Conversable Economist

As Hurricane Florence slams into the southeastern United States, here are a few posts from the past on the economics of hurricanes and other natural disasters.

\”Economics and Natural Disasters\” (November 2, 2012)

This blog was written as Hurricane Sandy hit the US in 2012. Among a number of other articles, in this blog I mention how David Stromberg laid out the economic arguments about natural disasters in \”Natural Disasters, Economic Development, and Humanitarian Aid,\” appearing in the Summer 2007 issue of my own Journal of Economic Perspectives. Stromberg described how the basic framework for economic analysis of natural disasters emerged from correspondence between Voltaire and Rousseau in 1755 (footnotes and citations omitted):

\”[I]n 1755 an earthquake devastated Lisbon, which was then Europe’s fourth-largest city. At the first quake, fissures five meters wide appeared in the city center. The waves of the subsequent tsunami engulfed the harbor and downtown. Fires raged for days in areas unaffected by the tsunami. An estimated 60,000 people were killed, out of a Lisbon population of 275,000. In a letter to Voltaire dated August 18, 1756, Jean-Jacques Rousseau notes that while the earthquake was an act of nature, previous acts of men, like housing construction and urban residence patterns, set the stage for the high death toll. Rousseau wrote: “Without departing from your subject of Lisbon, admit, for example, that nature did not construct twenty thousand houses of six to seven stories there, and that if the inhabitants of this great city had been more equally spread out and more lightly lodged, the damage would have been much less and perhaps of no account.”
\”Following Rousseau’s line of thought, disaster risk analysts distinguish three factors contributing to a disaster: the triggering natural hazard event (such as the earthquake striking in the Atlantic Ocean outside Portugal); the population exposed to the event (such as the 275,000 citizens of Lisbon); and the vulnerability of that population (higher for the people in seven-story buildings).\”

\”Natural Disasters: Insurance Costs vs. Deaths\” (April 16, 2015)

This blog post looked at the lists of the most destructive natural disasters that are published regularly by Swiss Re.  I discussed why it is that the disasters with the greatest losses to property are  often different than the disasters with the greatest loss of life.  I wrote:

[T]he effects of a given natural disaster on people and property will depend to a substantial extent on what happens before and after the event. Are most of the people living in structures that comply with an appropriate building code? Have civil engineers thought about issues like flood protection? Is there an early warning system so that people have as much advance warning of the disaster as possible? How resilient is the infrastucture for electricity, communications, and transportation in the face of the disaster? Was there an advance plan before the disaster on how support services would be mobilized?

In countries with high levels of per capita income, many of these investments are already in place, and so natural disasters have the highest costs in terms of property, but relatively lower costs in terms of life. In countries with low levels of per capita income, these investments in health and safety are often not in place, and much of the property that is in place is uninsured. Thus, a 7.0 earthquake hits Haiti in 2010, and 225,000 die. A 9.0 earthquake/tsunami combination hits Japan in 2011–and remember, earthquakes are measured on a base-10 exponential scale, so a 9.0 earthquake has 100 times the shaking power of a 7.0 quake–and less than one-tenth as many people die as in Haiti.

For example, in the  the most recent version, see pp. 48-49 in this 2018 report, the most costly natural disaster from 1970-2017 in terms of insured losses was Hurricane Katrina in 2005, with $82 billion in losses. But biggest natural disaster over that time in terms of lives lost was 300,000 dead from storms and flooding in Bangladesh in 1970. The 1,836 lives lost in Katrina don\’t make the top-40 list of most lives lost in a natural disaster from 1970-2017.

\”The New Orleans Economy Since Katrina\” (October 25, 2013)

In describing the aftermath of Hurricane Katrina on New Orleans, I wrote:

\”According to U.S. Census Bureau estimates, in the July 2005 the population of the New Orleans-Metairie-Kenner metropolitan area was area at a shade over 1.3 million, essentially unchanged since 2000. By the July 2006 count, dropped to 978,000. The population has rebuilt slowly since then, up to nearly 1.2 million by July 2009, but remains below the pre-storm level. What about the economy of New Orleans? As I\’ll try to explain, it\’s a story with twists and turns, but perhaps without any clear policy implication.\”

One of the sources I mentioned in the blog quotes Michael Hecht, president of the largest economic development agency in the region, to this effect: “New Orleans was like a morbidly obese person who finally had a heart attack that was strong enough to scare them, but not strong enough to kill them … Katrina laid bare that this was a city and a region that had been in slow, decadent decline, probably since the ’60s …”

I also mention an insight about natural disasters and housing markets from Jacob Vigdor in \”The Economic Aftermath of Hurricane Katrina,\”which appeared in the Fall 2008 issue of the Journal of Economic Perspectives. I wrote:

When a city is declining, low-quality housing can become quite inexpensive. The result is that those with low incomes find it hard to leave the city, because although their prospects for earning income aren\’t good, their cost of housing is low, and moving to some other area with a higher cost of housing seems like a high-risk choice. But Hurricane Katrina blasted the New Orleans housing stock. Vigdor wrote: `The 2000 Census counted just over 215,000 housing units in the city of New Orleans. By 2006, the estimated number of units had declined to 106,000, of which more than 32,000 were vacant. Although these vacant units appeared intact from the exterior, most of them undoubtedly required significant interior rehabilitation prior to occupation. Hurricane Katrina thus rendered two-thirds of the city’s housing stock uninhabitable, at least in the short term.\’ To be sure, a substantial amount of this housing stock was eventually refurbished. But some of the cycle of low-income people living in low-cost housing was diminished, partly because a number of those low-income people ended up relocated in other cities, and partly because much of the refurbished housing was no longer as inexpensive as it had previously been.

