feels to me that we have a tendency to lionize those who are uncompromising in their criticisms, in a way that makes it harder for those who are trying to work through costs and tradeoffs to enunciate a policy with practical gains.
\”In this context, this paper will look at the relationship between the evolution of GNH and the evolution of GDP and other macroeconomic indicators. … Using the case of Bhutan, this paper will examine the relationship between GDP growth and happiness (or well-being), using subjective well-being measures such as surveys of nationally-representative samples of the population (such as the GNH Surveys). That is, we will examine whether GDP growth is a useful proxy for and conduit to happiness, and whether happiness-driven policies can help raise economic growth rates.\”
At present, the working definition of Gross National Happiness in Bhutan involves four \”pillars:\” Sustainable and Equitable Social and Economic Development, Preservation and Promotion of Culture Conservation of the Environment, and Good Governance. These in turn divided into nine \”domains,\” which are then divided into 33 \”indicators,\” which are measured by 124 variables, each with their own weights. For a rough sense, here are the nine \”domains\” and what they are meant to cover.
Although the idea of Gross National Happiness has often been invoked in Bhutan since the 1970s, attempts to measure it with 124 indicators are more recent, and in fact have only been done in directly are in 2008, 2010, and 2015. The authors explain: \”To measure GNH, a profile is created for each person showing in which of 33 grouped indicators (formed from the abovementioned 124 indicator variables) the person has achieved sufficiency. As noted by the Gross National Happiness Commission (2015), not all people need to be sufficient in each of the 124 variables to be happy. Accordingly, in tabulating the Survey results the Commission divides Bhutanese into four groups depending on their degree of happiness, using three cutoffs: 50%, 66% and 77%.\”
Thus, a comparison between growth of per capita GDP in Bhutan and the Gross National Happiness Index for these three years looks like this.
From 1980 to 2017, Bhutan\’s per capita GDP rose by a factor of 6, thanks in part to the development of its energy sector and to expanding trade ties with India. But given the data, it doesn\’t seem possible to say if Gross National Happiness has also risen sixfold.
There are also survey measures of happiness, in which people are asked to rank their own level of happiness: for example, in the World Happiness Repot 2018, \”the happiness ranking of Bhutan fell from 84th (2013–15) in the world to 97th (2015–17) out of 156 countries.\”
So what are we to make of Bhutan\’s Gross National Happiness?
1) It is bog standard economics that GDP was never intended to measure happiness, nor to measure broader social welfare. Any intro econ textbook makes the point. A well-known comment from \”Robert Kennedy on Shortcomings of GDP in 1968\” (January 30, 2012) make the point more poetically. But for those who need a reminder that social welfare is based on a wide variety of outcomes, not just GDP, I suppose a reminder about Gross National Happiness might be useful.
2) Bhutan\’s measurement of 124 weighted indicator variables, and their distribution through the population, is probably about as good a way of measuring Gross National Happiness as any other, and better than some. But it\’s also pretty arbitrary in its own way.
3) The interesting question about GDP and social welfare isn\’t whether they are identical, but whether they tend to rise together in a broad sense. For example, countries with higher per capita income also tend to have more education and health care, better housing and nutrition, more participatory governance, and a variety of other good things. .A few years ago I wrote about \”GDP and Social Welfare in the Long Run\” (April 6, 2015), or see \”Why GDP Growth is Good\” (October 11, 2012).
4) \”Happiness\” is of course a tricky subject, which is why it\’s the stuff of literature and love. After a lot of consideration, Daniel Kahneman has argued that \”people don\’t want to be happy.\” Instead, they want to have a satisfactory narrative that they can tell themselves about how their life is unfolding. If incomes, education, and life expectancy rise over, say, 40-50 years but on a scale of 1-10 people don\’t express greater \”happiness\” with their live, does that really mean they would be equally happy with lower incomes, education and life expectancy–especially if other countries in the world were continuing to make gains on these dimensions? There is an ongoing argument over whether those who have higher income express more happiness because they get to consume more, or because they feel good about comparing themselves who are worse off. It\’s easy to say that \”money doesn\’t bring happiness,\” and there\’s some truth in the claim. But for most of us, if we lived in a country with lower income levels and could watch the rest of the world through the internet and television, it would bug us at least a little, now and then.
It seems to me easy enough to make the case that looking at Gross National Happiness as is better than an exclusive focus on doing nothing but boosting short-term GDP. But outside the fictional mustachio-twirling econo-villains of anti-capitalist comic books, no one actually believes in an exclusive focus on GDP. For me as an outsider, it\’s hard to see how Gross National Happiness has made Bhutan\’s development strategy different. After all, lots of countries at all income levels emphasize lots of goals other than short-term GDP. And the government of Bhutan pays considerable attention to GDP, as the authors note, \”While there is importance given to GNH in Bhutan, governmental organizations (especially commerce related ones) focus keen attention on GDP and how it measures trade, commerce and the economic prosperity of the country. In addition, the IMF has provided a great deal of technical assistance to Bhutan to help improve its national accounts …\”
My own favorite comment on the connection from GDP to social welfare is from a 1986 essay by Robert Solow (\”James Meade at Eighty,\” Economic Journal, December 1986, pp. 986-988), where he wrote: \”If you have to be obsessed by something, maximizing real National Income is not a bad choice.\” At least to me, the clear implication is that it\’s perhaps better not to be obsessed by one number, and instead to cultivate a broader and multidimensional perspective. If you want to refer to that mix of statistics as Gross National Happiness, no harm is done. But yes, if you need to pick one number out of all the rest (and again, you don\’t!), real per capita GDP isn\’t a bad choice. To put it another way, a high or rising GDP certainly doesn\’t assure a high level of social welfare, but it makes it easier to accomplish those goals than a low and falling GDP.
