Monday, September 25, 2017

Child Labor in Decline

The phrase "child labor" conjures up such ugly images for me that it's hard to discuss it dispassionately. But the International Labour Organization has a recent report, "Global Estimates
of Child Labour: Results and Trends 2012-2016" that offers some useful facts and distinctions.

It would of course be peculiar to count every employed child as a human rights abuse. For example, in 2016 the ILO counts 216 million children as "in employment." However, 151 million of them are counted in the more concerning category of "child labor," which is largely determined by the number of hours worked. For example, any child in the 5-11 age category who is "in employment" is also counted as "child labor." But children in the 15-17 age bracket need to work 43 hours per week or more to be counted is "child labor." Another subcategory is "hazardous work," which includes the physically or emotionally hazardous, along with the illegal.

The figure shows the categories of "child labor" and "hazardous work" from 2000-2016. The steady decline over time is apparent. Of course, the numbers should not be taken as precise.  "The 2016 estimates use data from a total of 105 national household surveys covering more than 70 per cent of the world population of children aged 5 to 17 years." It's easy to hypothesize about reasons why some countries might understate (to make themselves look better) or overstate (to attract international aid) or just not know (because of weak statistical apparatus) the level of child labor. But the overall downward trend is highly unlikely to be a result of some trend in survey bias.



Here are a few ways of slicing up the underlying data:

By region: "The Africa region and the Asia and the Pacific region together host nine out of every ten children in child labour. Africa ranks highest both in the percentage of children in child labour – one-fifth – and the absolute number of children in child labour – 72 million. Asia and the Pacific ranks second highest in both these measures – 7 per cent of all children, 62 million in absolute terms, are in child labour in this region."

Effect of armed conflict on child labor: "The Africa region has also been among those most affected by situations of conflict and disaster, which in turn heighten the risk of child labour. The incidence of child labour in countries affected by armed conflict is 77 per cent higher than the global average, while the incidence of hazardous work is 50 per cent higher in countries affected by armed conflict than in the world as a whole."

Most child labor is within families: "Most child labour takes place within the family unit. More than two-thirds of all children in child labour work as contributing family labourers, while paid employment and own-account workers make up 27 per cent and 4 per cent, respectively, of those in child labour. These numbers underscore an important broader point concerning the nature of child labour in the world today. Most children in child labour are not in an employment relationship with a third-party employer, but rather work on family farms and in family enterprises; understanding and addressing family reliance on children’s labour will therefore be critical to broader progress towards ending child labour."

Child labor and forced labor: "According to the 2016 Global Estimates of Modern Slavery, there were about 4.3 million children aged below 18 years in forced labour, representing 18 per cent of the 24.8 million total forced labour victims worldwide. This estimate includes 1.0 million children in forced labour for sexual exploitation, 3.0 million children in forced labour for other forms of labour exploitation, and 300,000 children in forced labour imposed by state authorities."

Child labor in agriculture: "The agricultural sector accounts for by far the largest share of child labour. The sector accounts for 71 per cent of all those in child labour and for 108 million children in absolute terms. Child labour in agriculture relates primarily to subsistence and commercial farming and livestock herding. It is often hazardous in its nature and in the circumstances in which it is carried out."

By gender: "Boys appear to face a greater risk of child labour than girls. There are 23 million more boys than girls in child labour and 17 million more boys than girls in hazardous work. The gender gap increases with age. The difference in child labour incidence is less than one percentage point for 5–11 year-olds, rising to three percentage points for 12–14 year-olds and to five percentage points for 15–17 year-olds. But it is possible that these figures understate girls’ work relative to that of boys.  ... Girls are much more likely than boys to shoulder responsibility for household chores, a form of work not considered in the child labour estimates. Estimates of children’s involvement in household chores, produced for the first time for the 2016 Global Estimates, indicates girls are much more likely than boys to perform household chores in every weekly hour bracket. Girls account for two-thirds of the 54 million children aged 5–14 years who perform household chores for at least 21 hours per week, the threshold beyond which initial research suggests household chores begin to negatively impact on the ability of children to attend and benefit from school. ... Girls are also more likely than boys to perform “double work duty”, meaning both work in employment and in household chores."

The recommended policies to reduce child labor don't include any surprises. Make public schools available, and don't charge fees for them. Provide enough income support for families so it's not an economic necessity for children to work: some countries have moved toward "conditional cash transfer" programs that essentially pay families for the school attendance of their children. Challenge some existing social norms. In the extreme cases of hazardous child labor and forces labor, expose the practices and prosecute. But the bulk of child labor is family work in the agricultural sector, so that's where most of the progress needs to be made.

