Friday, March 24, 2017

Global Productivity Growth: Diminishing Convergence

"Productivity is a gift for rising living standards, perhaps the greatest gift. It is not, however, one that always keeps on giving ..." So said Andrew G. Haldane, the chief economist at the Bank of England, in his talk on "Productivity Puzzles" delivered at the London School of Economics on March 20, 2017. Some of the talk focuses on UK experience in particular: here, I want to focus on Haldane's broader perspective on global productivity growth, and on his intriguing argument that from a global perspective, most of the productivity slowdown can be attributed to a failure of innovation to diffuse across countries as rapidly as in the past.

Here's a figure showing the pattern of productivity growth worldwide since the 1950s, and then a figure showing the same productivity data divided into advanced and emerging economies.

Haldane summarizes overall patterns in the productivity figures in this way (footnotes omitted):
First, the slowdown of productivity growth has clearly been a global phenomenon, not a UK-specific one. From 1950 to 1970, median global productivity growth averaged 1.9% per year. Since 1980, it has averaged 0.3% per year. Whatever is driving the productivity puzzle, it has global rather than local roots.
Second, this global productivity slowdown is clearly not a recent phenomenon. It appears to have started in many advanced countries in the 1970s. Certainly, the productivity puzzle is not something which has emerged since the global financial crisis, though it seems the crisis has amplified pre-existing trends. Explanations for the productivity puzzle based on crisis-related scarring are likely to be, at best, partial.
Third, the productivity slowdown has been experienced by both advanced and emerging economies. The slowdown in median productivity growth after the 1970s among both advanced and emerging market economies is around 1¾ percentage points (Chart 8). Indeed, looking at country-specific trends, it is striking just how generalised the productivity slowdown has been ...
Haldane then turns to the economic arguments about convergence, which suggest that countries which are lagging behind in productivity and per capita GDP should have a natural opportunity to grow more quickly, by taking advantage of flows of technology and expertise from the countries on the technology frontier (for some additional discussion of convergence, see my post on "Will Convergence Occur?" November 25, 2015). As he says:
"Growth theory would predict that, over time, technological diffusion should lead to catch-up between frontier and non-frontier countries. And the greater the distance to the frontier, the faster these rates of catch-up are likely to be. So what explains the 1¾ percentage point slowdown in global productivity growth since the 1970s – slower innovation at the frontier or slower diffusion to the periphery? If the frontier country is taken to be the United States, then slowing innovation can only account for a small fraction of the global slowing, not least because the US only has about a 20% weight in world GDP. In other words, the lion’s share of the slowing in global productivity is the result of slower diffusion of innovation from frontier to non-frontier countries.
"To illustrate that, Chart 10 plots the distribution of levels of productivity across countries over a set of sample periods, where productivity is measured relative to a frontier country (the United States) indexed to one. Comparing the distributions in the 1950s and 1970s, there is a clear rightward shift. Cross-country productivity convergence or catch-up was underway, as the Classical growth model would suggest. In recent decades, however, that pattern has changed. Comparing the 1970s with the 1990s, there is a small leftward shift in the probability mass. And in the period since the global financial crisis, there has been a further leftward shift in the distribution and a widening of its range. Today, non-frontier countries are about as far from the technological frontier as they were in the 1950s."

Haldan also offers a graph showing productivity level relative to the US: again, emerging market economies show convergence toward the US level of productivity from the 1950s up through the 1970s, but then shows a divergence in much of the 1980s and 1990s--with no particular convergence or divergence since about 2000.

As Haldane puts it:
"One of the key determinants of international technology transfer has been found to be cross-border flows of goods and services, people and money and capital. While they have waxed and waned historically, all of these have tended to rise rapidly since the middle of the 20th century. Other things equal, that would have been expected to increase the speed of diffusion of innovation across countries over that period. In practice, the opposite appears to have occurred.

"Taken at face value, these patterns are both striking and puzzling. Not only do they sit oddly with Classical growth theory. They are also at odds with the evidence of history, which has been that rates of technological diffusion have been rising rather than falling over time, and with secular trends in international flows of factors of production. At the very time we would have expected it to be firing on all cylinders, the technological diffusion engine globally has been misfiring. This adds to the productivity puzzle.
I'll only add that any view of the US productivity slowdown is likely to be incomplete if it doesn't take into account that it's a long-term issue, with a global dimension, and that a decline in the diffusion of productivity seems to be involved.

Thursday, March 23, 2017

Interview with Jonathan A. Parker

Aaron Steelman has a broad-ranging "Interview" with Jonathan A. Parker in the most recent issue of Econ Focus from the Federal Reserve Bank of Richmond (Third/Fourth Quarter 2016, pp. 22-26). Here are a few tidbits that caught my eye:

Increased volatility for high-income households
"[I]n work with Annette Vissing-Jorgensen we have looked at how the labor income of high-income households has changed significantly. What we zoomed in on is that high-income households used to live a relatively quiet life in the sense that the top 1 percent would earn a relatively stable income, more stable than the average income. When the average income dropped by 1 percent, the incomes of the top 1 percent would drop by about only six-tenths of a percent. In the early 1980s that switched, so that in a recession if aggregate income dropped by 1 percent, the incomes of the top 1 percent dropped more like 2.5 percent — quadrupling the previous cyclicality. So now they're much more exposed to aggregate fluctuations than the typical income. We also show that decade by decade, as the top income share increased, so did its exposure to the business cycle in the 1980s, 1990s, and 2000s. And as you go further and further up the income distribution, that top share — not just the top 1 percent, but the top 10th of a percent, and the top 100th of a percent — there's also been a bigger increase in inequality and a bigger increase in the exposure to the business cycle. ... 
"First, starting around the end of the 1980s, we see the adoption of incentive-based pay for CEOs and other highly placed managers. Incentive compensation over this time rises, and it happens to be that the incentive compensation is not based on relative performance, which would therefore difference out what goes on in the macroeconomy, but instead is based on absolute performance. And in the U.S. case, that could partly be due to simply what counts legally as incentive-based compensation and so is not subject to corporate profits tax. Pay in the form of stock options, for example, counts as incentive-based compensation. Pure salary does not and so is taxed as corporate profits above $1 million.
"The other possibility is that ... new information and communication technologies allow the best managers to manage more people, to run bigger companies, and therefore to earn more; the best investment managers to manage more money and to make more for themselves; the best entertainers and performers to reach more people and therefore earn a larger share of the spending on entertainment goods. High earners have become small businesses. ... We do know that increased cyclicality in income among high earners can't come simply from the financial sector. That sector just isn't quantitatively big enough, and you see the increase in earnings share and in cyclicality across industries and occupations. It's not the case that just the top hedge fund managers have become the high earners and they're very cyclical; Oprah is also."
Why don't households smooth consumption?
"I use Nielsen Consumer Panel data to design and run my own survey on households to measure the effect of what was then the second of these large randomized experiments run by the U.S. government, the economic stimulus program of 2008. The key feature of that program was that the timing of the distribution of payments was determined by the last two digits of the Social Security number of the taxpayer, numbers that are essentially randomly assigned. So the government effectively ran a $100 billion natural experiment in 2008, distributing money randomly across time to people, and this policy provides a way to measure quite cleanly how people respond to infusions of liquidity. ...
"The first thing I found out is that illiquidity is still a tremendous predictor of who spends more when a predictable payment arrives. But it's not only liquidity. People with low income have a very high propensity to spend, and not just people who have low income today, as would be associated with the standard buffer-stock model. You can imagine a situation where you've had a bad income shock, you happen to have low liquidity, and you spend a lot. But illiquidity one or even two years prior to the payment is just as strongly associated with a propensity to spend out of liquidity, as illiquidity at the time of the payment. This same set of people who have persistently high propensities to consume are also the people who characterize themselves as the type of people who spend for today rather than save for tomorrow when I asked them specifically about their type, not their situation. They are also the people who report that they have not sat down and made financial plans. ... Low liquidity, or low financial wealth, is a very persistent state across households, suggesting the propensity to spend is not purely situational. A lot of it is closer to an individual-specific permanent effect than something transient due to temporary income shocks. ... 
"So the question is how many people are influenced by constraints in practice. Is their marginal propensity to consume noticeably influenced by the fact that they might be constrained next month or in six months? I would say that's quantitatively important for roughly half of the population. ... I don't think there's a lot of transition between the people who would consistently hit these constraints or be concerned about them and the people for whom they're not that relevant."
Tradeoffs in the coming revisions in the Consumer Expenditure Survey