English working people everywhere, so far as I know, refuse brown bread; it is usually impossible to buy whole-meal bread in a working-class district. They sometimes give the reason that brown bread is \’dirty\’. I suspect the real reason is that in the past brown bread has been confused with black bread, which is traditionally associated with Popery and wooden shoes. (They have plenty of Popery and wooden shoes in Lancashire. A pity they haven\’t the black bread as well!) But the English palate, especially the working-class palate, now rejects good food almost automatically. The number of people who prefer tinned peas and tinned fish to real peas and real fish must be increasing every year, and plenty of people who could afford real milk in their tea would much sooner have tinned milk–even that dreadful tinned milk which is made of sugar and corn-flour and has UNFIT FOR BABIES on the tin in huge letters. In some districts efforts are now being made to teach the unemployed more about food-values and more about the intelligent spending of money. When you hear of a thing like this you feel yourself torn both ways. I have heard a Communist speaker on the platform grow very angry about it. In London, he said, parties of Society dames now have the cheek to walk into East End houses and give shopping-lessons to the wives of the unemployed. He gave this as an instance of the mentality of the English governing class. First you condemn a family to live on thirty shillings a week, and then you have the damned impertinence to tell them how they are to spend their money. He was quite right–I agree heartily. Yet all the same it is a pity that, merely for the lack of a proper tradition, people should pour muck like tinned milk down their throats and not even know that it is inferior to the product of the cow. 

Back in 1917 during World War I, the US government encouraged the formation of the Clean Plate Club. The idea was to provide additional food support to the war effort by reducing food waste at home. Here\’s a poster from that time:

And here\’s another:

Although that first Clean Plate Club officially ended with World War I, the idea seems to have popped up again over the years, during the Great Depression, during World War II, and at numerous family dinner tables all around the United States ever since.

The latest version is courtesy of the National Resources Defense Council and its \”Save the Food\” project. In radio ads and billboard spots, along with the website, the NDRC often makes a claim: \”A 4-person family loses $1500 a year on wasted food.\” Or as NDRC puts it in a 2017 report: \”In 2012, NRDC published a groundbreaking report that revealed that up to 40 percent of food in the United States goes uneaten. That is on average 400 pounds of food per person every year. Not only is that irresponsible—it’s expensive. Growing, processing, transporting, and disposing that uneaten food has an annual estimated cost of $218 billion, costing a household of four an average of $1,800 annually.\”

My immediate reaction was that some categories must be getting getting shuffled together here. The emphasis of the public relations campaign and the website is about households savings food. Plan
meals ahead! \”Using up leftovers helps the environment.\” \”It’s okay for veggies to wilt and soften. Really. It happens with time and doesn’t mean they’re bad.\” \”Keep herbs like cut flowers – with their stems in a glass of water.\” \”Use a slice of bread to soften up hardened brown sugar.\”

All fair enough, I suppose. But as a member of a family of five that eats most of its meals at home, I simply don\’t believe that we are on average throwing away \”400 pounds of food per person per year.\” That would be more than a pound of food per day for each of us, every day. That\’s not plausible. (We compost much of our organic waste, and we would know.)

Instead, my strong suspicion–confirmed by a closer reading of the NDRC report–is that the category of household food waste is getting shuffled together with all food waste that happens in every stage of the food industry: in farm fields, storage, processing, wholesale, retail, restaurants, cafeterias, and so on. For another fact-filled website on food waste, see the ReFed web\\site: ReFED is a collaboration of over 50 business, nonprofit, foundation, and government leaders committed to reducing food waste in the United States.

Two main sets of reasons are given for prioritizing a reduction in food waste. One is the environmental costs of food production and waste disposal.The other is the ongoing presence of hunger in America. Both issues are worthy of concern. But I am unpersuaded that eating softened vegetables, keeping our herbs like cut flowers, and using bread to soften up our hardened brown sugar is much of an answer to either concerns.

(It may help if you read the rest of the memo in the tone of an outraged 11 year-old, upon being told to finish his vegetables because there are hungry people in the world.)

1) The environmental protection goal is based on less overall food being consumed. But the feed-the-hungry goal is based on existing food being transferred to those who don\’t now have it. The goal of less food consumed is different and not aligned with the goal of transferring food to those who need it. 