Friday, September 22, 2017

Imperfect Information: Is It For or Against Free Markets?

In the real world, no one has full and complete information about economic interactions. But is that an argument for or against free markets? For or against government regulation? The answer seems to be "all of the above."

Friedrich von Hayek (Nobel 1974) is among the most prominent of those who have made the case that imperfect information strengthens the case for free markets. Samuel Bowles, Alan Kirman, and Rajiv Sethi offer an overview of Hayek's beliefs about information and free markets in "Retrospectives: Friedrich Hayek and the Market Algorithm," in the Summer 2017 issue of the Journal of Economic Perspectives (31:3, pp. 215-230).

In one much-quoted example, Hayek offers a discussion of what  happens in the market for some raw material, like tin, when "somewhere in the world a new opportunity for the use" arises, or "one of the sources of supply of tin has been eliminated." Either of these changes (rise in demand, or a fall in supply) will lead to a higher market price. But as Hayek points out, no company that uses tin, nor any consumer who uses products made with tin as an ingredient, needs to know any details about what happened. No commission of government officials needs to meet to discuss how every firm and consumer should be required to react to this change in the price of tin. No government quota system for allocation of tin supplies needs to be established. No special government program for research and development into cheaper substitutes for tin, and no government-subsidized producers for potential-but-still-costly substitutes needs to be created. Instead, the shifts in demand or supply, and the corresponding changes in price, work themselves out with a larger number of small-scale shifts in the market.

A government agency might collect information on who currently produces and uses tin. But that government lacks the granular information about all the different alternatives that might possibly be used for tin, and any sense of when a user of tin would be willing to pay twice as much, or when a user of tin would shift to a substitute if the price rose even a little. Indeed, this granular information about the tin market is not even theoretically available to a government planner or regulator! Many users of tin, or potential suppliers of additional tin, or potential suppliers of substitutes, don't actually know just how they would react to the higher price until after it happens. Their reactions emerge through a process of trial and error.

Hayek's point becomes even more acute if one considers not just existing basic products, like tin, but the potential for innovative new products or services. One can make a guess about whether a certain type of new smartphone, headache remedy, spicy sauce, alternative energy source, or water-in-a-bottle will be popular and desired. But government planners--especially given that they are operating under political constraints--won't have the knowledge to make these decisions. Hayek's point is not only that government economic planners not only that government planners lack perfect information, but that is is not even theoretically possible for them to have perfect information--because much of the information about production, consumption, and prices does not exist. thus, Hayek wrote:
"[The market is] a system of the utilization of knowledge which nobody can possess as a whole, which … leads people to aim at the needs of people whom they do not know, make use of facilities about which they have no direct information; all this condensed in abstract signals … [T]hat our whole modern wealth and production could arise only thanks to this mechanism is, I believe, the basis not only of my economics but also much of my political views ..."
As Bowles, Kirman and Sethi point out in the title of their article, Hayek's view of market system can be viewed as an "algorithm" for calling information into existence and then coordinating among the agents in the market.

On the other side, there's also a powerful case that imperfect information can cause markets not to function well. For example, the financial meltdown leading up to the Great Recession can be described as a situation where the available information was highly imperfect about the expected path of housing prices, and more specifically about complex financial securities based on home mortgages (that is, collateralized debt obligations). The information about what could happen to the macroeconomy as a result was imperfect, too. Bowles, Kirman and Sethi point out that there are a variety of economic settings where imperfect information can lead a market, or even an entire economy, into dysfunction and recession.