"The BLS [Bureau of Economic Statistics] is revising the CE Survey now. It's called the Gemini Project, and I have been involved a little with advising how to revamp it. Surveys in general have been experiencing problems with participation and reporting. The CE is suffering from these problems, and so the Gemini Project is trying to address them. The CE has the huge benefit of being a nationally representative survey done by the Census Bureau; almost all of the alternative datasets that we're using from administrative sources that are not strictly survey datasets are less representative. So reducing the CE's problems with participation and reporting could potentially have a very large payoff. Of course, the cost of the change is that the CE Survey as it stands now is a very long panel dataset that has had the same format throughout the whole time. So we're going to break that and no longer be adding new time periods to an intertemporally comparable dataset. But I think that's probably a cost worth paying at this point.
"What the BLS is planning is to change dramatically the way the CE Survey is conducted. They're going to gather data in quite different ways than they have in the past, including some spending categories that will almost have so-called administrative sources. What I have been pushing for is maintaining some panel dimension in the new version of the CE Survey. If you don't have a panel dimension, then for lots of macro-type questions, you can track people only at the group level. And since groups are usually affected differently by other things going on in the world, you lose a lot of ability to identify stuff that might be interesting — tracking someone who had a specific policy exposure in one period and seeing how they're doing a month or a year later. If the BLS eliminates the panel dimension, researchers couldn't do anything like I did with my tax rebates work, nor any other work that looks at treatments that are happening at the individual level. But I'm hoping that the new, state-of-the-art version of the CE Survey will last another 35 years and be just as good."

Wednesday, March 22, 2017

India: What's Needed for Sustained Growth?

India has been experiencing episodes of rapid growth since the 1980s, but the growth always seem accompanied by a question mark. Thus, V. Anantha Nageswaran and Gulzar Natarajan write in their report Can India Grow? Challenges, Opportunities, and the Way Forward (published by Carnegie India, November 2016): 
"Indeed, in the past twenty-five years, every time India achieved a slightly higher economic growth rate, it was followed by some combination of an external financing deficit, a rise in nonperforming assets in the banking system, a high rate of inflation with consequent currency overvaluation, and other problems. This was the case at the end of the 1970s, at the end of the 1980s, and again in 2012–2013."
A main theme of the report the problems that India needs to overcome to lay a firm foundation for sustained economic growth into the future. While the report often takes a moderately optimistic glass-half-full tone, discussing what policies are being undertaken, I found that I was more struck by the glass-half-empty interpretation--that is, the depth and severity of many of these issues. Here are some examples (with footnotes omitted throughout for readability).

India's education system has gotten children into school, but is failing to teach them

"If education were only about schools, about physical infrastructure, materials, and ensuring universal enrollment, then India has succeeded spectacularly. Every large population center has a school; most schools have buildings and teachers assigned; and students have study materials. It was hoped or assumed that once the schooling inputs were in place, education and learning outcomes would somehow follow automatically. But this has proved not to be the case. Lant Pritchett, an education researcher with Harvard’s Kennedy School of Government, has evocatively described the situation as `schooling ain’t learning.' And schooling without learning leads to very poor educational outcomes, a finding supported by the 2014 Annual Status of Education Report, the largest nongovernmental household survey undertaken in rural India:
"`51.9% of Class 5 children in rural India cannot read a Class 2 text; only 25% of children in Class 5 and 46.8% in Class 8 could read simple English sentences; just 25.3% of Class 3 children could do a two-digit subtraction, 26.1% of Class 5 children and 44.1% of Class 8 students could do division. ...'
"A 2010 study by the Tata Institute of Social Sciences in Mumbai found that only 10 percent of new graduates and 25 percent of graduates of engineering and MBA programs had adequate skills to be employable. Numerous other surveys have confirmed the results."

Female labor force participation in India is strikingly low
"A ... major labor market deficiency is the country’s shockingly low female workforce participation rate. At 24 percent in 2014, it was comparable to levels in the Middle East and North Africa, and just half that in Indonesia. A 2015 report from the McKinsey Global Institute showed that the female contribution to India’s GDP, at 17 percent, is the lowest in the world among a sample constituted of countries and regions, and less than half the global female share of GDP at 37 percent. The report estimates that if India did as well as the best-performing country in South Asia on this metric, by 2025 its incremental output would be higher by 16 percent, or $700 billion. But this would require, even more than enabling public policies, a social transformation on a scale equivalent to that which led to the weakening of caste barriers in Indian society in the latter part of nineteenth century and the early twentieth century."
India has a small number of large firms, a huge number of tiny firms, and little in the middle

"The number and proportion of small and microenterprises are staggeringly high. Their contribution to output and employment is infinitesimally small. Yet romanticism in policy circles with micro and small has endured far longer than is justified by their economic value added. Small has not been beautiful, as the capital and labor locked up in these unproductive enterprises represent lost economic opportunity. Furthermore, most such enterprises are informal and operate beneath the radar of tax
authorities and other regulators. ... India’s industrial base has a gaping hole in the middle. Specifically, India has a preponderance of microenterprises and a tiny set of large enterprises. It has neither small nor medium-sized enterprises."

The size of of farms is small and declining, making investment and economies of scale 

A striking high share of India's workers are in the informal economy
"A statistical update on employment in the informal economy published by the International Labor Organization in 2012 showed that India has one of the world’s largest informal sectors. At 83.6 percent, the share of informal employment in  the country’s overall nonagricultural employment total is the highest in the world. Furthermore, India’s labor force participation rate is one of the lowest in the world. Only Egypt and Honduras fare worse."
Domestic savings and capital accumulation in India have been low
"The economic historian Robert Allen has documented India’s capital accumulation shortfall. He writes, “Between 1860 and 1990, it [India] accumulated little capital and achieved little growth. Its capital-labor ratio in 1990 ($1,946) and labor productivity ($3,235) were like Britain’s in 1820 ($1,841 and $4,408, respectively).” Comparing the development trajectories of seventeen countries in the 1820–1990 period, he argues that developing countries such as India “need to accumulate capital in the massive way that  East Asian economies have done since 1960 in order to close the gap with the West.” That gap is a huge one to close. Unfortunately, India is constrained by its low savings rate and narrow capital base, both of which constrain it from generating the capital required to sustain a high economic growth rate for a sufficiently long period."
India's government depends on a narrow slice of the population for its tax base
"The narrow industrial base and limited pool of middle-class taxpayers is nowhere reflected more starkly than in the country’s very low tax-to-GDP ratio. India has one of the lowest ratios among the G20 countries—far lower than Brazil’s, for example. Despite India’s large population, the country’s income tax base is comparable to that of a small European country. In 2012–2013 there were just 31.19 million assessees, or less than 3 percent of the 1.2 billion population, in contrast to 147 million assessees in 2013 among 316 million people in the United States."
India's public spending on infrastucture has been falling as a share of GDP

India's government and government-run programs are often dysfunctional

"The inability to implement government programs is pervasive and dominates the public’s perception of weak governance. India’s government-run schools are noteworthy for neglect and apathy. Teacher absenteeism is rampant; learning levels are abysmal; toilets, where available, are mostly nonfunctional; and so on. In healthcare, doctor and nurse absenteeism is very high, and the quality of primary care services is unacceptable. Even when resources and personnel are made available, most large government-run hospitals remain badly managed. In both sectors, well-designed national programs with adequate implementation flexibility have fallen far short of expectations when subjected to the field test of implementation.
"Inordinate delays in fixing a leaking pipeline or repairing potholes, let alone building new roads or drilling wells, and slow garbage collection are frustrations familiar to most Indians. The execution of small panchayat (the unit of administration at the village level) works, even when contracted and the money made available, takes months to years. And despite the existence of progressive and comprehensive legislation on social protection, atrocities against lower castes, children, and women continue unabated.
"Supervisory systems, even when not compromised, struggle to enforce regulations. The commanding sectors of modern India, infrastructure and urban facilities, are marred by the same malaise. The capacity to design and document projects, manage procurements, mobilize financial resources, finalize contracts, and manage the execution effectively is sorely lacking even at the highest levels of state and national government. It is no surprise that contracting corruption, execution delays, and renegotiations have become quotidian in these sectors."
The pathway to export-led growth through low-wage manufacturing seems to be less available
"One of the defining features of successful economic growth over long periods in the recent past has been the central role of exports. The most prominent example is that of East Asia, where long periods of economic growth were sustained by strong export growth, in particular driven by the manufacturing sector. India clearly exports a far smaller share of its output than did any of the East Asian economies during their high-growth periods. The prospects for the manufacturing sector becoming the engine of India’s growth do not appear promising, owing to the structural shifts taking place in the global economy and the concomitant trend of premature deindustrialization. More worryingly, the prospect of exports becoming a main driver of economic growth also looks bleak."
These issues mostly suggest their own solutions, but implementation isn't easy or straightforward. The bottom line of the report is that India's economy has enough strong areas that 4-5% annual GDP growth remains quite possible. But it's worth remembering that when it comes to per capita GDP, India ranks 150th among the countries of the world, at a level similar to Nigeria and Congo. Annual growth rates of 4-5% would mean that India barely keeps pace with other emerging market economies like China, or gradually falls behind.

