Friday, June 23, 2017

Tobacco Taxes in Low- and Middle-Income Countries

The appropriate taxation and regulation of tobacco use is well-trodden ground in US policy: after all, the breakthrough announcement by the US Surgeon General that "smoking is hazardous to your health" happened back in 1964 (for a commemoration of the 50th anniversary, see "Smoking, 50 Years Later," January 28, 2014).  But there's a renewed stir about tobacco policy in the last few years, driven this time by an international focus.

For example, back in June 2015 William Savedoff and Albert Alwang wrote "The Single Best Health Policy in theWorld: Tobacco Taxes" (Center for Global Development Policy Paper 062). They write: "Tobacco use is the largest cause of preventable disease and death in the world. ... A 10 percent increase in the real price of cigarettes leads to an average 4 percent reduction in tobacco consumption. ... Tobacco taxes are one of the most cost-effective health interventions available. Using taxes to raise the price of tobacco products in low- and middle income countries costs between US$3 – US$70 for each additional year of life (as measured by Disability Adjusted Life Years or DALYs) (Ranson 2002), comparable to the cost of child immunization."

Last November, the Fiscal Affairs Group at the IMF put out a report called "How to Design and EnforceTobacco Excises?" In April 2017, the World Bank held a two-day event titled "Tobacco Taxation: Win-Win for Public Health and Domestic Resources Mobilization Conference" (the agenda and slides for some of the presentations are here).

But for those who want a genuine doorstop of a report summarizing the state of knowledge on these issues, the useful starting point is the nearly 700-page report from the National Cancer Institute and the World Health Organization, "The Economics of Tobacco and Tobacco Control" (December 2016).
It includes an early chapter on "The Economic Costs of Tobacco Use, With a Focus on Low- and Middle-Income Countries," as well as discussions of supply and demand factors affecting tobacco use and the range of public policy options. Here, I'll just mention a few main themes that caught my eye, some of which may be useful for generating classroom discussion and lecture examples.

Pretty much every report on the economics of tobacco taxation, and this one is no exception, quotes
Adam Smith's thoughts on the subject (The Wealth of Nations, Book V, Chapter III): "Sugar, rum, and tobacco are commodities which are nowhere necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation. ... In the meantime the people might be relieved from some of the most burdensome taxes; from those which are imposed either upon the necessaries of life, or upon the materials of manufacture."

In calculating the effects of a tobacco tax, a key parameter is how the higher price will affect the quantity of tobacco demanded. The NCI/WHO report notes (footnotes omitted):
"Price elasticity of demand is the key economic concept used to understand or measure changes in cigarette consumption resulting from changes in the excise tax and in the retail price of cigarettes. In an economic context, elasticity refers to the responsiveness of one variable to a change in another variable. The price elasticity of demand measures how responsive demand (or consumption) is to a change in the price of the product. Technically, the price elasticity of demand is the percentage change in the consumption of a product in response to a 1% change in the price of the product, with all else remaining constant. As will be discussed below, nearly all empirical studies have found that the price elasticity of demand for tobacco products lies between zero and minus one. Estimates for high-income countries (HICs) are clustered around –0.4; estimates for low- and middle-income countries (LMICs) are more variable and somewhat greater in absolute terms (further from zero), with estimates clustered around –0.5. In other words, for HICs, a 10% increase in the price of tobacco is expected to decrease tobacco consumption by 4%. For LMICs, a 10% increase in price would be expected to decrease tobacco consumption by 5%. Thus, tax and price increases are a potentially potent tobacco control tool in all countries.
"Many econometric studies have estimated price elasticities for other aspects of tobacco use beyond consumption, including prevalence, cessation, initiation, duration of smoking, frequency of smoking (e.g., daily vs. non-daily), and conditional demand (amount of the product consumed conditional on being a user of that product). Still others have estimated cross-price elasticities of the demand for tobacco products—that is, the impact of a change in the price of one tobacco product (e.g., cigarettes) on the use of another tobacco product (e.g., smokeless tobacco), or of a change in the price of a subcategory of one product (e.g., premium cigarette brands) on the use of a different subcategory of that product (e.g., discount cigarette brands)."
Of course, the responsiveness of tobacco use to tax policy varies by group. For example, the immediate effect of a tobacco tax increase over the short-run of a year or two will be smaller (a common finding is about half as large) than the long-run effect over time. Smoking by younger people, not yet as well-established in the habit, tends to be more responsive to higher tobacco taxes than smoking by older people. And people in lower- and middle-income countries (LMICs) tend to respond more strongly to higher tobacco taxes than those in higher income countries. The NCI/WHO  report states:

"In summary, the number of studies based on aggregate measures of tobacco use in HICs is growing. These studies are becoming increasingly sophisticated over time, and the resulting estimates of price elasticity are remarkably consistent. Regarding the short-run price elasticities for cigarette demand, most estimates have clustered around –0.4, with the majority ranging from –0.2 to –0.6. Early studies of tobacco use in LMICs produced wide estimates of price elasticity, with most suggesting that cigarette demand in LMICs is much more responsive to price than cigarette demand in HICs. The rapid expansion of research in LMICs in recent years indicates that the range of price elasticity estimates has narrowed somewhat, with the majority of short-run price elasticity estimates falling between –0.2 and –0.8, with many clustering around –0.5. In all countries, studies that model the addictive nature of tobacco use conclude that the long-run price elasticity of demand is greater than that estimated for the short run. Price elasticity estimates tend to be more inelastic in countries where low-priced, relatively affordable cigarettes are widely available.

"Since the early 1990s, many studies based on U.S. cross-sectional data have confirmed Lewit and colleagues’ 1981 conclusion that youth smoking is more responsive to price than adult smoking. For example, using data from the 1992–1994 Monitoring the Future surveys, Chaloupka and Grossman estimated an overall price elasticity of –1.31 for youth smoking. In a later study with similar findings, Lewit and colleagues examined the impact of cigarette prices on youth smoking prevalence and intentions to smoke. Data for this study came from cross-sectional surveys of 9th-grade students in 1990 and 1992 from the 22 U.S. and Canadian sites in the Community Intervention Trial for Smoking Cessation. This study estimated that the price elasticity of youth smoking prevalence was –0.87, and the price elasticity of intentions to smoke by nonsmoking youth was –0.95. These results indicate that youth are somewhat more sensitive to price than adults."
One difficulty for economists in thinking about tobacco policy is that many of the effects of smoking are felt by the smoker. If people choose to smoke, with knowledge of the health consequences, then who are economists or public health experts to say they are wrong? Of course, the issue of second-hand smoke or the effects of pregnant women smoking are different here--those are external effects on others. But for many smokers, the issue is one that economists sometimes refer to as "internalities," where your own decisions have an undesired and unexpected on yourself. If smokers are hooked by a habit whose power and effects they do not fully anticipate, then one can make a case for policies that make tobacco use more costly, or quitting easier. The report notes:
"Smokers tend to hold erroneous beliefs about smoking and health: They think they will be able to quit when they want to, that low-tar cigarettes are less harmful than other cigarettes, that they are in a lower risk group compared with other smokers, or that the general health risks do not apply to them as individuals. In fact, many adult tobacco users struggle with quitting, the great majority of smokers regret having started, and young people taking up tobacco use significantly underestimate the addictive potential of these products and overestimate their likelihood of quitting in the future."
One reason for the ongoing focus on smoking in low- and middle-income countries is that tobacco taxes are already relatively high in many high-income countries. As a result, the potential gains to public health (and the potential for using tobacco taxes to raise government revenue) are greater in many low- and middle-income countries. Moreover, tobacco taxes in low- and middle-income countries as a group have barely budged in the last couple of decades. The report notes (footnotes and references to tables omitted):
"Total tax burden is defined as the sum of all taxes—including general sales taxes, such as a value-added tax—expressed as a percentage of the retail price. According to the 1999 World Bank publication Curbing the Epidemic: Governments and the Economics of Tobacco Control, the total tax burden on cigarettes is highest in HICs and decreases as a country’s income level decreases. Using 1996 data for the sample of countries in this study, the average tax burden was 67% in HICs, 50% in upper middle-income countries, 46% in lower middle-income countries, and 40% in low-income countries. A similar analysis based on 180 countries was performed by WHO in 2014 using the World Bank’s income categories. Although the choice of descriptive statistics (i.e., unweighted/simple average, weighted average, and median) substantially influences the results, the 2014 WHO data confirm the earlier World Bank findings that the tax burden is higher for HICs and lower for LMICs. In fact, considering unweighted average tax burdens, the picture in 2014 is not different from that in 1996."
The rhetoric around tobacco taxes can become overheated. For example, the preface of the NCI/WHO report states at one point: "Globally, approximately six million people a year die from diseases caused by tobacco use, including 600,000 from exposure to secondhand smoke. This is six million too many. Every single death from tobacco is a preventable tragedy." But the notion that public policy should seek to prevent "every single death from tobacco" is an extreme form of prohibitionism.