2) Telling households that they are wasting $1500 per year in the food they purchase for home is incorrect, because food saved from farm fields and processing plants and restaurants doesn\’t help my household budget.

3) Most households would be better off monetarily and health-wise if they ate more at home, rather that grabbing meals and snacks from restaurants. If people end up tossing some dodgy aged vegetables now and again, at least they were trying to eat some food found in nature. Telling people about how money spent on food at home is often wasted is not necessarily an incentive to spend more on food at home!

4) The environmental costs of food production are real. There is a long list of ways to address issues of water use, energy use, fertilizer runoff, land erosion, and other issues. Working to reduce the total quantity of food demanded is not obviously the most effective approach. 

5) The problem of hunger and malnourishment in certain US populations is real. But the practical answers aren\’t about reducing household food waste. Instead, they involve greater buying power for low-income families and assuring an availability of food, together with education to help these families spend food resources more effectively–which will often involve more meals eaten at home and, yes, some additional food thrown away at home.

6) The notion of \”waste\” can be elusive. There are economic reasons that some amount of food might be left unharvested in a field, or thrown away from a restaurant. An economist is tempted to infer that \”waste\” really means \”not worth the costs of saving it.\” In the autumn it can be better to buy a large number of fresh apples, even if a few end up going to waste, rather than to risk running out of fruit on a Wednesday night with no time to shop, or not having enough on hand to make an apple crumble.

At the end of the day, it\’s of course hard to oppose reducing waste. But I\’m mildly allergic to policy discussions based on a combination of misleading statistics and  finger-shaking mini-sermons, like this newest version of the Clean Plate Club.

China\’s Belt and Road Initiative was first announced five years ago in 2013. Broadly speaking, the grand plans is for a grand set of transportation connections from China across Asia, and reaching to Africa and Europe. Some of the connections would be overland and others would be overseas. Chinese banks and investment funds would provide substantial finance for these projects, and Chinese firms–many with considerable experience building infrastructure in China– would carry out a substantial chunk of the work.

The timeline for a massive set of infrastructure investments that could affect 80 countries and two-thirds of the world\’s population is appropriately measured in decades, not in a few years. Still, five years after the main announcement is a reasonable time to review the record. Jonathan Hillman offers one perspective in \”China\’s Belt and Road Is Full of Holes\” written as a Policy Brief for the Center for Strategic & International Studies (CSIS, September 2018). For additional detail, the Economist magazine ran a cover story on the subject in the July 26 issue, \”China has a vastly ambitious plan to connect the world: What is behind the Belt and Road Initiative?\”

In evaluating the Belt and Road Initiative, the first step it to recognize that there is no list of what projects included, or not included. As Hillman writes: \”The BRI is also breathtakingly ambiguous. There is no official definition for what qualifies as a BRI project. There are Chinese-funded projects in countries not participating in the BRI that share many of the same characteristics. The BRI was officially launched in 2013, but projects started years earlier are often counted. The BRI brand has been extended to fashion shows, art exhibits, marathons, domestic flights, dentistry, and other unrelated activities. The BRI’s loose, ever-expanding nature, and a lack of project transparency, have led many observers to exaggerate its size. When assessing the BRI, there is always a risk of imposing order where, by design, it does not exist.\”

Or as the Economist puts it: \”No definitive BRI map has been published. The scheme has expanded far beyond its original core of Eurasia and the Middle East, from New Zealand to the Arctic, Africa to Latin America and even outer space. Estimates of the BRI’s total intended investment range from $1trn to $8trn.\”

There are a number of motivations, all possibly overlapping, for the Belt and Road Initiative.

1) As China becomes the largest economy in the world, it will want to build on trade ties across the region. Many countries in south and east Asia, or on the eastern coast of Africa, have enormous infrastructure needs. One can paint a picture of the BRI as the basis for an \”everybody wins\” expansion of global trade.

2) China is looking for ways to sustain its high growth rate. Using a combination of Chinese finance that supports employment of China\’s construction and infrastructure companies is a potential method of doing that. There is some talk that China would also like to build or transfer some of its lower-margin and environmentally dirtier industries to other countries, as well.

3) From a foreign policy point of view, the Belt and Road Initiative can been seen as a way of projecting Chinese power and influence, both over the governments of countries involved in these projects and also by building ports and other infrastructure that could be used by China\’s military.

There are also some potential economic and political dangers here for China. As an example of issues that can arise, consider the project of building a port in Hambatota, Sri Lanka, as described by a New York Times report earlier this summer (July 1, 2018).

Sri Lanka already has one large port at its capital city of Colombo. However, Mahinda Rajapaksa–who was president a few years back, thought it would be a good idea to have a second big port at another location of Hambatota, which happens to be not far from where he is from. Various possible sources of finance evaluated the proposal, and turned it down as not commercially viable. But then China financial sources stepped in and loaned a few billion dollars.