For another recent post on India's economy, see my overview of the most recent Economic Survey from India's Ministry of Finance in "The Economic Vision for Precocious, Cleavaged India" (February 16, 2017).

Tuesday, March 21, 2017

Available: My Principles Text, Fourth Edition

Here at the Conversable Economist blog, we (that would be me) interrupt the usual parade of economics articles, report, graphs, and figures to bring you a commercial message.

The fourth edition of my Principles of Economics textbook is now available. It is mainstream in content, well-written, and fairly priced. It offered me a chance for me to unpack my personal toolkit of how to explain this material: that is, my preferred order for the material, step-by-step conceptual explanations, metaphors,  historical and modern examples, evocative graphs and tables, quotations, parables, and more. If you're actively looking at possible textbooks for next fall, or perhaps just keeping track of what's out there, I commend it to your attention. Here's are shots of the front and back covers, which includes a few nice comments from current users.

Monday, March 20, 2017

What's the Value of US Household Production?

The value of household production has never been included in GDP. But although this is sometimes interpreted as a knock against those who do most of household production, it's really just a matter of accounting. To be included in GDP, there needs to be a market transaction. Even back in 1934, when Simon Kuznets was reporting the first estimates of "national income" to the US Congress, he was careful to note: "A student of social affairs who is interested in the total productivity  of the nation, including those efforts which, like housewives' services,  do not appear on the market, can therefore use our measures only  with some qualifications."

However, the US Bureau of Economic Analysis and statistical agencies in other countries now often use  "satellite accounts" to calculate the value of household production, which is currently equal to about 23% of US GDP--and has been declining over time. Here's a bit of broader context for the comment from Kuznets in  his 1934 report, National Income, 1929-1932 : Letter from the Acting Secretary of Commerce Transmitting in Response to Senate Resolution No. 220 (72nd Cong.) a Report on National Income, 1929-32, and then some information on the current estimates of the size of household production in the US and elsewhere.

Kuznets wrote in 1934:
"The volume of services rendered by housewives and other members of the  household toward the satisfaction of wants must be imposing indeed,  when totaled for the 30 million families comprising the population of  this country; and the item is thus large enough to affect materially any estimate of national income. But the organization of these services  render them an integral part of family life at large, rather than of the specifically business life of the nation. Such services are, therefore, quite removed from those which gainfully occupied groups undertake to perform in return for wages, salaries, or profits. It was considered  best to omit this large group of services from national income, especially  since no reliable basis is available for estimating their value. This  omission, unavoidable though it is, lowers the value of national income  measurements as indexes of the nation's productivity in conditions  of recent years when the contraction of the market economy was accompanied by an expansion of activity within the family. ... Thus, the estimates submitted in the present study define income in such a way as to cover primarily only  efforts whose results appear on the market place of our economy.  A student of social affairs who is interested in the total productivity  of the nation, including those efforts which, like housewives' services,  do not appear on the market, can therefore use our measures only with some qualifications." 
Back in the Depression, as Kuznets noted, there was a shift from the market-paid work that was part of GDP to household services that were not counted in GDP. But in more recent decades, the shift has tended to go the other direction, as people have tended to shift away from household production and instead to purchase a larger share of these services in the market. Benjamin Bridgman at the US Bureau of Economic Analysis offers an overview of how these calculations are done and the trends over time in "Accounting for Household Production in the National Accounts: An Update, 1965–2014," in the February 2016 issue of Survey of Current Business.

The starting point is to use surveys of time use, like the American Time Use Survey (ATUS) and the Multinational Time Use Survey (MTUS). The categories and reporting in these surveys have varied over time, and thus the results should be interpreted with a degree of caution, but broadly, there are seven categories of household production "housework, cooking, odd jobs, gardening, shopping, child care, and domestic travel." Then the hours spent on these tasks are multiplied by the wage commonly paid in the market for those doing these domestic tasks.

The value of household services was equal to about 37% of GDP in 1965, but is currently equal to about 23% of GDP. As Bridgeman writes:
"Household production has declined in importance over time as more women engage in market work. ... Including household production in 2014 would increase national output by 23 percent, less than the 26 percent in 2008. Since much of the decline in market work was driven by men, who spend relatively little time in home production, the shift is not enough to counteract the general decline of the household sector. The gap between working and nonworking men is also relatively small, so moving a man from the market to the home does not increase his hours much. Working men spent an average of 16.2 hours per week in household production, only slightly less than the 21.2 for nonemployed men. In contrast, the movement of women into market work had a big impact since there is a significant difference in hours that employed and nonemployed women devote to home production. Working women devoted 23.2 hours of household production compared with 33.2 hours for nonworking women in 2014." 

Saturday, March 18, 2017

American Leisure: TV and a Bit of Socializing

The most fundamental tradeoff that individuals face is time: no matter your income, education level, gender, ethnicity, we all get precisely 1,440 minutes each day, and 168 hours each week. The American Time Use Survey, conducted by the Census Bureau, surveys a nationally representative group Americans on their use of time. Here are some patterns of American leisure.

Americans average about five hours of leisure time each day, and they spend 55% of that time watching television. 
Leisure time on an average day

In the April/May issue of 1843 magazine (published by The Economist), James Tozer digs down into the American Time Use Survey data a little further, in a short "What the numbers say"  article on "Leisure time." For example, here's a breakdown of total leisure per day, in minutes, by demographic categories. Men, the less educated, and the elderly tend to have more leisure time.

Tozer also looks at how leisure time changes between 2006 and 2015. In this figure, the size of the circles is proportional to how much time was spent on leisure time just on weekends and holidays. The different colors show age groups. The axis on the right-hand side shows how time spent in these categories shifted from 2006-2015. Thus, older folks are watching more TV and spending less time on reading and thinking. Younger folks are spending a little less time watching TV, a lot less time socializing, and a lot more time on their computers and phones.

As I wrote about five years ago on this website:
Economists sometimes quote the old proverb: "De gustibus non est disputandum." There's no arguing over taste. We tend to accept consumer tastes and preferences as given, and proceed from there. I suppose that those of us who blog, and then hope for readers, can't really complain about those who spend time looking at a screen. I certainly have my own personal time-wasters, like reading an inordinate number of mysteries. I assume that for many people the television is on in the background of other activities. But at some deep level, I just don't understand averaging 8 hours of television per day [per household]. I always remember the long-ago jibe from the old radio comedian Fred Allen:"Television is a medium because anything well done is rare."