People act in many ways affect health: diet, exercise, driving cars, not taking a multivitamin ever day. In all of these areas, public policy can provide some information and incentives for healthier behavior, while still stopping far short of invasive micromanagement of people's day-to-day activities. In the US, federal cigarette taxes were raised dramatically in 2009, and many states have additional tobacco taxes of their own. But in many low- and middle-income countries, raising their  low tobacco taxes to higher levels offers a substantial gains to public health--along with a government revenue source that does not discourage working, hiring, or saving.

Thursday, June 22, 2017

The Story of Robert Keayne, Protocapitalist

Self-made entrepreneurs often generate a mixed public response. On one side, there is often an appreciation for their skills, the economic dynamism they provide, and in some cases for the charitable work funded by their earlier profits. For example, remember the ecomiums written when hard-boiled capitalist and hard-driving manager Steve Jobs died, or consider the current feelings about Bill Gates which are now filtered through the perception of work done by the Gates Foundation. On the other side, there is a deep-seated suspicion that "behind every great fortune is a great crime" (which seems to be an off-kilter paraphrase of a comment from a play by Balzac), and a belief that such a fortune must have resulted in substantial part from hard and exploitative dealing. 

This tension reaches far back into American history, well before the creation of the United States. John Paul Rollert tells the story of  protocapitalist Robert Keayne in "When making a profit was immoral,"  which appears in the Chicago Booth Review (Summer 2017). Rollert writes:

"Keayne was born in 1595 in Berkshire, England, not far from Windsor Castle. A humble butcher’s son, he would later note that he had received “no portion from my parents or friends to begin the world withal.” Accordingly, he obtained little in the way of formal education and was apprenticed at 10 years old to John Heyfield, a merchant-tailor in London. ...
"Keayne successfully completed his eight-year contract before striking out on his own. He proved adept at his trade, a blessing that was compounded by marrying well in his early 20s. By 1634, Keayne was prosperous enough to wager £100 on the Massachusetts Bay Company. It was an enormous sum, more than double the yearly income of the average wageworker in Victorian England 250 years later. The risk, however, was in keeping with Keayne’s conscience, which had been inflamed and enlightened by Puritan evangelists, while also being a considered bet by a savvy merchant on the bounty of a brave new world just across the ocean.
"Along with Anne, his wife, and beloved Ben, the only one of his four children to survive infancy, Keayne voyaged to Boston in 1635, swiftly becoming one of the city’s most distinguished and widely despised merchants. In fact, we only know so much about him because of the 50,000-word will that he began writing in 1653, three years before his death, to provide a full account of his life and the probity of his business affairs in order to “cleare myself in all material things.” ...

"In 1639, only four years after he had arrived in town, Keayne was accused of “oppression” in his dealings, a catch-all term that covered any instance of buyers or sellers taking advantage of the ignorance or necessity of one another in a business transaction. The specific charge was that he had sold sixpenny nails for 10 pence a pound, reaping a healthy profit off his neighbor. Too healthy, it seemed, for the customary profit margin on basic goods in the colony was between 10 and 30 percent.

"Keayne argued that the matter was a simple misunderstanding, willful on the part of his accuser. He said that the man had originally purchased sixpenny nails on credit for 8 pence a pound and later exchanged them for eightpenny nails at 10 pence a pound, a profit margin of only 20 percent (hardly a “haynous sine,” Keayne observed in his will). It was only when Keayne asked him to pay off his balance, after giving him ample time to do so, that the man brought his suit to the authorities, with the accusation of oppressive pricing.
"Early on during the trial, Keayne made a strong show of defending himself, with the messenger who delivered the second bag of nails testifying on his behalf, but then a raft of townspeople came forward to levy similar charges against him. As John Winthrop, the governor of the settlement and perhaps the most esteemed man in Boston, wrote in his diary, Keayne was widely known for being “notoriously above others observed and complained of” for the prices he charged and had been “admonished, both by private friends and also by some of the magistrates and elders”—all, it seemed, to no effect. He was convicted by the General Court of the offense, which had broadened beyond a single transaction to encompass a general way of doing business, and fined £200, a sum that was later reduced to £80.
"Had the matter rested there, one suspects that Keayne would still have complained in his will of the “deep and sharpe censure that was layd upon me,” but the incident would not have been the defining moment of his professional career and, perhaps, his life. But then the elders of the First Church of Boston took up the matter to determine whether an ecclesiastical reproach was also warranted.

"Keayne was fortunate to escape the most serious punishment, excommunication. That sentence was passed on eight offenses related to economic matters between 1630 and 1654, a period when only 40 such sentences were given, tantamount, as they were, to consigning one to eternal damnation. Instead, Keayne was formally admonished, according to the records of the First Church, “for selling his wares at excessive Rates, to the Dishonor of Gods name, the Offense of the Generall Cort, and the Publique scandal of the Cuntry,” a censure he lived under until the following May, when he became “Reconciled to the Church.”
"Keayne continued to attend services, and the day after the rebuke was handed down, the Reverend John Cotton, the city’s foremost theologian, delivered a sermon that was obviously inspired by the wayward merchant. The subject, Winthrop wrote in his diary, was the “false principles” of trade that so many merchants seemed to abide by. They were recorded by Winthrop as follows:
  • That a man might sell as dear as he can, and buy as cheap as he can.
  • If a man lose by casualty of sea, etc., in some of his commodities, he may raise the price of the rest.
  • That he may sell as he bought, though he paid too dear, etc., and though the commodity be fallen, etc.
  • That as a man may take advantage of his own skill or ability, so he may of another’s ignorance or necessity.
  • Where one gives time for payment, he is to take like recompense of one as of another.
Again, following these bullet points are considered “false principles,” and following such principles was considered grounds for censure or even excommunication. The guiding social/religious principle for merchants, as Rollert quotes in the words of the famous Puritan  John Bunyan (author of The Pilgrim's Progress) is that "A man in dealing should as really design his neighbour’s good, profit and advantage, as his own.” In the modern lingo, the parallel comment would be that there is a corporate social responsibility that all stakeholders should be taken into account.

The story of Robert Keayne's last will and testament seems to have been unearthed some decades ago by Bernard Bailyn, who described "The Apologia of Robert Keayne" in the William and Mary Quarterly (7:4, October 1950, pp. 568-587, available through JSTOR). Keayne's actual will from 1653 was reprinted in 1886 in "A Report of the Record Commissioners of the City of Boston containing miscellaneous papers," which is available through the magic of HathiTrust. Bailyn writes: 
"When his executors came to open this Last Will and Testament they found not only a complicated allocation of his worldly goods but an outpouring of long suppressed indignation, a helter-skelter apologia pro vita sua and a reiterated demand that justice be done him even if only in memory. It had taken him five months to write out the document, and when the will was copied into the first volume of the probate records of Suffolk County it filled no less than 158 pages ...

The resulting 5I,000 words provide an insight into the workings of a seventeenth-century mind. What he had "here writt out of the greife and trouble of my heart" was an appeal to the Puritan conscience of New England to reconsider its "un- christian, uncharitable and unjust reproaches and slandrs" against him, and raised the hope "that such which have taken liberties to load me with divers reproaches and long to lay me under a darke cloude may have cause to see that they have done amisse and now to be sorry for it though they have not beene so before."
Of course, we don't know the ins and outs of the dispute over the price of nails (which were a highly valuable commodity at the time). We do know that Keayne rose from being an impoverished apprentice to being one of the wealthiest men in the Boston of his time. We know that he had enemies, and that some of the accusations made against him were false, and that he a high-profile court case was decided against him. We also know that he gave considerable money to the poor and to the city throughout his life, and even left a bequest to Harvard. We also  know that he was often chosen for responsible positions. Baily writes:
"Until his death in 1656, however, despite unpopularity and repeated controversies with his fellow citizens, Robert Keayne continued to fill responsible public positions. He held his earliest public office in 1636, when the Boston Town Meeting elected him to a committee charged with the ordering of all land allotments and other business except elections. In the years that followed he was reelected selectman four times, chosen as a representative to the General Court at least seven times and served in innumerable lesser functions such as surveyor of the highways."
From a modern view, almost 400 years later, Robert Keayne seems like a many of considerable practical talent, trying to combine a life of capitalist success and Puritan moral values--and sometimes getting caught in grinding of these two forces.