The Hamabatota port got built, but it goes largely unused. As the Times reported: \”The seaport is not the only grand project built with Chinese loans in Hambantota, a sparsely populated area on Sri Lanka\’s southeastern coast that is still largely overrun by jungle. A cricket stadium with more seats than the population of Hambantota\’s district capital marks the skyline, as does a large international airport – which in June lost the only daily commercial flight it had left when FlyDubai airline ended the route. A highway that cuts through the district is traversed by elephants and used by farmers to rake out and dry the rice plucked fresh from their paddies.\”

In the 2015 election, China dumped a few million dollars into the re-election campaign for Rajapaksa, who lost anyway. The debt payments owed by Sri Lanka for this dysfunctional project were climbing. The government of Sri Lanka ended up handing over Hambatota port, and 15,000 acres around it, to  Chinese financial interests, in exchange for knocking $1 billion off its debt. But according to the Times story, the Sri Lankan Finance ministry estimates that \”[t]his year, the Government is expected to generate $14.8 billion in revenue, but its scheduled debt repayments, to an array of lenders around the world, come to $12.3 billion.\”

Does this kind of experience count as a \”success\” for the Belt and Road Initiative? China now has ownership and  control over a port only a few hundred miles from India–although the current arrangement (subject to later negotiation, of course) is that it will not be used by the Chinese military.

On the other side, this kind of \”success\” comes at a high cost. The funds loaned to Sri Lanka are mostly lost–it\’s just a matter of when the renegotiation happens. Other countries around the region have become quite concerned about going into debt to Chinese sources of finance, and concerned about whether China will end up meddling in their elections or perhaps bribing their local officials, and concerned about how their domestic workers don\’t get many of the construction contracts, and concerned about possible environmental damage.

In the Belt and Road Initiative, China\’s banks and investment funds have often been willing to lend to projects that had been turned down by others potential funding sources like development banks, Japan, Europe, the US, and issuing bonds in global financial markets. The Chinese loans have also often included lots of conditions about business going to Chinese firms, but not many conditions about the environment, local workers, or anything else. The bankers and sources of finance in  high-income countries will testify that when you loan lots  of money to a foreign government which can\’t repay, that government doesn\’t feel appreciative! Instead, that government is likely to regard you as an enemy. And sovereign governments can make life hard on foreign investors within their borders, if they wish to do so.

The Belt and Road Initiative is a spectacular success as a brand name. But on the ground, matters are less clear. For example, Hillman carries out an exercise of looking at six geographic \”corridors\” that have been identified with the Belt and Road Initiative, and then asks whether most of the BRI projects are actually happening in those corridors. He writes: \”For five of the six corridors, there appears to be no significant relationship between corridor participation and project activity …\” The exception is the China-Pakistan corridor, which is also the only corridor which connects China with a single country.

Again, the Belt and Road Initiative will unfold over time, and it\’s far too early for lasting judgments.  But in these projects, China\’s conduct as a business and foreign policy partner is being judged by other nations across the region–and often found wanting.

But in the last year or two, snakebite antivenom has gotten more attention. Organizations like Médecins Sans Frontières have been raising the issue for years. In a meeting in May, the \”World Health Assembly in Geneva [the decision-making body for the World Health Organization] demanded action\” and passed a resolution. So there\’s that. But a number of obstacles remain.

The current method of producing antivenom is done via animals. As noted in an article in the journal of the Royal Society of Chemistry:

\”Meanwhile, new approaches to make antivenom production simpler and cheaper are being developed. Currently, anti-venom production is laborious. Venom is extracted from a snake, then administered to a horse or a sheep in small doses to evoke an immune response. The animal’s blood is then drawn and purified to obtain antibodies that act against venoms. One promising approach that would make antivenom production quicker and cheaper is recombinant antivenoms. These antivenoms are produced by expressing therapeutic monoclonal antibodies, which can bind to a specific protein or a toxin in snake venom, in an engineered cell line.\”

Different snakes have different venoms, and thus require different antivenoms. Ideally, there would be a universal antivenom, but researchers say this seems a decade away.

There seems to be a race-to-the-bottom phenomenon in this market. Potential producers of antivenoms in high-income countries face high research costs. In the areas where snakebite occurs, doses of high-quality antivenom are quite expensive relative to people\’s incomes, and sometimes several doses are needed. Thus, it becomes common to give patients less than a full dose, and hope for the best. The health care providers who administer the venom often lack training. It becomes common for low-quality medications to enter the market, which in these countries is largely unregulated. In fact, most antivenom products available in these countries have almost never been through a standard clinical trial, looking at effectiveness and possible side-effects. Potential producers for high quality antivenom have been withdrawing from the market.

And the market itself isn\’t all that big: \”Added into all this is the issue that the antivenom market simply isn’t that lucrative for big pharma. Market research firm Transparency Market Research put the global antivenom market at $1.7 billion (£1.3 billion) in 2016. Sanofi Pasteur halted production of its FAV-Afrique antivenom, effective for several African snakes, in 2010. Sanofi cited cut-price competition for the withdrawal.\”

There has been a string of articles over the last few years expressing concerns that supplies of antivenom are about to run out. It seems as if some institution-building is needed here if the supply of antivenoms is going to rise to meet the scale of the problem.