Joseph Stiglitz (Nobel, 2001) is among the best-known of those who have explained how imperfect information can hinder the functioning of a market, and thus offer a justification for government intervention or regulation.  Stiglitz offers a readable overview of his perspective in "The Revolution of Information Economics: The Past and the Future" (September 2017, National Bureau of Economic Research Working Paper 23780). The paper isn't freely available online, although readers may have access through a library subscription, but a set of slides from when he presented a talk on this topic at the World Bank in 2016 are available here.  Stiglitz emphasizes two particular aspects of imperfect information: it leads to a lack of competition and especially to problems in the financial sector. He writes:
"The imperfections of competition and the absence of risk markets with which they are marked matter a great deal. ... And in those sectors where information and its imperfections play a particularly important role, there is an even greater presumption of the need for public policy. The financial sector is, above all else, about gathering and processing information, on the basis of which capital resources can be efficiently allocated. Information is central. And that is at least part of the reason that financial sector regulation is so important. Markets where information is imperfect are also typically far from perfectly competitive ... In markets with some, but imperfect competition, firms strive to increase their market power and to increase the extraction of rents from existing market power, giving rise to widespread distortions. In such circumstances, institutions and the rules of the game matter. Public policy is critical in setting the rules of the game."
Stiglitz also argues that in a modern economy, concerns over information are likely to become more acute.
"Looking forward, changes in structure of demand (that is, as a country gets richer, the mix of goods purchased changes) and in technology may lead to an increased role of information and increased consequences of information imperfections, decreased competition, and increasing inequality. Many key battles will be about information and knowledge (implicitly or explicitly)—and the governance of information. Already, there are big debates going on about privacy (the rights of individuals to keep their own information) and transparency (requirements that government and corporations, for instance, reveal critical information about what they are doing). In many sectors, most especially, the financial sector, there are ongoing debates about disclosure—obligations on the part of individuals or firms to reveal certain things about their products." 
Both Hayek and Stiglitz use a similar "straw man" argumentative tactic: that is, set up a weak position as the opposing view, and then set it on fire. Hayek's preferred straw man is government economic planners who seek to dictate every economic decision. He was writing in part with economic systems like the Communist Soviet Union in mind. But arguing that a market is better than wildly intrusive and weirdly over-precise old-time Soviet-style economic planning doesn't make a case against more restrained and better-aimed forms of economic regulation. Indeed, Hayek occasionally expressed support for a universal basic income and for certain kinds of bank regulation.

Stiglitz's straw man is a free market that operates essentially without government intervention or regulation. He likes to emphasize that in the real world of imperfect information, there is no conceptual reason to presume that markets are efficient. But arguing that imperfect information can offer a potential justification for government regulation doesn't make a case that all or most government regulation is justified. especially given that the real-world government regulators labor with their own problems of political constraints and limited information. And indeed, while Stiglitz tends to favor an increase in US economic regulations in a number of specific areas, his vision of the economy always leaves a substantial role for private sector ownership, decision-making, and innovation.

So what's the bottom line here? In my introductory economic textbook (if you are teaching the course, I encourage you to check it out), I seek some resolution between these competing views by quoting the well-known line from F. Scott Fitzgerald: “The true test of a first-rate mind is the ability to hold two contradictory ideas at the same time.” In this case, the contradictory ideas are that markets can often be a substantial improvement on government regulators, and government regulators can often be a substantial improvement on unconstrained market outcomes. One can't presume that unconstrained markets are efficient, one can't presume that government interventions are efficient, either. I finish Chapter 20 of the textbook with this comment:
As the famous British economist, Joan Robinson (1903–1983), wrote some decades ago: “[E]conomic theory, in itself, preaches no doctrines and cannot establish any universally valid laws. It is a method of ordering ideas and formulating questions.” The study of economics is neither politically conservative, nor moderate, nor liberal. There are economists who are Democrats, Republicans, libertarians, socialists, and every other political group you can name. Of course, conservatives may tend to emphasize the virtues of markets and the limitations of government, while liberals may tend to emphasize the shortcomings of markets and the need for government programs. But such differences only illustrate that the language and terminology of economics is not limited to one set of political beliefs, but can be used by all.

Tuesday, September 19, 2017

Antitrust in the 1520s: Diet of Nuremberg, Martin Luther, and the City of Augsberg

Monopolies can come into existence for reasons that are beneficial to consumers: for example, perhaps a monopoly has patent protection for an innovative new product, or perhaps economies of scale allow a big company to sell at a cheaper price. However, once the monopoly is in place, it then has incentives to increase its profits by raising prices for consumers. Thus, the ongoing challenge of antitrust law is to encourage behaviors that are beneficial to consumers. like innovation and economies of scale, while offering consumers some protection from the price-fixing power of monopolies. This story has of course played itself out numerous times in US economic history, from the trusts and "robber barons" of the late 19th century to more recent arguments about IBM, Microsoft, and the most recent batch of high-tech giants.

But these issues of the benefits and costs of monopoly behavior have a much longer historical pedigree. One prominent example is the situation that had arisen in Germany in the 1520s. It's described in some detail in "Social Reform and the Reformation," by Jacob Salwyn Schapiro, which was published in 1909 in a series of volumes edited by the Columbia University Political Science Department alled  Studies in History Economics and Public Law (Volume XXXIV, number 2). Here I'll focus on the story that Schapiro tells in "Chapter 1: The Growth of Monopolies." 