(For a discussion of price controls in the colonial United States at the time of the Revolutionary War, see "Price Controls in the Colonial United States: "A Sharping Set of Mushroom Pedlers" (December 27, 2016).

Tuesday, June 20, 2017

Unions in Decline: Some International Comparisons

Union membership and clout has been dropping in the US economy for decades. But it's not just a US phenomenon: a similar drop is happening in many high-income countries. The OECD Employment Outlook 2017 discussed the evidence in "Chapter 4: Collective Bargaining in a Changing World of Work."

Here are a couple of illustrative figures. Across the OECD countries, about 17% of workers belong to a union. As the report notes: "Trade union density has been declining steadily in most OECD and accession countries over the last three decades (Figure 4.2). Only Iceland, Belgium, and Spain have experienced a (very) small increase in trade union density since 1985 ..." In each of the panels, the solid black line is the overall OECD average, for ease of comparison.

Here's a parallel figure showing comparisons across countries for "collective bargaining coverage," which is the share of employees covered by collective bargaining agreements. On average, union bargaining coverage in OECD countries declined from 45% in 1985 to 33% by 2013.

The distinction between these figures should make the point that a number of countries have rules which in some cases require that firms pay non-union workers similarly to union workers. Conversely, many of the same countries also have a raft of possible exceptions to these rules. The OECD chapter provides a more detailed discussion of these ins and outs. But several overall patterns seem clear.

1) Labor union power is weaker just about everywhere.

2) The extent of labor union power varies considerably across countries, many of which have roughly similar income levels.  This pattern suggests that existence of unions, one way or another, may be less important for economic outcomes than the way in which those unions function. The chapter notes the importance of "peaceful and cooperative industrial relations," which can emerge--or not--from varying patterns of unionization.

3) In the next few decades, the big-picture question for union workers, and indeed for all workers, is how to adjust their workplace skills and tasks so that they remain valued contributors in an economy characterized by new technologies and global ties. Workers need political representation--whether in the form of unions or in some other form--that goes beyond arguing for near-term pay raises, and considers the difficult problem of how to raise the chances for sustained pay raises and secure jobs into the future.

Friday, June 16, 2017

An Update on Foreign Direct Investment

Foreign direct investment is "an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. [T]he investor´s purpose is to gain an effective voice in the management of the enterprise. ... Some degree of equity ownership is almost always considered to be associated with an effective voice in the management of an enterprise; the BPM5  [Balance of Payments Manual: Fifth Edition] suggests a threshold of 10 per cent of equity ownership to qualify an investor as a foreign direct investor." 

That's the definition of foreign direct investment from UNCTAD, which has published the World Investment Report 2017: Investment and the Digital Economy. This year's report includes the usual detailed overview of trends, along with some discussion of the evolving policy climate for foreign direct investment and the changing role of digital companies. Notice that FDI is explicitly separated from "portfolio investment," in which international investors buy stocks or bond or other financial assets across financial borders but without any management involvement. The usual believe is that FDI plays an important role in direct facilitation of international trade, and in the diffusion of technology and management expertise across borders, while portfolio investment plays a much smaller role in these areas.

Here are some overall patterns. FDI peaked back in 2007, and the 2016 level of $1.8 trillion it had not yet surpassed that earlier level. Most FDI inflows are to developed economies, although developing economies are not far behind.

What are the major countries for FDI inflows and outflows? The US economy perhaps unsurprisingly tops both lists, but there are some eye-raisers as well. Here's the list for inflows of FDI. Three points catch my eye here. First, notice the huge drop-off in inflows to the UK in 2016, essentially matched by a large rise in inflows to Ireland. My suspicion is that this change is Brexit-related. Second, if one combines the inflows to China, Hong Kong, and Singapore--on the basis that they are all basically China-related--then inflows to the area of China are now essentially the same as those to the US economy. Third, a reason why the UK, Ireland, and Netherlands all rank so high, given that they are actually not large economies in the global context, probably involves ongoing relocations of corporate ownership across national borders: for example, perhaps a US company owns a substantial share of a firm in Netherlands, which in owns a substantial share of a firm based in a third country. 

Here's the corresponding figure for outflows of foreign direct investment. Again, the US and China lead the way. But overall, the high-income countries shown in green represent a greater share of FDI outflows than the emerging market countries shown in orange. 
We hear a lot about a globalizing world economy. So what explains why FDI has essentially been flat for a decade? 

At least some of the reasons seems to be that countries are becoming more skeptical about the potential merits of FDI, and are more likely to impose rules placing limits on foreign buyers if they fear that "strategic" assets might be held by foreign investors, that domestic workers might be laid off, and so on. UNCTAD does a count each year of changed in national investment policies, which are then broadly classified as tending to liberalize or to restrict FDI. Back in the 1990s, pretty much all the changes were on the "liberalization" side. But starting in the early 2000s, the share of such changes involving "restriction" started rising, and is now about one-quarter of the changes in any given year.  

On the other side, the rising prominence of digital multinational enterprises has tended to support the level of FDI, and keep it at least flat rather than declining. UNCTAD makes a list of the top multinational enterprises, which are ranked according to the size of their foreign assets: that is, not according to their international sales, or their international visibility, but according to their level of foreign direct investment over time. Because of this method of ranking, as the report notes, "some well-known global digital giants, such as Amazon and Facebook, do not feature in the top 100. Neither do major telecom players, such as Verizon and AT&T, whose domestic assets and revenues are very large, but whose foreign businesses are relatively small." 

Thus, here's a picture of the tech and telecom companies in the UNCTAD top 100 list of multinational enterprises, and how the list has evolved in recent years. 
As the report explains (citations and parenthetical references to boxes and figures deleted):
"The fast rise of tech MNEs [multinational enterprises] represents one of the most noteworthy trends in the world of global megacorporations in recent years. This phenomenon has attracted increasing attention, not only at the research and policy levels, but also in the broader public. In 2010, the relevance of tech companies in the top 100 MNE ranking compiled by UNCTAD was still limited and not significantly different than 10 years earlier. From 2010 to 2015, in contrast, the number of tech companies in the ranking more than doubled, from 4 to 10, and their share in total assets and operating revenues followed a similar, and even more pronounced, trend . This growing weight results from a group of tech MNEs, mainly from the United States, entering the ranking. Some of these companies, such as Alphabet (Google) and Microsoft, are leading the digital revolution; others, such as Oracle, heavily rely on and benefit from the acceleration of the internet to deliver their value proposition. When including telecom MNEs, other important enablers of the digital economy, 19 MNEs in the top 100 are ICT companies – a sizeable portion of megacorporations. Tech megacorporations are enjoying exceptional growth momentum."
The statistics on foreign direct investment can be hard to disentangle, because ownership of foreign assets is an interconnected and overlapping network that can cross national borders multiple times. But the sheer magnitude of these flows--$1.8 trillion in FDI in 2016--compels attention. 

Wednesday, June 14, 2017

Competition Issues in Seed and Agricultural Chemicals

The number of US public companies (that is, companies with stock traded on a public exchange and owned by those shareholders) has dropped by half in the last 20 years.  Part of the reason is a slowdown in the rate of start-ups; part is a rise in mergers and acquisitions of existing firms.  In the next few months, these forces will be playing themselves out in the markets for seeds and agricultural chemicals.  James M. MacDonald discusses one arena in which these forces are playing out in "Mergers and Competition in Seed and Agricultural Chemical Markets," published in Amber Waves from the US Department of Agriculture (April 3, 2017).

As MacDonald explains, the global economy currently has a "Big Six" of agricultural chemical companies. However, Dow Chemical and DuPont have announced a plan to merge, and Bayer has announced a plan to buy Monsanto, which would reduce the Big Six to the Big Four. At the same time, a state-owned Chinese chemical company called ChemChina has made an offer to buy Syngenta, another one of the Big Six. So here's the current industry, and the proposed transactions, in a table.