 Here\’s an overview from a few years ago of the state of the research pipeline for snake antivenom. Here\’s a more recent overview from the World Health Organization on guidelines for production, control, and regulation of snake antivenoms.

\”The Kerner report was the final report of a commission appointed by the U.S. President Lyndon B. Johnson on July 28, 1967, as a response to preceding and ongoing racial riots across many urban cities, including Los Angeles, Chicago, Detroit, and Newark. These riots largely took place in African American neighborhoods, then commonly called ghettos. On February 29, 1968, seven months after the commission was formed, it issued its final report. The report was an instant success, selling more than two million copies. …  The Kerner report documents 164 civil disorders that occurred in 128 cities across the forty-eight continental states and the District of Columbia in 1967 (1968, 65). Other reports indicate a total of 957 riots in 133 cities from 1963 until 1968, a particular explosion of violence following the assassination of King in April 1968 (Olzak 2015).\”

 The September 2018 issue of the  Russell Sage Foundation Journal of the Social Sciences includes a 10-paper symposium from a range of social scientists concerning \”The Fiftieth Anniversary of the Kerner Commission Report.\” The introductory essay by Susan T. Gooden and Samuel L. Myers Jr., \”The Kerner Commission Report Fifty Years Later: Revisiting the American Dream\” (pp.  1–17) does an excellent job of setting the historical context and contemporary reactions to the report, along with offering some comparisons that I at least had not seen before about difference between rioting and non-rioting cities over over time.

The opening paragraph above is quoted from the Gooden/Myers paper. As they point out, perhaps the most commonly repeated comment from the report was that it baldly named white racism as an underlying cause of the problems. As one example, to quote from the Kerner report: “What white Americans have never fully understood—but what the Negro can never forget—is that white society is deeply implicated in the ghetto. White institutions created it, white institutions maintain it, and white society condones it.”

Although the report was widely disseminated, it was not popular. As Gooden and Myers report:

\”President Johnson was enormously displeased with the report, which in his view grossly ignored his Great Society efforts. The report also received considerable backlash from many whites and conservatives for its identification of attitudes and racism of whites as a cause of the riots. `So Johnson ignored the report. He refused to formally receive the publication in front of reporters. He didn’t talk about the Kerner Commission report when asked by the media,\’ and he refused to sign thank-you letters for the commissioners (Zelizer 2016, xxxii–xxxiii).\”

Other contemporary critics of the report complained that by emphasizing white racism, the report seemed to imply that changes in the beliefs of whites should be the main topic, while not paying attention to institutions and behaviors. Gooden and Myers cite a pungent comment from the American political scientist Michael Parenti, who wrote back in 1970:

\”The Kerner Report demands no changes in the way power and wealth are distributed among the classes; it never gets beyond its indictment of “white racism” to specify the forces in the political economy which brought the black man to riot; it treats the obviously abominable ghetto living conditions as “cause” of disturbance but never really inquires into the causes of the “causes,” viz., the ruthless enclosure of Southern sharecroppers by big corporate farming interests, the subsequent mistreatment of the black migrant by Northern rent-gorging landlords, price-gorging merchants, urban “redevelopers,” discriminating employers, insufficient schools, hospitals and welfare, brutal police, hostile political machines and state legislators, and finally the whole system of values, material interests and public power distributions from the state to the federal Capitols which gives greater priority to “haves” than to “have-nots,” servicing and subsidizing the bloated interests of private corporations while neglecting the often desperate needs of the municipalities. . . . . To treat the symptoms of social dislocation (e.g., slum conditions) as the causes of social ills is an inversion not peculiar to the Kerner Report. Unable or unwilling to pursue the implications of our own data, we tend to see the effects of a problem as the problem itself. The victims, rather than the victimizers, are defined as “the poverty problem.” It is a little like blaming the corpse for the murder.\” 

Gooden and Myers point to another issue with the report that social scientists immediately point out. The members of the Kerner Commission made personal visits to cities that had experienced rioting, and made an effort to talk with people in the affected communities. But they made essentially no effort to visit cities that had not experienced riots. It\’s hard to draw inferences about the causes of riots without making some effort to look at what differs across rioting and non-rioting cities. 

These sorts of patterns are open to a range of interpretations. Perhaps cities were less likely to riot in the 1960s if more immediate progress was apparent. Perhaps something about having a higher black-white income ratio at the start made rioting more likely. Perhaps rioting led to an outmigration of middle- and upper-class families of both races, which could contribute to a stagnation of the black-white ratio stagnated. The cities that rioted were mainly the northeast, midwest, and west, and so political, social, and economic differences across the geography of the US surely also have played a role. 