To set the stage, the end of the 15th century and into the 16th century is a very prosperous time for Germany. Schapiro writes:
The end of the fifteenth century witnessed Germany's high noon of prosperity. Old and insignificant towns like Augsburg Nuremberg and Ulm blossomed forth into wealthy and populous cities. The great merchants vied with princes and kings in magnificence and luxury. Their gardens palaces and entertainments were the envy of the poorer nobility. Aeneas Sylvius writing in 1458 says: "We proclaim it aloud Germany has never been richer or more prosperous than to-day. She takes the lead of all other nations in wealth and power One can say truly that God has favored this land above all others On all sides are seen cultivated farms cornfields and vineyards and gardens Everywhere are great buildings, walled cities and well-to-do farmers." Jacob Wimpheling, the famous humanist, declared fifty years later that Germany was never more prosperous than to day and she owes it chiefly to the untiring industry and energy of her people artisans as well as merchants. The peasants too are rich and prosperous."  The desire for wealth became the all absorbing passion and we find the popular preacher Martin Butzer denouncing the materialistic spirit of the time. "All the world," he says, "is running after those trades and occupations that will bring the most gain. The study of the arts and sciences is set aside for the basest kind of manual work. All the clever heads, which have been endowed by God with capacity for the nobler studies are engrossed by commerce, which nowadays is so saturated with dishonesty that it is the last sort of business an honorable man ought to engage in." The headquarters of German capitalism was the city of Augsburg which because of its situation acted as a distributing center for all Eastern goods received from both Lisbon and Venice. 
But the importance of ports and trade routes shifting. Venice, which was relatively close to German merchants, was declining while farther-away Lisbon was rising. Doing business at this greater distance tended to favor the larger German merchants, who could afford to have dedicated representatives in Lisbon to manage their transactions, warehouses, and shipping. As Schapiro explains, this shift provided a launching pad for Germany's wealthier merchants to act as price-fixing monopolists. He wrote:
The wealthier merchants quickly took advantage of this condition and organized themselves into associations or "companies." At first they united for the purpose of buying and transporting in common in order to reduce expenses; but very soon they united for the purpose of selling as well. These associations quickly developed into monopolistic combines that controlled the entire Asiatic trade in and arbitrarily fixed the prices of all Eastern articles. The small merchant found himself crowded to the wall. All methods familiar to monopoly everywhere and at all times were used to drive him out of business. 
Schapiro cites a number of contemporary complaints about the situation. Here are three, one from from Martin Luther, and the other two from religious and civil assemblies of that time:
Luther complains in his pamphlet On Trade and Usury, printed in 1524: "The monopolists succeed in driving out the small merchants by buying up large quantities of goods, and then suddenly raise the prices when they are left masters of the field. So, these monopolists, have everything in their hands and do whatever they wish raise and lower prices at will and oppress and ruin small dealers, just as a great pike swallows up a lot of little fishes. They have become lords over God's creatures and free from all bonds of religion and humanity ..... If monopolies are permitted to exist, then justice and righteousness must vanish." ...
The Diet of Nuremberg complained in 1522: "The companies take special care to monopolize those spices that are most needed. If one company is not rich enough it associates itself with another and so gets the article in its hands. If a poor merchant desires to deal in these wares, the companies are immediately at his throat. They are able to ruin him, because having more money and more goods, they are able to sell cheaper and give longer credit .... The companies are responsible for lessened business. To-day, there is one great concern with many branches where formerly there were twenty independent merchants ..."   
The Landtag of the Austrian hereditary dominions at Innsbruck in 1518 declared: "The great companies have monopolized all things and are not to be borne any longer. All sorts of merchandise-- silver, copper, steel, iron, linen, sugar, spices, corn, cattle, wine, meat, tallow. and leather--have fallen into their hands Through their money power, they have become so strong, that no merchant having less than 10,000 florins is able to compete with them. They raise prices arbitrarily when it is to their advantage and as a result their incomes are as great as those of princes. They are a great harm to our land."
The tensions created by these monopoly powers were then heightened by an enormous rise in the overall price level. Schapiro writes: "During the first quarter of the sixteenth century there occurred a most remarkable revolution in prices. Every article foreign and domestic rose enormously in some cases one hundred per cent and over Naturally the monopolies were blamed by all classes for this extraordinary advance in the prices of the necessities of life." As he is also quick to note, monopoly is not the only cause here, and may not have been the primary cause. For example, there were wartime shortages resulting from the conflict between Venice and the League of Cambray. There was also an enormous increase in the volume of currency in circulation, with large increases in silver and copper production in Germany and Hungary, as well as imported silver from the new world by Spain.