As MacDonald explains, the Big Six itself is a fairly recent development: "The “Big Six” emerged in the 1990s and early 2000s, arising from mergers among large chemical, pharmaceutical, and seed
companies as well as from their acquisitions of many smaller seed and biotechnology companies. At the time, the future of integrated life sciences companies promised to use new developments in biotechnology to support work in human pharmaceuticals, seed genetics, and agricultural chemicals. That vision did not reach fruition, as the pharmaceutical businesses later separated from the
seed and agricultural chemical businesses." But now that the Big Six has happened, markets for specific seeds are not surprisingly quite concentrated. For example, here are four-firm concentration ratios (that is, the share of sales by the largest four firms) in US production of corn, cotton, and soybeans, for 2000 and 2015..

Bar chart

The standard set of arguments applies here. Firms involved in mergers always promise "synergies," and in particular, the promises here often argue for a more effective research and development effort. Those who buy the products are more worried that less competition will mean higher prices. 

In addition, it's not obvious that larger firms with higher profits will have a more aggressive R&D effort. As Sir John Hicks famously wrote, "The best of all monopoly profits is a quiet life" (in "Annual Survey of Economic Theory: The Theory of Monopoly," Econometrica, January 1935, vol. 3, p. 8). Giant monopolies can often be slow to innovate, because why bother if your customers can't go anywhere else. MacDonald has a simple graph to illustrate this point:
Line chart
As MacDonald points out, a recent trend had been for antitrust authorities to express concerns that mergers would inhibit R&D. He writes:
"U.S. antitrust enforcement agencies rarely cited innovation concerns in merger challenges through the early 1990s, but they have been increasingly likely to do so since then and have introduced innovation concerns into merger challenges in agriculture. In 2016, the U.S. Department of Justice challenged the purchase of Precision Planting, LLC, by John Deere on the grounds that the acquisition would reduce innovation in high-speed planters. John Deere and Precision Planting, a unit of Monsanto, are the two major producers in this nascent industry. After many years of research, during 2014 each firm introduced high-speed planting systems that allow row crop farmers to substantially increase planting speeds at no cost in accuracy. While the Deere system was bundled into new planters, the Precision Planting product could be sold as a set of components and retrofitted onto existing planting equipment, including Deere’s. The Department argued that intense rivalry between the two led to improved prices for farmers and to the rapid introduction of innovative new features, and that the merger would eliminate that competition."
I can't claim to have made any intensive study of these proposed mergers. But when an industry is already quite concentrated and profitable, my bias is that proposals for further mergers should have some very high hurdles to cross. It will be interesting to see how the antitrust administrators under the Trump administration address this industry.

Tuesday, June 13, 2017

Interview with Janet Currie: Health, Liability, Overtreatment

Jessie Romero interviews Janet Currie on a range of topics in "Interview: Janet Currie," Econ Focus: Federal Reserve Bank of Richmond, First Quarter 2017, pp. 23-36. Here are a few tidbits: 

Socioeconomic Status and Effects of Pollution
"There is a large environmental justice literature arguing that low-income and minority people are more likely to be exposed to a whole range of pollutants, and that turns out to be remarkably true for almost any pollutant I’ve looked at. A lot of that has to do with housing segregation; areas that have a lot of pollution are not very desirable to live in so they cost less, and people who don’t have a lot of money end up living there. It also seems to be the case, at least some of the time, that low-income people exposed to the same level of pollutants as higher-income people suffer more harm, because higher-income people can take measures to protect themselves. Think about air pollution. If I live in a polluted place but I have a relatively high income, maybe I have better-quality windows so I have less air coming in, or I can afford to have air purifiers, or I can afford to run my air conditioner. It could even be the case that lower-income people are more vulnerable to the effects of pollution in the first place. For example, someone who is malnourished is more likely to absorb lead than someone who is not malnourished. So people who are better nourished may be better able physiologically to protect themselves against the effects of pollutants."

Reform of Joint and Several Liability

"Joint and several liability, or JSL, is essentially the “deep pockets” rule: If multiple parties are found to be liable for the harm caused, the plaintiff can collect damages from one or all of the parties, regardless of how each one contributed to the harm. So people sue the deep pocket. A hospital is a good example. When Bentley MacLeod and I first started reading about tort cases related to malpractice during child delivery, one of the things that struck us as bizarre is that they often talked about the nurse: The nurse was sitting in the nurse’s station, she didn’t come when I called, she didn’t call the doctor. We wondered, why are they spending so much time talking about what the nurse did or didn’t do? Surely the doctor was the prime mover in deciding treatment? What we eventually realized was, the nurse is the employee of the hospital, whereas doctors are generally working as independent contractors; so if you want to blame the hospital — the deep pocket — you have to tie the nurse to the lawsuit. Most of the time, under JSL, the hospital gets sued and the doctor doesn’t. If the hospital pays, legally it can try to recover damages from the doctor, but they hardly ever do that. Essentially, under JSL, the doctors are working in a regime where they’re never going to get sued. JSL reform makes the payment of damages proportional to the contribution to the harm, which makes it more likely the doctor will be sued. And if the doctor is the decisionmaking agent, then in theory that should improve outcomes."
The Difference between Overprovision and Misallocation of Medical Care 
"Many people are concerned about overtreatment and excessive spending, but the problem is more subtle. Bentley, Jessica Van Parys, and I studied heart attack patients admitted to emergency rooms in Florida. We found large differences in how doctors allocated procedures across patients; some doctors were much less likely to use aggressive treatments with older or sicker patients who might have been deemed less appropriate candidates for the treatment. Young, male doctors who trained at a top-20 medical school were the most likely to treat all patients aggressively, regardless of how appropriate the patient seemed to be. In the case of heart attacks, it appears that all patients have better outcomes with more aggressive treatment, so treating only the “high-appropriateness” patients aggressively harms the “low-appropriateness” patients. Similarly, many people are concerned that U.S. doctors perform too many C-sections. But actually, in another paper, Bentley and I found that it looks like too many women with low-risk pregnancies receive C-sections, while not enough women with high-risk pregnancies receive C-sections. So the goal shouldn’t necessarily be to reduce the total number of C-sections but rather to reallocate them from low-risk to high-risk pregnancies."
A couple of add-ons here for interested readers:

Monday, June 12, 2017

Facing the Costs of Paid Parental Leave

An AEI-Brookings Working Group on Paid Family Leave has been considering family leave policies during the last year or so, and some results of their deliberations appear in "Paid Family andMedical Leave: An Issue Whose Time Has Come" (May 2017). For the fortunate readers out there who don't concern themselves with the political leanings of DC think tanks, the American Enterprise Institute tends to leans right, while Brookings tends to lean left. Thus, the report is based on views of knowledgeable experts from a range of political perspectives. (For those who want names, the Codirectors of the report are Aparna Mathur and Isabel V. Sawhill, and the other participants are Heather Boushey, Ben Gitis, Ron Haskins, Doug Holtz-Eakin, Harry J. Holzer, Elisabeth Jacobs, Abby M. McCloskey, Angela Rachidi, Richard V. Reeves, Christopher J. Ruhm, Betsey Stevenson, and Jane Waldfogel.)

Some of the themes in the report, while certainly worth making, are not especially new. For example, "the United States is the only advanced nation that does not have a paid leave policy at the national level. The federal Family and Medical Leave Act, passed in 1993, offers 12 weeks of job-protected, unpaid leave, but only about 60 percent of the workforce is eligible for its protections. ... Polls show overwhelming public support for paid family and medical leave ... with almost 71 percent of Republicans and 83 percent of Democrats in favor of a paid parental leave policy."

But economists mistrust polls which ask if people would like to receive a pleasant new benefits, but don't place equal emphasis on the costs. Thus, for me the most intriguing point in the report is that apparently no one in the Working Group, no matter their political leanings, favored requiring an employer mandate for employers to pay the costs of paid leave. As the report notes:
"That said, paid leave generates a variety of concerns from a business perspective. Most obviously, there are business costs associated with paid leave if employers are simply mandated to provide it. For this reason, we think it is worth noting that no one in our working group favored an employer mandate. ... This approach is popular with the general public. However, we do not favor it for two reasons. First, it would be burdensome on employers, especially small businesses and those employing a disproportionately high share of likely parents. Second, it will likely lead to a reluctance to hire female workers of a certain age. ... Instead, most— although not all of us—favored a slight increase in the payroll tax on employees, with a minority in favor of reduced federal spending in other areas to pay for a new benefit. "
Here's some additional detail on their argument. As a starting point, here's an international comparison across OECD countries of paid parental leave. On the left, the bars show what percentage of income is replaces for men and for women. On the right, the bars show the length of parental leave. As the figure shows, it's fairly common for countries to have paid parental leave with a length of six months to a year, and it's common for the payments to replace about half of wages. 