Friday, March 17, 2017

Africa's Cities: The Low Development Trap

A few weeks ago, I offered some thoughts on "Agriculture in Sub-Saharan Africa" (February 22, 2017). For a complementary useful look at the urban side of Africa's development issues, a team of World Bank researchers led by Somik Vinay Lall, J. Vernon Henderson, and Anthony J. Venables have published Africa's Cities: Opening Doors to the World. This report isn't a bloodless overview of the trends and patterns of urbanization; instead, it's an argument with a thesis that urbanization in Africa is not serving as an engine for growth.  They write:
In principle, cities should benefit businesses and people through increased economic density. Firms clustered in cities should be able to access a wider market of inputs and buyers, with reduced production costs thanks to scale economies. Workers should consume more diverse products and services, pay less for what they consume, and enjoy easier commutes because of proximity to their jobs. Africa’s cities feel crowded precisely because they are not dense with economic activity, infrastructure, or housing and commercial structures. ... 
Typical African cities share three features that constrain urban development and create daily challenges for residents:
  • Crowded, not economically dense — investments in infrastructure, industrial and commercial structures have not kept pace with the concentration of people, nor have investments in affordable formal housing; congestion and its costs overwhelm the benefits of urban concentration.
  • Disconnected — cities have developed as collections of small and fragmented neighborhoods, lacking reliable transportation and limiting workers’ job opportunities while preventing firms from reaping scale and agglomeration benefits.
  • Costly for households and for firms — high nominal wages and transaction costs deter investors and trading partners, especially in regionally and internationally tradable sectors; workers’ high food, housing, and transport costs increase labor costs to firms and thus reduce expected returns on investment. ..
In sum, the ideal city can be viewed economically as an efficient labor market that matches employers and job seekers through connections (Bertaud 2014). The typical African city fails in this matchmaker role.  A central reason for this failure — one that has not yet been sufficiently recognized — is that the city’s  land use is fragmented. Its transport infrastructure is insufficient, and too much of its development occurs through expansion rather than infill. While the underlying causes of these problems are regulatory and institutional, the effects of spatial fragmentation are material: It limits urban economies. ... And without the economic density that gives rise to efficiency, Africa’s cities do not seem to increase worker productivity.  ...
Cities in Africa are costly for households, workers, and businesses. Because food and building costs are high,  families can hardly remain healthy or afford decent housing. Because commuting by vehicle is not only  slow but expensive, workers find it hard to take and keep jobs that match their skills. And the need for higher wages to pay higher living costs makes firms less productive and competitive, keeping them out of tradable sectors. As a result, African cities are avoided by potential regional and global investors and trading partners. ...
When urban costs drive nominal wages too high, firms will not be able to compete in the tradable sector and will produce only nontradables. The nontradable sector includes certain goods (beer and cement are examples), the construction trade, the retail trade, and many service sector activities, including informal sector employment. Demand for these goods and services comes from income generated within the city and its hinterland — but also from income transferred from outside, such as resource rents, tax revenues, and foreign aid.
The reason why a firm in the nontradable sector can afford to pay higher wages — while a firm in the tradable sector cannot — is that the nontradable producer can raise its prices citywide. By doing so, it passes its own cost increases on to consumers in the urban market. But such price hikes make the cost of living in a city even higher, contributing to the workers’ urban costs. This sequence can become a vicious cycle that keeps African cities out of the tradable sector and limits their economic growth.
The report is full of facts, patterns, and insights documenting these claims across urban areas in countries of sub-Saharan Africa. Some bits that caught my eye:
"In eight representative African cities, roads occupy far lower shares of urban land than in other cities around the world."

"Related to the predominance of informal housing near African city centers is their relative lack of built-up area. For example, in both Harare, Zimbabwe and Maputo, Mozambique, more than 30 percent of land within five kilometers of the central business district remains unbuilt. This land near the core is not left unbuilt by design in African cities, as it can be in well-developed downtowns such as Paris (which reserves 14 percent of downtown land for green space, making densely populated districts more livable). Instead, outdated and poorly enforced city plans, along with dysfunctional property markets, create inefficient land use patterns that no one intended. The downtown lacks structures — despite being crowded." 
"Without adequate formal housing in reach of jobs, and without transport systems to connect people living farther away, Africans forgo services and amenities to live in cramped quarters near their work. ... Across Africa, 60 percent of the urban population is packed into slums— much higher than the 34 percent seen elsewhere."
"African households face higher costs relative to their per capita GDP than households in other regions. ... Housing and transport are especially costly in urban Africa. Relative to their income levels, urban residents pay 55 percent more for housing in Africa than they do in other regions. Urban transport, which includes prices of vehicles and transport services, is about 42 percent more expensive in African cities than in cities elsewhere. ...  For the poorest urban residents especially, the cost of vehicle transport in some cities is prohibitive. The need to walk to work limits these residents’ access to jobs. The price premium for food is also large (about 35 percent)."
"African cities also are disconnected in that they are spatially dispersed. Structures are scattered in small neighborhoods. Without adequate roads or transport systems, commuting is slow and costly, denying workers access to jobs throughout the larger urban area. People and firms are separated from each other and from economic opportunity. And because urban form is determined by long-lived structures that shape the city for decades — if not centuries — cities that assume a disconnected form can easily become locked into it. ... African cities are 20 percent more fragmented than are Asian and Latin American ones."

What public policy emphases are implied by these insights? Lall, Henderson, and Venables write:
Africa’s urban areas are quickly gaining in population: Home to 472 million people now, they will be twice as large in 25 years. The most populous cities are growing as fast as 4 percent annually. Productive jobs, affordable housing, and effective infrastructure will be urgently needed for residents and newcomers alike. In urgency lies opportunity. Leaders can still set their cities onto more efficient development paths if they act swiftly — and if they can resist flashy projects, steadfastly pursuing two main goals in order of priority:
  • First, formalize land markets, clarify property rights, and institute effective urban planning.
  • Second, make early and coordinated infrastructure investments that allow for interdependence among sites, structures, and basic services.
A third goal is to improve urban transport and additional services. But this must not come ahead of the two goals listed above — nor can it be achieved unless those are met first.

Thursday, March 16, 2017

The Rise and Fall of Personal Interest Income

Yesterday, the Federal Reserve tweaked interest rates upward one more time, "to raise the target range for the federal funds rate to 3/4 to 1 percent." Most of the commentary has focused focuses on the macroeconomics of whether or when rates should rise, which seems appropriate. But spare a thought for those, including retirees, insurance companies, and pension funds, who depend on investments that make interest payments as part of their portfolio. One obvious consequence of the low interest rates in recent is that personal income received in the form of interest payments has also declined.

Here's a figure showing personal interest income received since the 1950s. The drop in interest payments received as personal income after the Federal Reserve cut interest rates to fight recession in 2001, and again in 2007-2008, are clearly visible.

To put this nominal data in a more revealing perspective, I've divided personal interest income by the size of the economy, as measured by GDP, which is a rough-and-ready way of adjusting for both economic growth and inflation over time. The result was striking:

The hump-shaped curve is striking to me. Back in the late 1940s, the main task of the Federal Reserve in the aftermath of World War II was to keep interest rates low so that government interest payments on the wartime debt would stay affordable. But the Fed broke lose from this arrangement and regained its independence with what is sometimes called the Treasury-Fed Accord of 1951. Interest rates rose, and so did the quantity of financial instruments paying interest, so the personal income received in the form of income rose, too.

The 1980s were a peculiar time for interest income. The blue line in the figure below shows the annual inflation rate. The red line shows an interest rate commonly used as a benchmark for the overall level of interest rates, the interest rate on 10-year Treasury bonds. High inflation during the 1970s had pushed nominal interest rates way up. The drop in inflation around 1983 came more suddenly than many had expected, and so there is a period when the real rate of return on many interest-bearing investment (that is, the gap between the red and the blue line) was unexpectedly high.

During that period in the mid-1980s, personal income from interest payments was historically high relative to GDP. But since then, interest rates have gradually drifted lower, and during a number of time periods, the returns available from alternative investments in the stock market looked quite attractive. Personal income received in the form of interest payments has drifted lower, although not yet back to the level of the 1950s.

Wednesday, March 15, 2017

US Health Care: The Case For Going Upstream

I suppose that anyone who is paying attention to US health care issues knows the basic pattern: the US spends much more on health care on a per capita basis, but life expectancy and other health outcomes in the US are often less than in comparable countries. But here's a striking figure created by Max Roser in July 2016 making this point, and available  as one of many useful figures at "Financing Healthcare," by Esteban Ortiz-Ospina and Max Roser, at their "Our World in Data" website.

The figure shows patterns of health spending and life expectancy in various high-income countries from 1970 to 2014. Around 1970, all the countries are down in the bottom left corner of the figure. Over time, both health spending and life expectancy rise everywhere. But as you can see, the US is an outlier. Over the last 45 years or so, US health spending rises to much higher levels than in other countries, while the gains in life expectancy have been much more modest.

The US political arguments over health care have pretty much ignored this pattern: that is, we argue back and forth over costs and coverage of US health insurance, but we spend relatively little time thinking about what public policy steps would most improve health.