Ultimately, these issues arose again in the Diets of Nuremberg from 1522-24. The main agenda of these gathering was to coordinate a response to Soliman the Turk, who had just invaded Hungary, and to Martin Luther, who was posing a danger to the established Catholic Church. But the issue of monopoly came up as well, and as Schapiro explains, a committee was appointed which "sent a questionnaire to the councils of the towns that represented the trading interests." The reply of the city of Augsburg has been much-quoted over the years, because it offers a defense of the large monopoly firms. Here are some snippets of the response from the city Augsburg, as quoted (and translated) by Schapiro:
Where there is no business, the country is of little account. Hence it follows that commerce is useful to kings and princes and good for the common weal. The more business a country does, the more prosperous are its people. There are lands where business interests are better protected than in Germany and where they do everything to encourage and attract the merchants .... Commerce adds to the coffers of princes and is besides absolutely essential to the common welfare where there are many merchants there is plenty of work. Only the great merchants are able to do business on a large scale, because the small traders have not enough capital.  ...
It is impossible to limit the size of the companies for that would limit business and hurt the common welfare; the bigger and more numerous they are the better for everybody. If a merchant is not perfectly free to do business in Germany he will go elsewhere to Germany's loss. Any one can see what harm and evil such an action would mean to us. If a merchant cannot do business, above a certain amount, what is he to do with his surplus money? It is impossible to set a limit to business and it would be well to let the merchant alone and put no restrictions on his ability or capital. ... Some people talk of limiting the earning capacity of investments. This would be unbearable and would work great injustice and harm by taking away the livelihood of widows, orphans and other sufferers, noble and non-noble, who derive their income from investments in these companies. Many merchants out of love and friendship invest the money of their friends--men, women and children--who know nothing of business in order to provide them with an assured income. Hence any one can see that the idea that the merchant companies undermine the public welfare ought not to be seriously considered. ... 
Of course, discussions making similar points have continued up to the present. Countries with lots of business activity are better off, and create jobs. If the companies are overregulated at  home, they will move elsewhere. Limiting what investment can earn would be unbearable. Out of love and friendship, the giant monopolists will look out for the widows and orphans. The committee for the Diet of Nuremburg didn't buy these arguments! But its report is an interesting mix of opposition to the big companies and admitting that their defenders are not altogether wrong. Here's Schapiro quoting from the committee report:
"The companies have done more injury to the common man than all the highwaymen and thieves put together yet the monopolists and their associates strut about in all the magnificence and luxury that wealth can buy. ...  We have already given reasons why the great companies should be destroyed but that does not mean that all business associations should be done away with. Such a course would be foolish and harmful to the whole German people, for the following reasons: In the first place, it would give the foreigners an opportunity to take over our business and then the companies could exploit Germany at will. Secondly, if we permitted only single individuals to trade, failure would be sure to result, which would be avoided by permitting associations of moderate size only. This, too, would give an opportunity to an individual who possesses great capital to do exactly what a company does and yet be within the law. Finally, a single individual cannot go to many places for goods and he cannot afford to hire agents as this costs money Therefore the foreign companies will have a great advantage over the German merchant."
Ultimately, the Diet of Nuremberg passed a set of anti-monopoly laws. Schapiro writes:
After a great deal of debate, the Diet passed a series of laws designed to mitigate the evils of monopoly. These provide that:
I. Companies are not to be capitalized for more than fifty thousand gulden and are to have only three branches. A statement of its membership and business must be filed with the government.
II. The profits must be divided every two years and the authorities notified of the fact.
III. No money may be loaned at usurious rates of interest.
IV. No commodity shall be entirely under one control.
V. No merchant shall buy during a single quarter of a year more than 100 cwt. of pepper, 100 cwt. of ginger, and 50 cwt. of other spices.
VI. The companies shall not impose a minimum selling price.
VII. The government shall regulate the prices of wares because the companies secretly agree to raise prices.
VIII. Each article imported shall be taxed by the imperial government a fixed sum on the hundredweight.
IX. Voyaging to Portugal is to be forbidden because of too much speculation there and the king of that country is to be asked to send the spices into Germany.
X. The penalty for violating these laws is to be confiscation of the property of the company one half to go to the imperial and the other half to the local government 
Whatever the merits and demerits of these rules, they made little difference. This early round of the anti-monopoly battles was won by the monopolists. As Schapiro explains: "In spite of the denunciations, petitions, laws, and decrees, the monopolies were not seriously disturbed. The vast wealth of the great companies, the political importance of the cities which they controlled, the weakness of the central government and the intimate relations of the merchants with the governing powers, were proof against all laws aimed at them." 