In the US, a few states have enacted paid parental leave rules. Here's a table giving some description. 
As the table helps to illustrate, some of these laws are quite recent, and the evidence on their operation is not in yet. The reason why Washington state isn't included in the table, as the report notes, is: "Washington State has not yet implemented its policy because it has not established a funding mechanism." In the other states, "California, Rhode Island, New Jersey, and New York incorporated paid family and medical leave into the states’ existing TDI [Temporary Disability Insurance] programs, financed through payroll contributions. However, these four states finance the paid family and medical leave benefit exclusively through employee payroll contributions, rather than joint employer/employee contributions ..." 

The report is scrupulous in  pointing out concerns with the existing US programs, and I'll mention two of them here. One is that the existing programs do relatively little to help lower-income women. Even among those eligible for paid leave in California, the take-up rate of existing benefits has been low. 
"Many of the bottom 40 percent of households (by income) are ineligible for job-protected unpaid leave under the FMLA [Family and Medical Leave Act] because they are employed in small firms (with fewer than 50 employees) exempt from the law or because they do not meet the eligibility requirements in terms of hours worked with their current employers. In addition, survey data consistently show that workers in low-income households and those with low educational attainment frequently lack access to any form of paid leave. Moreover, those with fewer resources or less income are much less able to take up this leave even if they are eligible. This has led to a system in which the beneficiaries of current leave policies (whether unpaid or paid by an employer) are primarily those with moderate or high incomes, stable jobs, and employment in larger organizations. ..."
"Ten years after California’s paid family leave policy was implemented in 2004, take-up rates by eligible mothers ranged from 25 to 40 percent. ...  A 2011 study found that half of workers eligible for paid leave were unaware of the program, and a third of those who were aware and eligible but who did not apply for family leave reported that the wage-replacement rate was too low. Others cited the lack of job protection or worried that taking leave would make their employer unhappy or hurt their opportunities for advancement."
The report details how the members of the working group differed on a number of points, as one might expect given the membership of the group. But they also work to describe at least a loose consensus proposal that most members of the group could support as a minimum proposal. Here are some central  elements for the design of benefits:  
"Many (but not all) of those in our group think that only those who have consistently worked with their employer for at least a year (or more than 1,000 hours in a year) should be eligible. Businesses will be averse to protecting employees’ jobs during an extended leave of absence if they contributed only a short period of work before taking leave. Some in our group are in favor of even stricter eligibility rules, but all agree that the employee should have contributed significantly to this benefit through continued participation in the workforce (in the case of a payroll tax) and with a specific
employer (for purposes of job protection). ...
"[I]t would keep the benefits relatively targeted and inexpensive by offering a 70 percent
replacement rate up to a cap of $600 per week, for a limited number of weeks (e.g., eight weeks). ... [I]t would include job protection. ... The plan’s key elements are its budget neutrality, its extension of benefits to the middle and working class and not just the poor, and its establishment of a floor on the number of weeks of leave provided. States and private employers would be free to supplement this leave if they chose to do so.
"Our working group would support such a plan— not as everyone’s preferred policy but as a reachable compromise in our group—and we put it forward for others to consider."
I very much like the honesty and straightforwardness of the plan. It acknowledges costs. It acknowledges that the US is a diverse country in its political and economic dimensions, and thus sees the federal role not as supplying a one-size-fits-all solution, but rather as setting a baseline on which states can build. It focuses on how to provide basic benefits for those who now often have no leave at all, paid or otherwise. As the report notes: "Overall, about 40 percent of households in the United States with children under the age of 18 are either headed by a single mother or are homes in which the mother is the primary breadwinner, according to data from the Pew Research Center. This share was just 11 percent in 1960."

As have explained in other posts, I think the evidence on the benefits of family leave is not as clear-cut as I might prefer; for more discussion, see "Some Economics of Parental Leave" (March 3, 2017). For example, one purported set of benefits of parental leave is giving parents a chance to remain home with children, at least for a time, while another set of benefits is that the parents are more likely to return to the paid workforce. The goals of more time with children and more connection to the workforce are tough to reconcile. The factors that determine whether low-wage parents returns to the labor force may have less to do with the availability of paid leave, and more to do with whether their job has been protected for a time and they are easily welcomed back, or how attractive the low-wage job is to them in the first place.  But the time crunch between parenthood and work is particularly rough in the couple of months right after a newborn arrives, and finding ways to ease that time crunch for the high proportion of US mothers who have limited resources seems a worthwhile goal. 

Saturday, June 10, 2017

Interview with Timothy Taylor: Quick Hits

My friend Stephen Dupont, a public relations and marketing guy, did an interview with me at his website.  The interview is aimed at a broad audience, with quick hits on a variety of subjects. There's much more at the website, but here's a sample: 

Stephen Dupont: Do you affiliate yourself with any particular school of economic thought or philosophy? 
Timothy Taylor: The great health care economist Victor Fuchs used to say that he was a “radical moderate.” He argues that moderates need to be radical, too, or else they will be drowned out by noise from radicals who are on the extremes. Of course, the problem with trying to be middle-of-the-road is that you get hit by ideological traffic going both directions.

Stephen Dupont: As the managing editor of the Journal of Economic Perspectives for more than 30 years, you’ve been a keen observer of economic trends, theories and policies. As you look back, is there anything that has surprised you over the past 30 years in the world of economics?
Timothy Taylor: For me, economics is an ongoing parade of surprises. I was surprised when the Berlin Wall came down, and a number of economists turned to the problem of “transition economies.” I am stunned that China has become the largest economy in the world. I was shocked that the countries of Europe—and Germany in particular—actually gave up their traditional currencies for the euro. I thought U.S. health care spending already sky-high back in 1980 at 9% of GDP, and now it’s approaching 18% of GDP. I did not suspect that the U.S. financial system and economy was as fragile as it turned out to be in the Great Recession of 2007-2009. I never would have thought that the Federal Reserve would take its policy interest rate down to near-zero, and hold it there for seven years. I flatter myself that my understanding of the economy is pretty good—except that I only learn to understand what has happened with a time lag of about two years.

Friday, June 9, 2017

Environmental Protection and Africa's Cities

Africa's cities are growing rapidly, which presents both an environmental problem and a policy opportunity. The problem is that many of these cities already have severe environmental issues. The opportunity is that because these cities are much smaller than they will be in a few decades, there are opportunities now to guide and shape their growth in ways that can be much more cost-effective than trying to clean up the mess after it has already happened. Roland White, Jane Turpie, and Gwyneth Letley explore these issues in a World Bank report, Greening Africa's Cities : Enhancing the Relationship between Urbanization, Environmental Assets, and Ecosystem Services (May 2017).

On the patterns of urbanization in Africa, they write:
"Urbanization in Africa began later than in any other global region and, at a level of about approximately 40%, Africa remains the least urbanized region in the world. However, as indicated in Figure 3, this is rapidly changing: SSA’s cities have grown at an average rate of close to 4.0% per year over the past twenty years, and are projected to grow between 2.5% and 3.5% annually from 2015 to 2055 (Figure 3). By contrast, globally the average annual urban population growth rate is projected to be between 1.44% and 1.84% from 2015 to 2030 (WHO 2015). From an environmental perspective, this has two important implications. On the one hand, most of Africa’s urban space has yet to emerge. Much of the area which will eventually be covered by the built environment has not yet been constructed and populated. Crucial natural assets – and significant biodiversity – thus remain intact in areas to which cities will eventually spread. On the other hand, this is changing quickly: pressures on the natural environment in and around cities are escalating steadily and these assets are increasingly under serious threat."

The existing environmental hazards levels in many African cities are often severe. They write: "For the entire region the proportion of urban residents with access to sanitation was estimated to be only 37% in 2010. Solid waste coverage also remains very limited with collection rates for many African cities at below 50% ..." 

Here's a figure showing particulate concentrations in a range of cities. You think some cities in China have problems with air pollution? On this measure, a number of cities in Africa are considerably worse. 

It's not a surprise that the health toll from these environmental pollutants is severe. In a number of countries in sub-Saharan Africa, the estimates of total welfare losses due to high air pollution are often in the range of 5% of GDP.  Here's a table showing estimates of premature deaths from various risk factors. For unsafe water and sanitation, the estimates of premature deaths are falling. For household and ambient air pollution, estimated deaths are rising.