The March/April 2017 issue of the Rand Review has a short essay by Doug Irving, "What Are the Social Determinants of Health?" (pp. 6-10), which describes some research in this area. One can make a plausible case that the US could improve its life expectancy and health levels with a tradeoff of less social spending on health care, but more social spending on housing, food, education, drug rehabilitation, and safe neighborhoods.  Irving writes:
"Where people live, what kinds of educational opportunities they have access to—these all seem to have strong effects on health,” said Kathryn Pitkin Derose, a senior policy researcher at RAND. ... She uses a simile that has become common in public-health circles to explain that need for a broader view of health care. The current system, she says, is like a lifeguard standing on the banks of a rushing river, always jumping in to rescue people at the last moment as they struggle in the water. What is needed, she says, is a new perspective—a new focus on what causes so many people to fall into the river in the first place, and on addressing those problems before more people follow. “You have to go upstream,” she says, “to see what's really affecting people's health.”
It's a question of opportunity cost: when the government devotes so much of its spending and so much of its support for those with low incomes to health care spending, other possibilities for social spending are inevitably constricted.

For a previous post arguing that a substantial share of health spending is wasted, both in the US and around the world, see "Wasteful Health Care Spending" (February 23, 2017).

Homage: I ran across this figure at Mark Thoma's ever-useful "Economist's View" blog.

Tuesday, March 14, 2017

Pigouvian Taxes and Bounties

The idea of a Pigouvian tax traces back to the classic 1920 book by Arthur C. Pigou, The Economics of Welfare. The concept is straightforward. There are certain situations, like those involving pollution, where the unregulated producer of a good does not need to take the social costs of pollution into account. As a result, the private costs of production are not equal to the social costs. In such a situation, one can make a case for the government to impose a tax--a "Pigouvian tax"--which forces the producer to pay for the social costs that it is imposing. 

In Part II, Chapter IX of the 1920 book, Pigou discusses "Divergences Between Marginal Social Net Product and Marginal Private Net Product."  He offers a clear statement of what modern economists mean by a Pigovian tax, but in the course of explaining the economic logic also provides some ammunition to those who fear that government may have quite a difficult time in applying such taxes. I quote here from the version of Pigou's book available at the always-useful Library of Economics and Liberty website.

Pigou starts the chapter by discussing situations in which social and private costs might not be aligned for reasons of lack of competition, like monopoly, or in situations like landlords and tenant-farmers where it may be difficult to negotiate who will pay for investing in improvements to productive capacity and who will get the benefits. He then moves to the arguments over what modern economists refer to as externalities and public goods. Pigou writes:
"Here the essence of the matter is that one person A, in the course of rendering some service, for which payment is made, to a second person B, incidentally also renders services or disservices to other persons (not producers of like services), of such a sort that payment cannot be exacted from the benefited parties or compensation enforced on behalf of the injured parties. ... 
"Among these examples we may set out first a number of instances in which marginal private net product falls short of marginal social net product, because incidental services are performed to third parties from whom it is technically difficult to exact payment. Thus, as Sidgwick observes, "it may easily happen that the benefits of a well-placed light-house must be largely enjoyed by ships on which no toll could be conveniently levied."Again, uncompensated services are rendered when resources are invested in private parks in cities; for these, even though the public is not admitted to them, improve the air of the neighbourhood. The same thing is true—though here allowance should be made for a detriment elsewhere—of resources invested in roads and tramways that increase the value of the adjoining land—except, indeed, where a special betterment rate, corresponding to the improvements they enjoy, is levied on the owners of this land. It is true, in like manner, of resources devoted to afforestation, since the beneficial effect on climate often extends beyond the borders of the estates owned by the person responsible for the forest. It is true also of resources invested in lamps erected at the doors of private houses, for these necessarily throw light also on the streets. It is true of resources devoted to the prevention of smoke from factory chimneys: for this smoke in large towns inflicts a heavy uncharged loss on the community, in injury to buildings and vegetables, expenses for washing clothes and cleaning rooms, expenses for the provision of extra artificial light, and in many other ways.Lastly and most important of all, it is true of resources devoted alike to the fundamental problems of scientific research, out of which, in unexpected ways, discoveries of high practical utility often grow, and also to the perfecting of inventions and improvements in industrial processes. These latter are often of such a nature that they can neither be patented nor kept secret, and, therefore, the whole of the extra reward, which they at first bring to their inventor, is very quickly transferred from him to the general public in the form of reduced prices. The patent laws aim, in effect, at bringing marginal private net product and marginal social net product more closely together. By offering the prospect of reward for certain types of invention they do not, indeed, appreciably stimulate inventive activity, which is, for the most part, spontaneous, but they do direct it into channels of general usefulness."
There's a lot of content packed into that paragraph. Pigou is pointing out that private and social costs are likely to be misaligned in various public goods (lighthouses, parks in cities, forests), as well as in the effects of pollution, and in the effects of scientific innovation. In these cases, economic theory suggests the possibility that by using taxes related to the social costs of certain actions (like pollution) or subsidies (he calls them "bounties" related to the social benefits of certain actions, like innovation. Pigou writes:
"It is, however, possible for the State, if it so chooses, to remove the divergence [between social and private costs] in any field by "extraordinary encouragements" or "extraordinary restraints" upon investments in that field. The most obvious forms which these encouragements and restraints may assume are, of course, those of bounties and taxes. Broad illustrations of the policy of intervention in both its negative and positive aspects are easily provided. ...
"The private net product of any unit of investment is unduly large relatively to the social net product in the businesses of producing and distributing alcoholic drinks. Consequently, in nearly all countries, special taxes are placed upon these businesses. Marshall was in favour of treating in the same way resources devoted to the erection of buildings in crowded areas. He suggested, to a witness before the Royal Commission on Labour, "that every person putting up a house in a district that has got as closely populated as is good should be compelled to contribute towards providing free playgrounds."The principle is susceptible of general application. It is employed, though in a very incomplete and partial manner, in the British levy of a petrol duty and a motor-car licence tax upon the users of motor cars, the proceeds of which are devoted to the service of the roads. It is employed again in an ingenious way in the National Insurance Act. When the sickness rate in any district is exceptionally high, provision is made for throwing the consequent abnormal expenses upon employers, local authorities or water companies, if the high rate can be shown to be due to neglect or carelessness on the part of any of these bodies."
In short, Pigou back in 1920 was offering an economic justification for taxes on alcohol and gasoline, as well as for property taxes used to support local parks and amenities. This all holds together as a matter of theory and logic. But as usual when moving from theory to policy, the devil is in the details. Here, I'll point to two sets of concerns that arise from reading Pigou. 

First, it's important to remember the decisions about which Pigovian taxes and bounties will be set up that the decisions are not made by the disinterested angels of our better nature, or even by economists, but rather by politicians. Later in the book, Part II, Chapter XX, is titled "Intervention by Public Authorities," and there Pigou offers this important distinction between the theoretical case for Pigouvian taxes and the practical reality: 
In any industry, where there is reason to believe that the free play of self-interest will cause an amount of resources to be invested different from the amount that is required in the best interest of the national dividend, there is a prima facie case for public intervention. The case, however, cannot become more than a prima facie one, until we have considered the qualifications, which governmental agencies may be expected to possess for intervening advantageously. It is not sufficient to contrast the imperfect adjustments of unfettered private enterprise with the best adjustment that economists in their studies can imagine. For we cannot expect that any public authority will attain, or will even whole-heartedly seek, that ideal. Such authorities are liable alike to ignorance, to sectional pressure and to personal corruption by private interest. A loud-voiced part of their constituents, if organised for votes, may easily outweigh the whole. This objection to public intervention in industry applies both to intervention through control of private companies and to intervention through direct public operation. On the one side, companies, particularly when there is continuing regulation, may employ corruption, not only in the getting of their franchise, but also in the execution of it. ...  On the other side, when public authorities themselves work enterprises, the possibilities of corruption are changed only in form. ... [Here Pigou quotes the US-based Report to the National Civic Federation on Municipal and Private Operation of Public Utilities.] "Every public official is a potential opportunity for some form of self-interest arrayed against the common interest."
A second concern is about the potential breadth of the Pigovian argument. Many modern economists would accept the theory of a Pigouvian tax applied in the case of pollution or a Pigouvian bounty applied to subsidizing scientific research, with some degree of hesitancy over the political economy concerns. But Pigou mentions a number of other cases in which social and private costs may diverge. For example:

When construction of factories imposes costs on neighborhoods
"... when the owner of a site in a residential quarter of a city builds a factory there and so destroys a great part of the amenities of the neighbouring sites; or, in a less degree, when he uses his site in such a way as to spoil the lighting of the houses opposite: or when he invests resources in erecting buildings in a crowded centre, which, by contracting the air space and the playing-room of the neighbourhood, tend to injure the health and efficiency of the families living there."