In other measures like the black-white ratios of unemployment rates, high school graduation rates, and poverty rates, the rioting and non-rioting cities look very similar. As Gooden and Myers write: 

\”This evidence points to a possible flaw in the Kerner Commission’s report. Although the evidence clearly points to a divided America—a divide that continues today—the trajectories of the riot cities and the nonriot cities are remarkably similar. Thus, it is a bit more difficult to embrace the conclusion that this racial divide was the cause of the riots given that the racial divide was evident in both riot cities and nonriot cities and perhaps was even more pronounced in the nonriot cities than in the riot cities before the riots.\”

For a take on the Kerner Commission report earlier this year, see \”Black/White Disparities: 50 Years After the Kerner Commission\” (February 27, 2018). Here\’s the Table of Contents of this issue of the Russell Sage Foundation Journal, with links to the papers:

• \”The Kerner Commission Report Fifty Years Later: Revisiting the American Dream,\” by Susan T. Gooden and Samuel L. Myers Jr. (pp. 1-17)
• \”How Does It Feel to Be a Problem? The Missing Kerner Commission Report,\” by Keisha L. Bentley-Edwards, Malik Chaka Edwards, Cynthia Neal Spence, William A. Darity Jr., Darrick Hamilton, Jasson Perez (pp. 20–40)
• \”From Bakke to Fisher: African American Students in U.S. Higher Education over Forty Years,: by Walter R. Allen, Channel McLewis, Chantal Jones, Daniel Harris (pp. 41–72)
• \”Whither Whiteness? The Racial Logics of the Kerner Report and Modern White Space,\” by Matthew W. Hughey (pp. pp. 73–98)
• \”Measuring the Distance: The Legacy of the Kerner Report,\” by Rick Loessberg and John Koskinen (pp. 99–119)
• \”Changes in the Policing of Civil Disorders Since the Kerner Report: The Police Response to Ferguson, August 2014, and Some Implications for the Twenty-First Century,\” by Patrick F. Gillham and Gary T. Marx (pp. 122–143)
• \”The Effects of the Neighborhood Legal Services Program on Riots and the Wealth of African Americans,\”  Jamein P. Cunningham and Rob Gillezeau (pp. 144–157)
• \”Fifty Years After the Kerner Commission Report: Place, Housing, and Racial Wealth Inequality in Los Angeles,\” by  Melany De La Cruz-Viesca, Paul M. Ong, Andre Comandon, William A. Darity Jr., and Darrick Hamilton (pp. 160–184)
• \”The Evolution of Black Neighborhoods Since Kerner,\” by Marcus D. Casey and Bradley L. Hardy (pp. 185–205)
• \”Detroit Fifty Years After the Kerner Report: What Has Changed, What Has Not, and Why?\” by Reynolds Farley (pp. 206–241)

Karen Dynan and Louise Sheiner provide a nice overview of this mechanism in their essay \”GDP as a Measure of Economic Well-being,\” written for the Hutchins Center at the Brookings Institutions (Working Paper #43, August 2018). Their paper offers a detailed and readable overview of man problems that arise in measurement of real GDP: problems in measuring the size of the digital economy, problems in adjusting for changes in the size of nonmarket work, and potential biases in the measure of inflation (which in turn lead to errors in estimating the size of the real economy), and others.

Here, I\’ll just focus on their comments about how US multinationals shift sales and profits to other countries (footnotes omitted).

\”[T]he rise of global supply chains and the legal latitude that companies have in declaring in which countries their economic activity takes place lend material downward bias to estimates of U.S. nominal GDP. In particular, “transfer pricing” and other practices allow multinational enterprises (MNEs) operating in the United States to underprice the sale or lease of intangible assets—such as blueprints, software, or new drug formulas—to affiliates in low-tax jurisdictions so that more of their profits are booked in these countries. The economic importance of such transactions has been documented in a variety of ways. For instance, in 2012, a Senate subcommittee questioned Microsoft about its agreements to shift some R&D costs and regional royalty rights to affiliates in Singapore and Ireland (U.S. Congress Senate Committee on Homeland Security and Governmental Affairs, 2012). In 2013, the subcommittee found that Apple used favorable transfer pricing agreements to shift billions of dollars of profits from the United States to Ireland (U.S. Congress Senate Committee on Homeland Security and Governmental Affairs, 2013). More generally, Hines (2005) and Lipsey (2006) show that U.S. MNEs register more profits in tax havens than can plausibly be accounted for by economic activity. Jenniges, Mataloni, Stutzman, and Xin (2018) find that U.S. companies that have a cost sharing agreement with a foreign entity appear less productive than similar companies without such an agreement, and foreign companies that have a cost sharing agreement with a parent company in the U.S. appear more productive than similar foreign companies. A 2016 OECD brief described how such transactions drove a 26 percent increase in measured GDP in Ireland in 2015. And, Tørsløv, Wier, and Zucman (2018) estimated that nearly 40 percent of multinational profits are shifted to low-tax countries each year.