There's no secret about the solutions here, and White, Turpie and Letley lay them out in some detail. Protect aquatic ecosystems like rivers and marshes. Avoid spreading pollution through stormwater runoff. Collect and treat sewage. Limit sources of air pollution. Preserve some greenspace. Don't build in places that are going to flood every few years. Such a list of policy steps can easily be expanded. Again, the goal is not to limit or hinder the urbanization of countries in sub-Saharan Africa, but only to guide it in more environmentally friendly directions. But the governance issues are severe. The authors write:
"Cities need to strengthen the institutions on which effective green urban planning and management rest by addressing structural limitations, accountability and capacity constraints. ... It is also important to recognize that the widespread planning failures evident in African cities are, in essence, a symptom of institutional weakness. In a “greening” context, green urban planning fails to emerge because African urban management institutions lack the capacity to generate such plans, and,
whether or not they are environmentally sensitive, the plans that are produced are seldom implemented or enforced. While the strengthening of government institutions is key, it is also perhaps one of the most challenging issues to address. ... Finally, the green urban development agenda needs to be better financially resourced. In the context of the limited fiscal devolution characteristic of cities in many African countries, there is a very substantial agenda here."
The authors of the report are clear-eyed about these problems, but the report is nonetheless infused with a can-do spirit, and features a number of encouraging stories. I hope I am wrong, but I confess that I am not optimistic that most of Africa's cities will rise to meet these environmental challenges.

For those interested, a couple of other recent posts on sub-Saharan Africa are:

Thursday, June 8, 2017

Corporate Benefits from White House Visits: A Tidbit of Evidence

Just because corporate executives pay hundreds of visits to the White House doesn't prove that their firms are benefiting from White House connections. Perhaps it's just a useful way for the White House to gather information and input about economic effects of real-world policies. Perhaps it's a useful way for the White House to get a little reflected glory from those who run successful companies. Perhaps it's a way of rewarding diehard supporters who would have been supporting you anyway. But Jeffrey R. Brown and Jiekun Huang actually take a look at how corporate stocks perform right around the time of White House visits. Their evidence appears in All the President’s Friends: Political Access and Firm Value," which appears as a National Bureau of Economic Working Paper (#23356, April 2017, not freely available on-line, but many academics will have access through library subscriptions.

The Brown/Huang approach is fairly straightforward. They look at the stock market returns of companies in the 10 days before and the 120 days after the visit of a top executive to the White House between 2009 and 2015. According to the White House logs, there were 2,286 visits by top executives to officials at the White House during these seven years, which includes more than 100 visits apiece with Barack Obama, Valerie Jarrett, and Jeffrey Zients. Brown and Huang adjust for how the overall stock market is doing, so they are looking at "abnormal" returns that differ from the average for the market as a whole. Here's a figure showing the pattern they find.

Within about 30 days of the visit of a top executive to the White House, on average a company sees its stock rise by nearly 1% more than the market as a whole--and then remain near that higher level at least through the 120-day horizon. When the authors break down the statistics by year, they find that the "cumulative abnormal returns," as they refer to these calculations, "are significantly positive during the election year (2012), the first years post-election (2009 and 2013) as well as 2014, suggesting that access to influential government officials is particularly beneficial during those years."

Of course, the pattern shown here doesn't prove that companies are benefiting from their White House connections. Perhaps stock market investors mistakenly perceive a White House visit means good news for the company. Perhaps top executives are more likely to get a White House invitation when good news is about to arrive for their company. But it's an interesting tidbit of actual evidence.

Wednesday, June 7, 2017

When Trotsky (Temporarily) Embraced Prices and Markets

The year was 1932. Leon Trotsky had been already been tossed out of the Communist Party and exiled from Stalin's Soviet Union. Writing from a distance, he found himself performing a balancing act: on one side, supporting the broad idea of the Revolution and the ultimate victory of socialism; on the other side, criticizing the first five-year economic plan as poorly designed and replete with failures. In his October 1932 essay, "The Soviet Economy in Danger," Trotsky finds himself arguing that Soviet bureaucrats were far too confident about economic central planning, and instead needed to rely more on prices and supply and demand. 

Here are some snippets from Trotsky, which include a number of phrases and sentences that could have been written by a fierce critic of socialism like Friedrich Hayek. Trotsky's concerns include: the large costs of mistakes in centralized decision-making, problems in which quality of output is sacrificed in the drive for greater quantity, lack of coordination across production chains in the economy, how bureaucrats lack a "universal mind" and thus need to rely on supply and demand and "commercial relations." Of course, for Trotsky, all of this just proves that socialism is working.
"Even though the first five-year plan took into consideration all possible aspects, by the very nature of things it could not be anything but a first and rough hypothesis, destined beforehand to fundamental reconstruction in the process of the work. It is impossible to create a priori a complete system of economic harmony. The planning hypothesis could not but include old disproportions and the inevitability of the development of new ones. Centralized management implies not only great advantages but also the danger of centralizing mistakes, that is, of elevating them to an excessively high degree. ... 
"The administrative hue and cry for quantity leads to a frightful lowering of quality; low quality undermines at the next stage the struggle for quantity; the ultimate cost of economically irrational “successes” surpasses as a rule many times the value of these same successes. Every advanced worker is acquainted with this dialectic, not through the books of the Communist academy (alas! more inferior goods), but in practice, through experience in their own mines, factories, railroads, fuel stations, etc. ... If we were to introduce a corrective coefficient for quality into the official data, then the indices of the fulfilment of the plan would immediately suffer substantial drops. ...
"The problem of the proportionality of the elements of production and the branches of the economy constitutes the very heart of socialist economy. The tortuous roads that lead to the solution of this problem are not charted on any map. To discover them, or more correctly to lay them, is the work of a lengthy and arduous future. All of industry groans from the lack of spare parts. Weavers’ looms remain inactive because a bolt is not to be had. “The assortment of articles produced,” writes EZ, “in the line of commodities of widespread consumption is haphazard and does not correspond to ... the demand.” ...
"If a universal mind existed, of the kind that projected itself into the scientific fancy of Laplace – a mind that could register simultaneously all the processes of nature and society, that could measure the dynamics of their motion, that could forecast the results of their inter-reactions – such a mind, of course, could a priori draw up a faultless and exhaustive economic plan, beginning with the number of acres of wheat down to the last button for a vest. The bureaucracy often imagines that just such a mind is at its disposal; that is why it so easily frees itself from the control of the market and of Soviet democracy. But, in reality, the bureaucracy errs frightfully in its estimate of its spiritual resources. In its projections it is necessarily obliged, in actual performance, to depend upon the proportions (and with equal justice one may say the disproportions) it has inherited from capitalist Russia, upon the data of the economic structure of contemporary capitalist nations, and finally upon the experience of successes and mistakes of the Soviet economy itself. But even the most correct combination of all these elements will allow only a most imperfect framework of a plan, not more.
"The innumerable living participants in the economy, state and private, collective and individual, must serve notice of their needs and of their relative strength not only through the statistical determinations of plan commissions but by the direct pressure of supply and demand. The plan is checked and, to a considerable degree, realized through the market. The regulation of the market itself must depend upon the tendencies that are brought out through its mechanism. The blueprints produced by the departments must demonstrate their economic efficacy through commercial calculation. ...

"Within the scope of this brief pamphlet I have deemed it necessary to present in all their acuteness the contradictions of the Soviet economy, the incompleteness and the precariousness of many of its conquests, the gross errors of the leadership, and the dangers that stand in the path of socialism. ... One who accepts the proletarian revolution only when it is accompanied by all conveniences and lifelong guarantees cannot continue on the road with us. We accept the workers’ state as it is and we assert, “This is our state.” Despite its heritage of backwardness, despite starvation and sluggishness, despite the bureaucratic mistakes and even abominations, the workers of the entire world must defend tooth and nail their future socialist fatherland which this state represents. ..."

Tuesday, June 6, 2017

The Slow-Motion Crisis in Government Pensions

Around the world, life expectancy is rising, birthrates are either falling or stable, and populations are aging. But Mauricio Soto offers some eye-opening calculations about what this means for those relying on government pensions in "Pension Shock," which appears in the June 2017 issue of Finance & Development.