When women work in factories
"Perhaps, however, the crowning illustration of this order of excess of private over social net product is afforded by the work done by women in factories, particularly during the periods immediately preceding and succeeding confinement; for there can be no doubt that this work often carries with it, besides the earnings of the women themselves, grave injury to the health of their children. ... [P]rohibition of such work should be accompanied by relief to those families whom the prohibition renders necessitous." 
When those who buy new products make other people envious
"For, in some measure, people's affection for the best quality of anything is due simply to the fact that it is the best quality; and, when a new best, superior to the old best, is created, that element of value in the old best is destroyed. Thus, if an improved form of motor car is invented, an enthusiast who desires above all "the very latest thing" will, for the future, derive scarcely any satisfaction from a car, the possession of which, before this new invention, afforded him intense pleasure. In these circumstances the marginal social net product of resources invested in producing the improved type is somewhat smaller than the marginal private net product."
When certain industries like agriculture help to make people suitable for military training
"The private net product of any unit of investment is unduly small in industries, such as agriculture, which are supposed to yield the indirect service of developing citizens suitable for military training. Partly for this reason agriculture in Germany was accorded the indirect bounty of protection."
When a city plan makes it necessary to demolish some buildings
"Thus it is coming to be recognised as an axiom of government that, in every town, power must be held by some authority to limit the quantity of building permitted to a given area, to restrict the height to which houses may be carried,—for the erection of barrack dwellings may cause great overcrowding of area even though there is no overcrowding of rooms,—and generally to control the building activities of individuals. It is as idle to expect a well-planned town to result from the independent activities of isolated speculators as it would be to expect a satisfactory picture to result if each separate square inch were painted by an independent artist. No "invisible hand" can be relied on to produce a good arrangement of the whole from a combination of separate treatments of the parts. It is, therefore, necessary that an authority of wider reach should intervene and should tackle the collective problems of beauty, of air and of light, as those other collective problems of gas and water have been tackled. ... Furthermore, it may, if desired, be extended to include land on which buildings have already been put up, and may provide "for the demolition or alteration of any buildings thereon, so far as may be necessary for carrying the scheme into effect."" 
When advertising just cancels out the effect of other advertising
"[I]t may happen that the expenditures on advertisement made by competing monopolists will simply neutralise one another, and leave theindustrial position exactly as it would have been if neither had expended anything. For, clearly, if each of two rivals makes equal efforts to attract thefavour of the public away from the other, the total result is the same as it would have been if neither had made any effort at all."
As these examples (and Pigou offers others) suggest, the idea of Pigouvian taxes and bounties applies in any and every situation where someone can make an argument that someone else is affected by a market transaction--even if just makes someone feel bad when someone else buys a new product.  It seems to me that almost every public policy argument can be framed in terms of avoiding social costs or gaining social benefits.  Again, remember that these arguments are not being made among pure-hearted truth-seekers, but rather in a political setting.

Thus, a question arises of how one disciplines the process of deciding when the Pigouvian logic applies. For example, it's common on one side to hear arguments that there is a case for Pigouvian bounties to subsidize the research and development that leads to  new innovations and higher productivity. On the other side, it's common to hear arguments that there is a Pigouvian case for limiting robots or other new innovations so that they don't impose costs on existing workers. But a set of policies that simultaneously encourage and discourage innovation runs a real risk of expressing our ambivalent feelings about new technology in way that is close to incoherent.

A related problem in thinking about Pigovian taxes arises when choosing the tax rate. For example, in the case of alcohol there is some evidence that moderate consumption may have health benefits, through a reduction in blood pressure. However, inappropriate and excessive consumption of alcohol can also lead to drunken driving, violence, fetal alcohol syndrome, and other consequences. Thus, it seems as if the appropriate Pigouvian tax on alcohol should be to subsidize the light social drinker, but to impose a high tax on drinkers who impose high social costs. When the effects of an action on third parties are heterogenous in this way. choosing an appropriate Pigouvian tax becomes tricky, and society may well feel a need for use of alternative or complementary policy tools.

Like many economists, I favor certain taxes and subsidies on Pigouvian grounds. But it's worth remembering that the arguments in such cases are not just technocratic, but ultimately involve value judgments about political economy and social welfare.

Monday, March 13, 2017

Differing Productivity Across US Industries

I like to point out that a nation's economy is very different than a nation's Olympic team. With the Olympic team, a relatively small number of extraordinary athletes can make a country look good, even if the rest of us are snoozing on the sofa while watching on television. But in the national economy, having a few extraordinary companies or workers isn't enough. For a nation's economy everyone counts. If substantial groups of people are not gaining the skills and experience to work up to their capabilities, the economy as a whole suffers. If a substantial number of industries are not seeing an ongoing increase in productivity, then productivity at the national level will suffer.

The rise in productivity has been quite different across US industries in the last couple of decades, as
Matthew Russell points out in "Economic productivity in the air transportation industry: multifactor and labor productivity trends, 1990–2014," published in the Monthly Labor Review (March 2017). As the title implies, a main focus is on productivity in air transportation, but this story is set in a broader context. 

Pause a moment and make a guess: What are a few US industries that you would expect to have the highest productivity growth from 1997-2014? Lowest productivity growth. Here's the list from Russell of US industries by annual growth rate of productivity during that time: 

At the top of the list, it's no surprise that "Computer and electronic products" lead the way, given teh pace of innovation in that industry. But at least to me, seeing "Air transportation" as the second industry on the list is a surprise. At the bottom of the list, the surprise for me is that 19 industries averaged negative productivity growth over this 17-year period--not just slow productivity growth, but actually negative. Last week I wrote about one of those industries in "Sagging Productivity in Construction" (March 6, 2017). 

Sure, there are lots of tricky measurement issues here in looking at the quantity of output, and making appropriate adjustments for quality. But even with that taken into account, the range of average annual productivity values from positive to negative is still quite striking. 

(For those who need a quick brush-up, "labor productivity" is calculated as the output of an industry divided by the number of labor hours used as an input in production. What is shown in this table is "multifactor productivity." As Russell explains: "Multifactor productivity is defined as an index of real output divided by an index consisting of the following real combined inputs: capital (K), labor (L), energy (E), materials (M), and services (S). Multifactor productivity provides a more complete accounting of industry and productivity growth than does either labor productivity or any other single-factor productivity approach.")