\”Under current methods, transfer pricing and profit shifting have led to an understatement of both nominal GDP and nominal gross domestic income (GDI). Consider the example of a smartphone whose software, blueprints, and branding are developed in the United States. If the phone is assembled in the United States, then the full value of the phone (priced at its market price) is included in GDP. If the phone is assembled abroad, then so long as the contract between the company doing the assembly (e.g. Foxconn) is an arm’s length transaction, GDP will still be correctly measured, as it will include the value of the phone less the amount paid to the foreign assembler. However, if a foreign-affiliate of the U.S. company is introduced in the transaction, GDP could end up understated.

\”Here’s one way this could happen: the U.S. company leases the rights to the intangible capital—the software, blueprints, and branding—to an affiliate in a low-tax country (say, Ireland) and it prices that lease at a value that is much less than its market value. Then the Irish affiliate contracts with Foxconn to do the assembly. Phones are then exported from Ireland to the United States and from Ireland to the rest of the world. In this case, only the value of the lease from the U.S. company to the Irish company will be included in U.S. GDP, and if this lease is priced at an artificially low level, U.S. GDP will be too low as well. Under current methods, estimates of imports associated with sales of the phone in the United States will be too high because the economic activity associated with the leased assets is unlikely to be attributed to this country. In particular, imports will be too high (because they will overstate the Irish content of the phone imported from Ireland), and exports will be too low (because they will understate the U.S. content of phones exported from Ireland to the rest of the world). The same bias would occur in GDI because of the understatement of the company’s U.S. earnings. Note that this transaction works because there is intangible capital that is hard to value and hard to pin to a location, and because the Irish company is an affiliate of the U.S. company, so that it does not matter to shareholders whether the Irish affiliate or the U.S. headquarters books the profits. 

\”This problem is of increasing concern both because of the evidence discussed above regarding the importance of profit-shifting in today’s economy and, more generally, because of the growth in MNE activity in recent decades. MNEs are now a large part of the global economy—according to Guvenon et  al. (2017), they accounted for $4.7 trillion of global value-added in 2017, an amount that was about the size of the fourth largest economy in the world at the time. The statistical community recognizes the issue, and the international statistical guidelines most recently adopted by the United Nations Statistical Commission (System of National Accounts 2008) called for estimates of the production activity of MNEs to reflect the economic ownership of intangible assets rather than the legal ownership (Moulton, van de Ven 2018). There are practical challenges associated with how to do so, and the BEA has yet to change its official methods to follow this guideline. 

\”Guvenon et al. (2017) explore one way in which the guidelines might be at least partially implemented. The authors use confidential MNE survey data collected by the Bureau of Economic Analysis and reapportion the earnings of U.S. MNE foreign affiliates based on labor compensation and sales to unaffiliated parties. The authors’ findings suggest that current practices have materially distorted estimated productivity growth at some points in the past—with an average annual understatement of growth of 0.1 percentage point from 1994 through 2004 and 0.25 percentage point from 2004 through 2008 (though no effect between 2008 and 2014). These figures represent a lower bound on the distortion, as foreign MNEs are probably also shifting some of their profits out of United States. Using this method, Bruner, Rassier, and Ruhl (2018) find that accounting for profit sharing would increase the level of U.S. measured GDP by 1.5 percent in 2014.\”

The Doha round of the World Trade Organization talks started way back in 2001, and seems to have come to a standstill. Regional trade agreements became the preferred path for many nations, with 20-25 per year being negotiated most years from 2002-2016. Then the number drops off sharply in 2017, and falls almost to zero so far in 2018.

Here\’s an illustrative figure from the World Trade Organization Regional Trade Agreements Information System.  There\’s a lot more background on regional trade agreements at the website.

[This post originally ran on Labor Day, 2011.]

It\’s clear that the first Labor Day celebration was held on Tuesday, September 5, 1882, and organized by the Central Labor Union, an early trade union organization operating in the greater New York City area in the 1880s. By the early 1890s, more than 20 states had adopted the holiday. On June 28, 1894, President Grover Cleveland signed into law: \’\’The first Monday of September in each year, being the day celebrated and known as Labor\’s Holiday, is hereby made a legal public holiday, to all intents and purposes, in the same manner as Christmas, the first day of January, the twenty-second day of February, the thirtieth day of May, and the fourth day of July are now made by law public holidays.\” (Note: This post has been reprinted on this blog on Labor Day since 2011.)

For those who need the sweet and savory flavor of economics to accompany their end-of-summer Labor Day picnic (and really, don\’t we all need that?), here are links to some posts on labor market topics, mostly from earlier this year.