Monday, September 18, 2017

Should the Federal Reserve Buy Corporate Bonds?

When (not "if") the next recession arrives, the Federal Reserve will want to take action to stimulate the economy. In recent decades, this action has often involved cutting a certain targeted interest rate--the "federal funds interest" rate--by 3-4 percentage points. However, the federal funds interest rate is now in the range of 1-1.25%, and for a variety of underlying reasons, it seems unlikely that these rates will climb to the 4-5% range any time soon.  Thus, central banks around the world are experimenting with nontraditional tools of monetary policy. For example, a number of central banks have pushed their own targeted policy interest rates into mildly negative territory, with what seems to be mild success so far. The US Federal Reserve, along with a number of other central banks, has engaged in "quantitative easing" policies in which the central bank buys financial assets directly. So far, the Fed has focused on Treasury debt and on mortgage-backed securities. But when the next recession  hits, should the Fed think about buying government bonds?

Thomas Belsham and Alex Rattan provide an overview of the issues that arise in making this choice, along with a review of what has happened since the Bank of England made a decision in August 2016 purchase up to £10 billion in corporate bonds, in their article "Corporate Bond Purchase Scheme:design, operation and impact," which appears in the Quarterly Bulletin of the Bank of England (2017 Q3, pp. 170-181).

Why might a central bank decided to purchase corporate bonds at all, as opposed to other assets?

If more parties in the market are willing to buy bonds--whether government bonds, corporate bond, or mortgage-backed securities-- it should be easier for borrowers to issue such securities. But Belsham and Rattan offer a few arguments as to why buying corporate bonds might have a bigger effect on the real economy than buying government bonds.

For example, they argue that when a central bank buys investment-grade bonds, which are typically issued by larger companies, those large companies become more likely to obtain capital by issuing bonds and less likely to do so through borrowing from banks. In turn, this could cause banks to become more willing to lend money to medium-sized and smaller-sized firms. Another reason is that part of the risk in bond markets is that such markets are often not very liquid, meaning that it isn't always easy to buy or sell bonds right away--at least not without taking a hit on your desired price. But if the central bank is steadily involved as a buyer of bonds, liquidity in the bond market improves, and the risk of holding bonds diminishes accordingly. Finally, when a central bank buys corporate bonds, those who had previously been holding the bonds (or would have been holding the bonds) clearly have some appetite for the risks and returns associated with corporate activities, so they are likely to try to seek out some other ways to invest their funds into active corporate activities (rather than into lower-risk and safer investments).

If a central bank decides to purchase corporate bonds, how can it keep the risk of doing so relatively low and avoid favoritism to certain industrial sectors or specific corporations? 

The Bank of England was willing to buy up to £10 billion in "investment-grade" corporate bonds (that is, relatively safe bonds, not high-yield, high-risk "junk bonds"). For comparison, the total amount of such bonds was about £500 billion. The goal of the BoE was to purchase these bonds without unbalancing the market.

In a regular auction, buyers compete to purchase an item. However, the Bank of England purchased bonds with a "reverse auction," in which sellers compete to sell an item--in this case a bond--to the central bank. Thus, the Bank of England was agreeing to pay the lowest possible interest rates (and there was also a "maximum price" that the Bank would not exceed when purchasing any given bond). In addition, the Bank of England looked at how much of the  £500 billion in bonds came from each sector of the economy, and took care to purchase bonds (tweaking the prices it was willing to pay just a bit as needed) so the Bank ended up owning bonds from each sector in the same proportion as these sectors were represented in the overall bond market.


What were some effects of the Bank of England Corporate Bond Purchase Scheme?
One quick-and-dirty way to evaluate the effects of this policy is to compare interest rates on corporate bonds of similar risk levels that are denominated in US dollars, euros, and pounds. If one sees a drop in the interest rate for these corporate bonds around the time the policy starts, a drop which isn't mirrored in the other markets, it suggests the policy had some effect.