What happened in the airline passenger industry? Here's a pattern of labor productivity in that industry since 1990, compared with the overall US business sector. Clearly, something happens to jolt productivity in this industry around 2002. 
Russell goes through the experience of the US airline industry over this time period in some detail. For this industry, output is measured by passenger-miles and by ton-miles for freight. Here are some nuggets about what drove the rise in productivity in the late 1990s and early 2000s (footnotes omitted). 
"American Airlines and United entered the Internet selling business through online companies in 1998 and quickly accounted for major ticket sales that saved the carriers millions of dollars through reduced passenger commissions. In 1998, some airlines began paying a flat $10 commission on tickets booked online and ceased payment as a percentage of the ticket fare charged. The move saved the airlines money and drove down real expenditures of purchased services throughout the industry. Other airlines chose to cut commissions paid to online ticket agents from 8 percent to 4 percent during the 1997–2000 period. As a result, passenger commissions fell by 34.2 percent, illustrating the great impact that direct Internet sales and passenger-enabled purchasing had on reducing commissions during the late 1990s. ...
"Real services declined by 10.8 percent over the 2000–02 timeframe as commissions on passenger airfare continued to decline substantially because of the drop in the number of passengers as well as the continued rise in Internet ticket purchasing. Commissions on passenger tickets fell by 39 percent, contributing the most to the average annual 8.2-percent downturn in combined inputs experienced from 2000 to 2002. Real-energy expenses declined by 18.1 percent, averaged annually, in 2000–02 as carriers quickly retired fuel-inefficient aircraft and switched to fuel-efficient aircraft as the price of jet fuel began a steep ascent in 2000. ... 
"The period from 2002 to 2007 saw the largest labor productivity gains in the air transportation industry over the 1990–2014 timeframe examined in this article. The increase was an average annual 9.8 percent, driven by strong output growth of 5.2 percent and falling labor input, at a rate of 4.8 percent. Labor input among legacy carriers fell as the carriers shifted their production model to meet the low-cost carrier competition’s business model. 
"Roughly three-quarters of the strong output gains in the 2002–07 period were attained through the use of narrow-bodied, single-aisle aircraft accommodating at least 60 passengers, and roughly 80 percent of the growth in output was attributable to the low-cost carriers. In particular, Southwest Airlines, which flies only one type of aircraft, a Boeing 737 single-aisle airplane, recorded an average annual 9.3-percent increase in revenue passenger miles, a percentage that led the low-cost carriers’ contributions to the overall 5.2-percent output growth.
"Declines in airline transportation employment during this period, led primarily by the legacy carriers, contributed to the sharp average annual decline of 4.8 percent in labor input. Throughout the mid-2000s, several airlines declared bankruptcy in order to restructure their debt and renegotiate labor contracts with unions. US Airways, United, Northwest, and Delta all initiated bankruptcy proceedings during the 2002–05 period and immediately sought ways to reduce their labor costs. The establishment of low-cost carriers with reduced labor costs forced the legacy air carriers to find ways to match the low-cost carriers’ savings ...  Also, labor unions made major concessions. For example, in 2003, the pilots, mechanics, ground crew, and flight attendants of American Airlines gave back nearly $2 billion in wages to the carrier in an attempt to help avoid bankruptcy. In addition to these wage concessions from the various labor unions were productivity concessions on the part of American Airlines workers that would reduce the carrier’s workforce by 2,000 to 3,000 workers.  ... In 2005, to boost productivity, Delta made major scheduling changes at its Atlanta hub. Such changes had been initiated earlier by American Airlines. The objective was to spread arrivals and departures more evenly throughout the day, limit congestion, and increase productivity. In another move, Frontier pilots agreed in 2004 to shift from a salaried pay system to an hourly pay system as a way for the company to increase pilots’ productivity by incentivizing them to fly more."
As usual, one's perspective on the productivity gains in air transportation will tend to depend on whether one is mainly a purchase of airline tickets, or whether one works for an airline. But it's useful to remember that this upheaval and job losses in US airlines was unrelated to international trade. Like most of the disruption and corporate distress that occurs in the enormous US domestic market, it was about disruptions from technology interacting with competitive struggles between US producers--with consumers benefiting from the result.

Saturday, March 11, 2017

Benjamin Franklin on the Origins of Daylight Savings Time

Daylight savings time starts this weekend.

The idea that adjusting the time of day can result in energy savings traces back to a whimsical essay written by Benjamin Franklin back in 1784. Franklin claims in the essay that while living in Paris and attending parties every night, he is habitually going to bed "three or four hours after midnight," and rising at noon. However, he is astonished to find one morning that the sun is rising and casting light at 6:00 am. He claims as his own personal discovery that while the ancients knew when the sun rose--after all, the time is in the almanac!--they did not know that the sun "gave light as soon as he rose. This is what I claim as my discovery. If the ancients knew it, it might have been long since forgotten; for it certainly was unknown to the moderns, at least to the Parisians ..." Franklin suggests that if everyone rose with the sun and went to bed with the sun during the summertime, there would be a vast savings of candle wax. The saved candle-wax could then be used during the shorter days of winter.

For the economists among us, there is a charm in how Franklin jibes at the "lovers of economy," and writes in what seems to me a jesting fashion: "I was pleased to see this general concern for economy, for I love economy exceedingly." Here's Franklin's letter:

The Journal of Paris
You often entertain us with accounts of new discoveries. Permit me to communicate to the public, through your paper, one that has lately been made by myself, and which I conceive may be of great utility.
I was the other evening in a grand company, where the new lamp of Messrs. Quinquet and Lange was introduced, and much admired for its splendour; but a general inquiry was made, whether the oil it consumed was not in proportion to the light it afforded, in which case there would be no saving in the use of it. No one present could satisfy us in that point, which all agreed ought to be known, it being a very desirable thing to lessen, if possible, the expense of lighting our apartments, when every other article of family expense was so much augmented.
I was pleased to see this general concern for economy, for I love economy exceedingly.
I went home, and to bed, three or four hours after midnight, with my head full of the subject. An accidental sudden noise waked me about six in the morning, when I was surprised to find my room filled with light; and I imagined at first, that a number of those lamps had been brought into it; but, rubbing my eyes, I perceived the light came in at the windows. I got up and looked out to see what might be the occasion of it, when I saw the sun just rising above the horizon, from whence he poured his rays plentifully into my chamber, my domestic having negligently omitted, the preceding evening, to close the shutters.
I looked at my watch, which goes very well, and found that it was but six o'clock; and still thinking it something extraordinary that the sun should rise so early, I looked into the almanac, where I found it to be the hour given for his rising on that day. I looked forward, too, and found he was to rise still earlier every day till towards the end of June; and that at no time in the year he retarded his rising so long as till eight o'clock. Your readers, who with me have never seen any signs of sunshine before noon, and seldom regard the astronomical part of the almanac, will be as much astonished as I was, when they hear of his rising so early; and especially when I assure them, that he gives light as soon as he rises. I am convinced of this. I am certain of my fact. One cannot be more certain of any fact. I saw it with my own eyes. And, having repeated this observation the three following mornings, I found always precisely the same result.
Yet it so happens, that when I speak of this discovery to others, I can easily perceive by their countenances, though they forbear expressing it in words, that they do not quite believe me. One, indeed, who is a learned natural philosopher, has assured me that I must certainly be mistaken as to the circumstance of the light coming into my room; for it being well known, as he says, that there could be no light abroad at that hour, it follows that none could enter from without; and that of consequence, my windows being accidentally left open, instead of letting in the light, had only served to let out the darkness; and he used many ingenious arguments to show me how I might, by that means, have been deceived. I owned that he puzzled me a little, but he did not satisfy me; and the subsequent observations I made, as above mentioned, confirmed me in my first opinion.
This event has given rise in my mind to several serious and important reflections. I considered that, if I had not been awakened so early in the morning, I should have slept six hours longer by the light of the sun, and in exchange have lived six hours the following night by candle-light; and, the latter being a much more expensive light than the former, my love of economy induced me to muster up what little arithmetic I was master of, and to make some calculations, which I shall give you, after observing that utility is, in my opinion the test of value in matters of invention, and that a discovery which can be applied to no use, or is not good for something, is good for nothing.
I took for the basis of my calculation the supposition that there are one hundred thousand families in Paris, and that these families consume in the night half a pound of bougies, or candles, per hour. I think this is a moderate allowance, taking one family with another; for though I believe some consume less, I know that many consume a great deal more. Then estimating seven hours per day as the medium quantity between the time of the sun's rising and ours, he rising during the six following months from six to eight hours before noon, and there being seven hours of course per night in which we burn candles, the account will stand thus;--
In the six months between the 20th of March and the 20th of September, there are
Nights 183
Hours of each night in which we burn candles 7
Multiplication gives for the total number of hours 1,281
These 1,281 hours multiplied by 100,000, the number of inhabitants, give 128,100,000
One hundred twenty-eight millions and one hundred thousand hours, spent at Paris by candle-light, which, at half a pound of wax and tallow per hour, gives the weight of 64,050,000
Sixty-four millions and fifty thousand of pounds, which, estimating the whole at-the medium price of thirty sols the pound, makes the sum of ninety-six millions and seventy-five thousand livres tournois 96,075,000