1) Rebalancing the Economy Toward Workers and Wages (March 5, 2018)

I quote John Bates Clark , probably the most eminent American economist of his time in his 1907 book, Essentials of Economic Theory

\”In the making of the wages contract the individual laborer is at a disadvantage. He has something which he must sell and which his employer is not obliged to take, since he [that is, the employer] can reject single men with impunity. … A period of idleness may increase this disability to any extent. The vender of anything which must be sold at once is like a starving man pawning his coat—he must take whatever is offered.\”

Are there some ways to tip the balance a bit more toward workers? Jay Shambaugh and Ryan Nunn have edited an ebook, Revitalizing Wage Growth: Policies to Get American Workers a Raise, with nine chapters on causes of wage stagnation and policy proposals to address it

2) \”The Job Guarantee Controversy\” (April 30, 2018)

With Senator Bernie Sanders in the forefront, some Democratic members of Congress are planning a bill to guarantee jobs that pay $15 per hour, not including mandatory benefits packages, for all Americans. Legislative details have not yet been announced (!), but several sets of plan have been published recently, including on the website of the Sanders Institute, which was founded by Jane O\’Meara Sanders, wife of the senator. Here, let\’s run through a couple of the more prominent plans, and then list on criticisms that have been bubbling up–with a focus on critiques from writers typically identified as being on the political left. …

Ultimately, it feels to me as if proposals for a federal job guarantee proposal are a cry of despair, erupting from an exhausted patience. To me, the underlying message is: \”Stop being distracted by small-scale arguments and day-to-day political compromises, drop the cautious incrementalism, and pay the money to help those who want to work. Stop quibbling, and just make it happen!\” Righteous exasperation always has a rhetorical appeal. But the real world is full of costs and tradeoffs, and if the US political system wants to make some dramatic moves to help US workers, considerably better options than a federal job guarantee are available.

3) \”The Rising Importance of Soft Skills\” (January 30, 2018)

Leading tech companies like Google have found that their most productive and valuable employeees are often not those with the most technical skills or cognitive ability. Instead, the most valuable employees have the soft skills in communication, teamwork, and seeing the big picture.

The evidence for the rising importance of soft skills goes beyond the anecdotal. David J. Deming provides an overview of economic research on this topic in \”The Value of Soft Skills in the Labor Market\” (NBER Reporter, 2017 Number 4). Deming cites evidence that for the US economy as a whole, the number of STEM (science, technology, engineering, mathematics) jobs rose rapidly from 1980 to 2000, but has declined since then. Moreover, the labor market returns to higher levels of cognitive skill have declined, too.

\”While cognitive skills are still important predictors of labor market success, their importance has declined since 2000. An important recent paper finds significantly smaller labor market returns to cognitive skills in the early and mid-2000s, compared with the late 1980s and early 1990s. … In a 2017 study, I replicate this finding and also show that returns to soft skills increased between the 1979 and 1997 NLSY waves. … We are not witnessing an end to the importance of cognitive skills — rather, strong cognitive skills are increasingly a necessary — but not a sufficient — condition for obtaining a good, high-paying job. You also need to have social skills. Between 1980 and 2012, social skill-intensive occupations grew by nearly 12 percentage points as a share of all U.S. jobs. Wages also grew more rapidly for social skill-intensive occupations than for other occupations over this period.\”

4) The Modern Shape-up Labor Market (July 23, 2018)

The “shape-up” system of hiring was described by journalist Malcolm Johnson in his Pulitzer-prize winning articles about crime on the docks of New York City in the late 1940s (Crime on the Labor Front, quotation from pp. 133-35). The description is perhaps best-remembered today for how it was depicted in the 1954 movie “On the Waterfront.” But it\’s a scenario that I think also captures some of the concerns of modern workers in the \”gig\” economy, where more and more workers are dependent on finding a new gig every month or week or day. Johnson described the process for a longshoreman of seeking and getting a job back in the 1940s in this way:

“The scene is any pier along New York’s waterfront. At a designated hour, the longshoremen gather in a semicircle at the entrance to the pier. They are the men who load and unload the ships. They are looking for jobs and as they stand there in a semicircle their eyes are fixed on one man. He is the hiring stevedore and he stands alone, surveying the waiting men. At this crucial moment he possesses the crucial power of economic life or death over them and the men know it. Their faces betray that knowledge in tense anxiety, eagerness, and fear. They know that the hiring boss, a union man like themselves, can accept them or reject them at will. He can hire them or ignore them, for any reason or for no reason at all. Now the hiring boss moves among them, choosing the man he wants, passing over others. He nod or points to the favored ones or calls out their names, indicating that they are hired. For those accepted, relief and joy. The pinched faces of the others reflect bleak disappointment, despair. …

“Under the shape-up, the longshoreman never knows from one day to the next whether he has a job or not. Under the shape-up, he may be hired today and rejected tomorrow, or hired in the morning and turned away in the afternoon. There is no security, no dignity, and no justice in the shape-up. … The shape-up fosters fear. Fear of not working. Fear of incurring the displeasure of the hiring boss.”

5) \”Four Examples from the Automation Frontier\” (February 12, 2018)

Cotton pickers. Shelf-scanners at Walmart. Quality control at building sites. Radiologists. These are just four examples of jobs that are being transformed and even sometime eliminated by the newest wave of automated and programmable machinery. Here are four short stories from various sources, which of course represent a much broader transformation happening across the global economy.