In the chart, the left-hand panel shows government spending on old-age pensions across OECD countries. The level has basically doubled from over 4% in 1970 to roughly 9% at present. But at least given current projections, and after various steps that governments have taken, government spending on pensions as a share of GDP isn't scheduled to rise much more in the next few decades.

The difficulty arises because if government keeps spending the same share of GDP on pensions at a time when the share of the population who are elderly keeps rising, then the average government pensions will cover a smaller share of income. Thus, the right-hand panel shows that while the "economic replacement rate" for an average individual over the age of 65 has been around one-third of per capita GDP for the last few decades, it's projected to fall to about 20% of per capita GDP by 2040 and later.

What's are some of the  possible responses here? One set of reactions could happen within the  political system. For example, the elderly could vote for dramatic increases in taxes on the working generation to support higher pensions. Or government pensions could be redesigned to provide only a basic income support, and nothing much higher, even if you paid much more in payroll taxes throughout your life.

Another set of reactions could happen with the actions of individuals. Soto's calculations suggest that if people worked about five years longer before retirement, it would offset about half of the predicted decline in the "economic replacement rate." If everyone also saved at least 6 percent of their income during their working life, this would offset the other half of the fall in the "economic replacement rate." Again, these changes are just what is necessary to offset the expected decline in what government pensions are currently scheduled to pay.

The needs and expectations of an aging population are a tectonic shift under our current political and economic understandings, and will cause some earthquakes before it's done.

Monday, June 5, 2017

What is Killing US Coal?

US coal output and coal jobs have dropped in recent years. In "What Is Killing the US Coal Industry?", Charles D. Kolstad names and investigates the suspects. The essay is a March 2017 Policy Brief for the Stanford Institute for Economic Policy Research. Here is Kolstad's list of suspects:
  • "Environmental regulations — the primary suspect for some — killed coal. 
  • "Deregulating railroads in the 1970s allowed cheap Western coal to displace more costly Eastern coal, resulting in major job losses in the labor-intensive Eastern coal industry. 
  • "The fracking revolution has driven down natural gas prices, making coal less competitive in electricity production. 
  • "Coal mining jobs are going away because of the same productivity gains that have led to fewer manufacturing jobs across the country — workers can produce more coal per hour, meaning fewer workers are needed to maintain steady coal output. 
  • "Other reasons include financial markets, which may see the future of coal as risky (for a variety of reasons) and thus a poor investment." 
The list of suspects has obvious political implications. For example, if the drop in coal is about high productivity growth among coal miners, or the rise of natural gas production, then there's not much the government can (or should) be doing to alter the situation. If the drop in coal is mainly about environmental rules, then we could perhaps have an argument over the costs and benefits of such rules, or whether such rules might be redesigned in a way that reduces a substantial share of the costs but keeps a substantial share of the benefits. 

Kolstead's conclusion: "[E]nvironmental regulations did not kill coal. Progress is the culprit." Here's some additional detail, starting with the big-picture overview of US coal output and jobs.

Total US coal output rose fairly steadily from 1950 up to about 2010. However, the graph shows that all of the rise was in western coal, like the Powder River Basin in Montana and Wyoming, rather than eastern coal like West Virginia and Pennsylvania. Railroad deregulation in the 1970s made it much more cost-effective for western coal to be shipped around the country.
Employment in the coal industry first fell sharply in the 1950s with the agreement between the United Mineworkers union to pursue automation in the coal industry in exchange for better wages. There is another long decline in coal miner jobs starting around 1980, but it is mostly in eastern mines. Remember, the output of eastern mines wasn't changing much during most of this time, which implies that the productivity of coal miners was rising substantially.

More recently, the rise of natural gas production has taken market share from coal: for example, coal has traditionally been the main fuel for generating electricity, even into the early 2000s. However, the share of electricity generated by natural gas now exceeds that from coal.

What about environmental regulations as a reason for decline in the coal industry? Kolsted points out two ironies here.

First, it's true that air pollution rules passed back in 1970 to reduce sulfur emissions tended to hurt high-sulfur eastern coal. But then those rules were given exceptions to help offset the harms to eastern coal. The result was that coal-fired power plants in the east ended up holding on to old and inefficient facilities much longer--and in recent years the age of those facilities has caught up with them. Kolsted explains:

"The easiest way to meet the 1970 sulfur emissions regulations was to burn low-sulfur coal, which set off  a dramatic expansion of low-sulfur coal mining, primarily in Wyoming. The strong demand for low-sulfur coal threatened high-sulfur coal producers, primarily in the East. 
"In order to save coal-mining jobs in the East, the Clean Air Act was amended in 1977 to require equipment on all new coal-fired power plants to physically remove sulfur from the smokestacks after combustion, reducing the attractiveness of low-sulfur coal (all coal becoming “compliance coal”). This reduced the competitive threat to Eastern mines.
"Another feature of the 1970 Clean Air Act had more subtle and delayed effects. That is the exemption of existing (as of 1970) power plants from sulfur reduction rules. This “grandfathering” was done for political reasons to facilitate passage of the Act. But it was also viewed as fair and without long-term consequences since those older plants were expected to retire at the end of their 40- or 50-year lives anyway. But as Revesz and Lienke (2016) detail, this exemption provided an incentive to keep old and dirty power plants operating rather than retire, despite the higher operating costs of old plants. To protect health and welfare, this necessitated the EPA’s imposition of more restrictions on old power plants over the years, including the acid rain provisions instituted in 1990 during the Bush administration. Additional rules were put in place during the next three presidential administrations to deal with the problems caused by old plants operating long after their assumed retirement date.
"Now, nearly 50 years after the 1970 Act, shuttering of old power plants has finally begun. ... [T]he coal plants retired in 2015 were quite old (the oldest began operation in 1944, the year the Allies landed in Normandy). ... This suggests that the decline in coal-fired electricity generation is largely the result of an aging fleet of power plants, which may well have been retired years ago absent the Clean Air Act’s grandfathering clause."

Second, if environmental regulations are loosened for all types of energy production--that is, for natural gas as well as for coal--it's quite plausible that natural gas will continue to gain relative to coal.

So yes, environmental rules affected eastern coal production. But the big stories for the fall of coal are productivity growth among coal miners and the rise of natural gas. demand for eastern coal might well be larger today if instead of favoring aging coal-fired electrical power plants through grandfathering rules, those plants had been updated and replaced over the decades.  

Friday, June 2, 2017

Interview with Hilary Hoynes: Anti-Poverty Programs

Douglas Clement offers yet another of his excellent interviews, this one with Hilary Hoynes, in The Region, published by the Federal Reserve Bank of Minneapolis (June 1, 2017).  Here are some tidbits.

Long-Term Returns to Food Stamps

"Food stamps are a central part of the U.S. social safety net, and it’s a means-tested program—meaning that you have to have low income to participate. And, remarkably, it has remained fairly intact over the past 20, 30, 40 years while other parts of the safety net for low-income families have been restricted and reformed. Also, it’s federal—run out of the USDA—so it doesn’t vary a lot geographically. That’s helpful because it really provides a uniform floor across the United States. In very poor areas, even in states that don’t tend to provide a lot of assistance for the poor, food stamps create a kind of universal minimum across all places. It does, however, create challenges for doing evaluation because it doesn’t vary much across space, and it also hasn’t varied much over time. ...

"Food stamps started under President Kennedy. His first executive action was to start some pilot programs for food stamps. ... Those pilot programs eventually led to passage of the Food Stamp Act in 1964. But it wasn’t until 1974, 10 years later, that subsequent legislation compelled all areas to implement food stamps. In that 10-year interim, Congress essentially said to U.S. counties, “We’re going to appropriate these funds for this program. If you’re interested in implementing this program, please apply and we will fund them, subject to our appropriation.” ... This resulted in gradual rollout of food stamps across the almost 3,200 U.S. counties. ...
"The “rollout design” is one of the tools in our tool bag for doing evaluation. And, of course, we need to convince ourselves that that rollout was as good as random, that it wasn’t systematic, that certain areas had the rollout earlier than others. In our first paper on this, my co-author Diane Schanzenbach and I really dug into the nature of the rollout and the political economy behind it. At the end of the day, we were convinced that it was as good as random which places got food stamps earlier rather than later. ...
"In the paper in last year’s AER with Douglas Almond and Diane Schanzenbach, we took a long-term evaluation lens to this program. Food stamps rolled out in the ’60s and ’70s, so the cohorts affected, or not, in early or late childhood are in their early 50s today. This presented an opportunity to address a question that no one has ever looked at before in the context of food stamps: What are their long-run benefits? ...