The authors carry out some more sophisticated calculations, which tend to confirm this general result. They write: "Sterling-denominated investment-grade private non-financial corporate (PNFC) bond spreads fell 10 basis points on the day of the announcement of the CBPS, and around a further
10 basis points in the days that followed. Issuance in sterling by UK PNFCs picked up sharply after the announcement, with the highest recorded monthly issuance of sterling-denominated investment-grade bonds in September of that year. Market intelligence also suggests that there was an improvement in liquidity in the sterling corporate bond market ... While the direct impact on the corporate bond market is encouraging, it is still too early to assess fully the transmission of the Corporate Bond Purchase Scheme to the real economy."

What's the Bank of England plan going forward? 

The current plan is that as bonds make payments and mature, these amounts will be reinvested into other bonds. Thus, the Bank of England portfolio of corporate bonds is planned to remain at about £10 billion -- at least for now.

This experiment is worth watching. If the US Federal Reserve feels a need during a future recession to carry out large-scale quantitative easing, the Bank of England process is likely to serve as a model. It would be interesting, and perhaps not in a good way, to watch the political pressure that would surely be exerted if the US Federal Reserve attempting to purchase corporate bonds in a way that doesn't intervene to favor certain parts of the bond market.

Friday, September 15, 2017

Federal Subsidies for Health Insurance

When I posted a couple of days ago on the most recent Census Bureau report about "Health Insurance Coverage in the United States," I didn't know that the Congressional Budget Office was about to come out with an updated set of estimates for "Federal Subsidies for Health Insurance Coverage for People Under Age 65: 2017 to 2027" (September 2017). Obviously, it's useful to consider the number of people with health insurance and the government subsidies at the same time!

The CBO calculation is that federal subsidies for those under age 65 (that is, not counting Medicare spending on those over 65, and not counting the portion of Medicaid funded by US states) are $705 billion in 2017. Here's the graph from the cover of the report summarizing these subsidies:
A few thoughts:

1) Total US health care spending is about $3.5 trillion in 2017. For the present calculation, subtract out Medicare, which is about $700 billion. Thus, the total federal subsidies of $705 billion represent about one-fourth of non-Medicare health care spending.

2) The Patient Protection and Affordable Care Act of 2010 increased these federal subsidies in 2017 by $117 billion: that is $72 billion for expansions of Medicaid coverage and $45 billion for subsidies involving the state-based insurance exchanges that are called the "Basic Health Plan."

3) The federal government subsidizes employer-provided health insurance to the tune of $279 billion in 2017 by treating it as an untaxed fringe benefit. The single largest method through which Americans get their health insurance continues to be employer-based coverage.
4) The Patient Protection and Affordable Care Act of 2010 expanded Medicaid enrollment by about 13 million people, and another 8 million have received subsidies for purchasing insurance on the state-level exchanges.

5) It's a little tricky to calculate how much the Affordable Care Act of 2010 expanded coverage. For example, if some employers decided to stop providing health insurance with the idea that their employees could turn to the state-based health  insurance exchanges, one would need to take those effects into account. But as a back-of-the-envelope estimate, one could reasonably say that the Affordable Care Act provide health insurance for about 21 million people, with a corresponding increase in federal health care subsidies of $117 billion. Thus, the average cost of person of expanded health insurance coverage has been about $5,500. As I've written before, there was never any mystery in how the 2010 legislation expanded insurance coverage: if the federal government was willing to spend an extra $117 billion, it could provide insurance coverage for another 21 million people.

6) A substantial number of US residents continue to lack health insurance. The CBO breaks it down this way: "Over the next decade, roughly 1 out of every 10 residents under age 65 is projected
to be uninsured each year, and the number of people who are uninsured is projected to be 31 million in 2027 ...  In that year, according to CBO and JCT’s estimates, about 30 percent of those uninsured
people would be unauthorized immigrants and thus ineligible for subsidies through a marketplace or for most Medicaid benefits; about 10 percent would be ineligible for Medicaid because they lived in a state that had not expanded coverage; about 20 percent would be eligible for Medicaid but would not enroll; and the remaining 40 percent would not purchase insurance to which they had access through an employer, through the marketplaces, or directly from insurers."

7) For ll the controversy surrounding the 2010 health care legislation, both at the time and since, it was essentially incremental. For most Americans with health insurance--most of those with employer-provided plans, Medicare, or already eligible for Medicaid--the 2010 act did not disrupt their health insurance in any substantial way.