An immense sum! that the city of Paris might save every year, by the economy of using sunshine instead of candles. If it should be said, that people are apt to be obstinately attached to old customs, and that it will be difficult to induce them to rise before noon, consequently my discovery can be of little use; I answer, Nil desperandum. I believe all who have common sense, as soon as they have learnt from this paper that it is daylight when the sun rises, will contrive to rise with him; and, to compel the rest, I would propose the following regulations; First. Let a tax be laid of a louis per window, on every window that is provided with shutters to keep out the light of the sun.
Second. Let the same salutary operation of police be made use of, to prevent our burning candles, that inclined us last winter to be more economical in burning wood; that is, let guards be placed in the shops of the wax and tallow chandlers, and no family be permitted to be supplied with more than one pound of candles per week.
Third. Let guards also be posted to stop all the coaches, &c. that would pass the streets after sunset, except those of physicians, surgeons, and midwives.
Fourth. Every morning, as soon as the sun rises, let all the bells in every church be set ringing; and if that is not sufficient?, let cannon be fired in every street, to wake the sluggards effectually, and make them open their eyes to see their true interest.
All the difficulty will be in the first two or three days; after which the reformation will be as natural and easy as the present irregularity; for, ce n'est que le premier pas qui coƻte. Oblige a man to rise at four in the morning, and it is more than probable he will go willingly to bed at eight in the evening; and, having had eight hours sleep, he will rise more willingly at four in the morning following. But this sum of ninety-six millions and seventy-five thousand livres is not the whole of what may be saved by my economical project. You may observe, that I have calculated upon only one half of the year, and much may be saved in the other, though the days are shorter. Besides, the immense stock of wax and tallow left unconsumed during the summer, will probably make candles much cheaper for the ensuing winter, and continue them cheaper as long as the proposed reformation shall be supported.
For the great benefit of this discovery, thus freely communicated and bestowed by me on the public, I demand neither place, pension, exclusive privilege, nor any other reward whatever. I expect only to have the honour of it. And yet I know there are little, envious minds, who will, as usual, deny me this and say, that my invention was known to the ancients, and perhaps they may bring passages out of the old books in proof of it. I will not dispute with these people, that the ancients knew not the sun would rise at certain hours; they possibly had, as we have, almanacs that predicted it; but it does not follow thence, that they knew he gave light as soon as he rose. This is what I claim as my discovery. If the ancients knew it, it might have been long since forgotten; for it certainly was unknown to the moderns, at least to the Parisians, which to prove, I need use but one plain simple argument. They are as well instructed judicious, and prudent a people as exist anywhere in the world all professing, like myself, to be lovers of economy; and,from the many heavy taxes required from them by the necessitities of the state, have surely an abundant reason to be economical. I say it is impossible that so sensible a people, under such circumstances, should have lived so long by the smoky, unwholesome, and enormously expensive light of candles, if they had really known, that they might have had as much pure light of the sun for nothing. I am, &c.

P.S. The concept of Daylight Savings Time is sometimes attributed to George Hudson, a New Zealand etymologist, who proposed the concept in an 1895 meeting, as reported in the Transactions and Proceedings of the Royal Society of New Zealand 1868-1961and  then followed up with a fuller discussion in an 1898 paper in the same publication outlet.  Franklin's earlier discussion was already known at the time; for example, a critical discussant in the 1895 meeting "said that the only practical part of Mr. Hudson's paper had long since been anticipated by Benjamin Franklin." However, Hudson certainly deserves credit for working out details in a more systematic way than Franklin's more whimsical letter.

P.P.S. For those not yet sated on this subject, here's a post from last year on "The Economics of Daylight Savings Time" (March 31, 2016).

Friday, March 10, 2017

Secular Stagnation vs. Financial Cycle Drag

With rates of unemployment and inflation at low levels by historical standards, the central issue for the US economy is slow growth in productivity and the overall economy.  Claudio Borio looks at two of the main hypotheses for the slowdown in "Secular stagnation or financial cycle drag?" which was given as a lecture last week at the National Association for Business Economics annual meeting held in Washington, DC.

Borio is head of the Monetary and Economic Department at the Bank of International Settlements. In turn, BIS was set up in 1930 and its membership is made up of 60 central banks from all over the world. BIS acts as a bank for central banks in certain international financial transactions, and also holds meetings and does research to encourage communication between central banks. Under Borio's leadership, the BIS has been a strong voice expressing concerns over financial cycle and their deleterious effects, so no one who knows the BIS research output will be surprised that he finds financial cycle drag, rather than secular stagnation, the more plausible explanation for slow growth. Here's how he lays out the argument (for readability, citations, footnotes, and references to graphs are omitted):

The secular stagnation hypothesis can be summarised in three propositions. First, the world has been haunted for a very long time, well before the crisis, by a structural aggregate demand deficiency that is likely to persist well into the future and keep growth sluggish. Many factors are typically mentioned in this context, including ageing populations, growing income and wealth inequality, and falling tangible investment owing to technological change. Second, the pre-crisis financial boom (or “bubble”) was the only reason why output reached potential, ie full employment. Third, and more technically, the natural (or equilibrium) real interest rate has been falling steadily and has been negative for some time. Now, the natural or equilibrium interest rate is typically defined as the rate that would prevail if output was at its potential level and hence inflation was stable. So, in plainer language, given the major structural demand deficiency, real (inflation-adjusted) interest rates must be negative in order to ensure that the economy operates at full employment and to avoid a costly deflationary spiral. Such a spiral would arise because, with nominal interest rates stuck at the zero lower bound, falling prices would raise real interest rates, which would cut spending further, which, in turn, would depress output and employment and hence prices, and so on. 
The financial cycle drag hypothesis can also be summarised in three propositions – largely the mirror image of the previous ones. First, the world has been haunted by the inability to restrain financial booms that, once they turn to bust, cause huge and long-lasting economic damage – deep and protracted recessions, weak and drawn-out recoveries, and persistently slower productivity growth. Such outsize financial cycles are best characterised by the joint fluctuations in credit and asset prices, especially property prices, as risk-taking ebbs and flows. And they tend to be much longer than “traditional” business cycles (say, 15–20 years rather than 8–10). Second, the pre-crisis boom actually pushed output above potential and undermined productivity. In other words, it was not even required to achieve full employment. Third, the natural or equilibrium real interest rate is positive and considerably higher than the secular stagnation hypothesis would suggest. There are two related reasons for this. Defining and measuring an equilibrium rate without explicitly considering the build-up of financial imbalances is too narrow an approach. In addition, the global demand deficiency has been overestimated while the role of primarily positive, and benign, secular supply side global factors in driving inflation has been underestimated. ...
The [secular stagnation] hypothesis is quite compelling in some respects, but even a cursory look at the facts raises some questions. The hypothesis was originally developed for the Unites States, a country that posted a large current account deficit even pre-crisis – hardly a symptom of domestic demand deficiency. True, US growth pre-crisis was not spectacular, but it was not weak either – recall how people hailed the Great Moderation, an era of outstanding performance. Likewise, the world as a whole saw record growth rates and low unemployment rates – again, hardly a symptom of global demand deficiency. Finally, recent declines in unemployment rates to historical averages – and, in some cases, such as the United States, close to estimates of full employment – point to supply, rather than demand, constraints on growth. 
At the same time, a number of specific pieces of evidence support the financial cycle drag hypothesis. First, there is plenty of evidence that banking crises, which occur during financial busts, cause very long-lasting damage to the economy. They result in permanent output losses, so that output may regain its pre-crisis long-term growth trend but evolves along a lower path. There is also evidence that recoveries are slower and more protracted. And in some cases, growth itself may also be seriously damaged for a long time. If so, given the GFC’s almost unprecedented depth and breadth, the subsequent evolution of output is not that surprising – although it would have been so for forecasters that did not adjust their “models” to take such patterns into account. 
Second, BIS research has found evidence that financial (credit) booms tend to undermine productivity growth, further helping to explain the post-crisis weakness ... Drawing on a sample of over 40 countries and over 40 years, the data suggest that this happens mainly as a result of a misallocation of resources towards lower-productivity growth sectors, notably construction, and that the impact of the misallocations that occur during the boom is twice as large in the wake of a subsequent banking crisis. The reasons are unclear, but may reflect, at least in part, the fact that overindebtedness and a broken banking system make it harder to reallocate resources away from bloated sectors during the bust. ...  The findings could help explain the faster pace of the long-term decline in productivity growth seen in recent years. 
Third, measures of output gaps used in policymaking now show that output was indeed above potential pre-crisis. ... The reason is simple: the symptom of unsustainable expansion was not rising inflation, which stayed low and stable, but the buildup of financial imbalances, in the form of unusually strong and persistent credit growth and property price increases. 
Or course, one need not make a totally black-or-white choice between the secular stagnation and the financial cycle drag hypotheses. For example, one could believe in secular stagnation, and still feel that it's pretty important to find ways to prevent financial cycles from blowing up into bubbles and crises.