"We couldn’t in our data know precisely which families were on food stamps, so it’s sort of an indirect estimate. But we know whether food stamps were implemented when these individuals were 2 or 4 or 14 or 20 years old. We essentially analyzed the data within that lens: How old were you when food stamps were rolled out in your county?

"The headline finding was about health. We measured metabolic syndrome, which is essentially a range of conditions including high blood pressure, diabetes, heart disease and obesity. ... And we found that the more exposure to food stamps that a person had, the lower their risk of metabolic syndrome in adulthood. In particular, the gains were greatest if the food stamps program was implemented before an individual was 3 or 4 years old. That period between in utero exposure—prebirth—to those first three or four years of life, was the age range where having more exposure to food stamps available led to a more dramatic reduction in the incidence of metabolic syndrome in adulthood. ... Then we also looked at effects on human capital outcomes. ...  In short, we found that better nutrition in early childhood leads to human capital improvement and better outcomes in adulthood, but that finding was limited to women."

On the Earned Income Tax Credit
"The EITC is the most important anti-poverty program for families with children in America. It removes the most children from poverty, and it’s organized as an in-work benefit rather than an out-of-work benefit. Welfare, for instance, is an out-of-work benefit ...  The whole idea of in-work programs like EITC is to respond to that and say, “Well, American voters would rather have a program that redistributes while encouraging work, not discouraging work.” The EITC operates as an earning subsidy on incomes up to about $14,000. For every dollar that you earn, if you’re a single mother with two children or a married couple with two children, for every dollar that you earn up to about $14,000, you get 40 cents added to that dollar through the EITC. It’s a quite powerful increase in your after-tax wage.
"It still needs to phase out or everybody would get it, so there are some negative work incentives that are faced by higher-income workers at levels where the EITC phases out: between about $15,000 and $40,000—or $18,000 and $45,000, depending on your family size. And it’s phased out at a rate of about 21 cents on the dollar. So, if you earn an additional dollar, your EITC is reduced by 21 cents, a gradual phase-out.
"Research shows that this program design has a dramatic effect on employment. When the EITC expands, you see more low-skilled workers, particularly single mothers, in the labor market. It has a very powerful effect on transitioning people from out-of-work to in-work. And in so doing, it lowers poverty rates, not just because you’re giving households a tax refund at the end of the year—and of course, if you give someone money, you’re going to reduce poverty—but just as important is the fact that by encouraging work, earnings go up in the household, and that also reduces poverty. It generates a roughly 2-for-1 reduction in poverty for every dollar of federal spending, and that’s every efficient. ... It does redistribution within the tax code, rather than a sort of brick-and-mortar social welfare operation that is the model of the state-based social safety net."
Head Start Doesn't Fade for All Groups 

"[M]any studies that look at the effects of Head Start (and, to some extent, of programs like Perry Preschool and others) have found that increases in cognitive test scores for children in the years they’re in Head Start seem to fade out once they enter school. ... Is it possible that this fadeout is masking the fact that there are gains for some groups that somehow, in the global mean, seem to disappear?
"It turns out that the story isn’t quite that simple; but we did discover that, yes, Head Start increases cognitive test scores, but those global mean results mask the fact that the gains are very concentrated at the bottom of the skill distribution. The test scores at the bottom of the distribution went up by a lot; whereas, test scores in the middle and the top of the distribution didn’t go up by very much. ...
"Fast forward in this Head Start impact study, and observe kids through grade 1. We found that overall, the fadeout occurs throughout the distribution for the full population. But by looking across groups based on maternal education, race, ethnicity and other characteristics, we uncovered this finding of much larger gains for a specific group: kids who enter Head Start as English language learners—that is, English is not the primarily language at home. And in this experiment, that turned out to mostly be Spanish speakers because of the population in the experiment. These results were contemporaneous when the kids are still in Head Start, but they also persisted through transition to elementary school. Fadeout didn’t occur."
Hoynes has written for the Journal of Economic Perspectives, where I work as Managing Editor, a couple of times. For those who would like to sample her work up close, the articles are:

Thursday, June 1, 2017

How America Could Save $65 Billion in Mobile Phone Bills

It is a fact of nature that all countries have the same electromagnetic spectrum of radio frequencies. It is a fact of politics that countries have different rules for allocating these frequencies. And it is a fact of economics that people in different countries pay very different rates for their use of spectrum. Mara Faccio and Luigi Zingales ask: "Why does the price of the same basket of mobile phone services vary around the world from $10.07 to $47.25? Why does the price of a 1GB mobile-broadband internet plan vary from $11.24 to $100.28?" They investigate the question in a January 2017 working paper "Political Determinants of Competition in the MobileTelecommunication Industry," available from the Stigler Center for the Study of the Economy and the State at the University of Chicago Booth School of Business.  For those who prefer to get their economics via cartoon, the most recent issue of the Chicago Booth Review has you covered with on this topic.

Countries can affect the competitive situation of telecommunications industries in many ways, including the rules that govern entry, the extent of price regulation, whether phone numbers are easily portable when shifting between carriers, whether voice-over-internet calls are permitted, and so on. These rules vary substantially across countries. Faccio and Zingales write: "[E]very time one crosses a national border in Europe the roaming company of the mobile phone changes. In spite of the European integration process, the mobile communication industry remains segmented at the national level. This is not unique to Europe: throughout the world, the mobile communication industry remains very much segmented by country." Another reason to focus on mobile phone and broadband is because the availability and quality of these services can be readily across users in different countries.

Indeed, they have data from the International Telecommunications Union available for 148 countries that includes dozens of variables in They have data on five main categories of variables in each country: regulatory climate; competitive structure; quality of service; spectrum auctions; and broad institutional characteristics (democracy, unions, tax rates and more). Thus, they offer a lot of statistical tables to make their case: "We show that the way a government designs the rules of the game has an impact on concentration, competition, and prices. Pro-competition regulation reduces prices, but does not hurt quality of services or investments. More democratic governments tend to design more competitive rules, while more politically connected operators are able to distort the rules in their favor, restricting competition.

But beyond the statistics, they offer a comparison between the United States and "the two EU countries with the level of regulation closest to the Unites States," namely Germany and Denmark. They write:

"The United States exhibits much higher monthly revenues per unique subscriber ($67.6 in 2015:3 vs $23.48 Germany and $31.01 for Denmark), which implies U.S. cellular phone companies have annual revenues per customers $530 higher than their German counterparts, and $439 higher than their Danish counterparts. One reason for the large difference could be that the U.S. carriers tend to subsidize the headsets, while the European carriers do not. The typical subsidy for an iPhone is $500 dollars (they charge $199 for a phone worth $699). Even factoring in this difference, each U.S. customer pays $280 a year more than a German customer and $189 a year more than a Danish one. Given the number of U.S. customers (233.2 million in 2015), this implies that U.S. operators enjoy a transfer of $65.2bn ($44.1bn) vis-à-vis the German (Danish)
"Not all of this difference is a pure transfer. We do find better quality of service in the
United States, where in 2013 4G connections represented 23.1% of the total and 4G coverage was 95.1%. In Germany, 4G connections represented 2.7% of the total 4G coverage was 64.54%, while for Denmark, 4G connections represented 9.31% of the total and 4G coverage was 92.37%."
However, the authors go on to argue that the relatively small differences in quality cannot explain the relatively large differences in prices paid by consumers; indeed, the higher prices paid by consumers help to explain the high stock prices for major US carriers like AT&T, Verizon, T-Mobile, and Sprint. In looking at their overall data set, the authors write: "We test this hypothesis and we find no evidence that a higher degree of competition leads to lower quality of service or less investments. If anything, the results go in the opposite direction."

In the United States, the Federal Communications Commission just completed in March 2017 its first "incentive" auction, in which the broadcast TV companies that were allocated huge chunks of spectrum decades ago, but now deliver most of their content via cables, have an chance to sell off that spectrum to mobile services. As the FCC writes: "In the auction, TV broadcasters could voluntarily give up their current broadcast channel in exchange for a share of the proceeds from an auction of their channel to commercial wireless service providers to provide expanded mobile broadband services." This is a step in the right direction. But American consumers have every reason to keep comparing their mobile bills to those in Germany, Denmark, and elsewhere, and to get an answer from their government on why the electromagnetic spectrum that is naturally available everywhere should cost more in the United States.