Wednesday, September 13, 2017

Health Insurance Coverage in the US

Since a number of major provisions of the Patient Protection and Affordable Care Act of 2010 took effect in January 2014, the share of Americans without health insurance has dropped substantially. But that success story remains incomplete, and the the progress that has been made has come at substantial financial cost.

Jessica C. Barnett and Edward R. Berchick of the US Census Bureau have authored this year's version of the authoritative report: Health Insurance Coverage in the United States: 2016 (Current Population Reports, September 2017, P60-660). Here's the share of Americans without health insurance from 2008-2016.  The big drop starting in 2014 is quickly apparent.
What forms of health insurance expanded in a way that can help to explain this decline? In private plans, employer-based health insurance didn't budge, but direct-purchase plans expanded--surely due to the expansion that occurred through the subsidized state-based insurance exchanges. On the government side, both Medicare and Medicare have seen expansions, with the rise in Medicaid in particular being traceable to the 2010 Affordable Care Act.

The report offers lots of detail about what groups are more or less likely to have health insurance. Many of the correlations are unsurprising. Those with less work experience in the previous year, or lower levels of education,  are less likely to be covered by health insurance. Even with the existence of Medicaid and Medicare, those with lower incomes remain less likely to have health insurance (including both public and private health insurance).

But I was intrigued by this figure showing the likelihood of not having health insurance by age. The different shading shows different years, and the drop in the rate of uninsured over time. The big drop-off around age 65 shows the effect of Medicare. The uninsurance rate for children is also relatively low, because low-income families with children are typically eligible for insurance through Medicaid and the Children's Health Insurance Program (CHIP). The age group least likely to have health insurance are in their 20s and 30s.
This report from the Census Bureau is about documenting patterns, not drawing policy conclusions.  But I'll add that the gains that have been made in expanding health insurance coverage are costing the US government about $110 billion per year, according to the Congressional Budget Office.  As I've written in the past, I support expanded spending for this reason, given the very limited array of policy options actually available. But I do have a number of qualms.

For example, a number of recipients of public health insurance or insurance subsidies might prefer a lower level of health insurance and more income in their pocket for other purposes--but that choice isn't available to them. Employer-provided health insurance in the United States is an untaxed fringe benefit that cost the US Treasury $266 billion in 2016, which encourages employers and employees to provide compensation in the form of health insurance and helps propel the ongoing rise in health care costs. Finally, the rate of uninsurance has fallen by less than one-half since the provisions of the Affordable Care Act went into effect. Thus, the problem that millions of Americans lack health insurance is far from resolved.

Tuesday, September 12, 2017

"Rationality is an Assumption I Make About Other People"

Self-aware people recognize that they sometimes act irrationally. So how can self-aware economists assume that other people act rationally? Here's how David D. Friedman answered that question in his 1996 book Hidden Order: The Economics of Everyday Life (pp. 4-5).
"Suppose someone is rational only half the time. Since there is generally one right way of doing things and many wrong ways, the rational behavior can be predicted but the irrational cannot. If we assume he is rational, we predict his behavior accurately about half the time--far from perfect, but a lot better than nothing. If I could do that well at the racetrack I would be a very rich man. 
“One summer, a colleague asked me why I had not bought a parking permit. I replied that not having a convenient place to park made me more likely to ride my bike. He accused me of inconsistency. As a believer in rationality, I should be able to make the correct choice between sloth and exercise without first rigging the game. My response was that rationality is an assumption I make about other people. I know myself well enough to allow for the consequences of my own irrationality. But for the vast mass of my fellow humans, about whom I know very little, rationality is the best predictive assumption available.
"One reason to assume rationality is that it predicts behavior better than any alternative assumption. Another is that, when predicting a market or a mob, what matters is not the behavior of individuals but the summed behavior of many. If irrational behavior is random, its effects may cancel out. 
"A third reason is that we are often dealing not with a random set of people but with people selected for the particular role they are playing. If firms picked CEOs at random, Bill Gates would still be a programmer and Microsoft would have done a much worse job than it did of maximizing its profits. But people who do not want to maximize profits or do not know how are unlikely to get the job. If they do get it, perhaps through an accident of inheritance, they are unlikely to keep it. If they do keep it, their companies are likely to go on a downhill slide. So the people who run companies can be safely assumed to know what they are doing--generally and on average. And since businesses that lose money eventually shut down, the assumption of rational profit maximization turns out to be a pretty good way of explaining and predicting the behavior of firms."