Monday, December 18, 2017

Migration from a Global Perspective

International migration is one of the hot-button subjects everywhere. The World Migration Report 2018 from the International Organization for Migration (the UN Migration Agency) provides a wealth of facts and background not just about the economics, which is my focus here, but also about regional aspects of migration, international frameworks governing migration, media coverage of migration, how potential migrants perceive their choices, and more.

Here's a table showing total international migration over time. The absolute numbers have risen considerably, but the rise when viewed as a share of global population  looks smaller.
And here's a graph showing the destinations for migration by region:
Here's a summing up of the overall patterns (with footnotes omitted for readability):
"The current global estimate is that there were around 244 million international migrants in the world in 2015, which equates to 3.3 per cent of the global population. A first important point to note is that this is a very small minority of the global population, meaning that remaining within one’s country of birth overwhelmingly remains the norm. The great majority of people in the world do not migrate across borders; much larger numbers migrate within countries (an estimated 740 million internal migrants in 20093). ... Current data indicate that in 2016 there were 40.3 million internally displaced persons (IDPs) worldwide and 22.5 million refugees. Further, the total number of people estimated to have been displaced globally is the highest on record. ...
"In regard to the distribution of international migrants by countries’ income group, about two thirds of international migrants resided in high-income economies in 2015 – around 157 million. This compares with 77 million foreign-born who resided in middle-income countries (about one third of the total migrant stock) and almost 9 million in low-income countries in the same year."
As implied already, the main focus of the report is not on the economics of migration. However, it does sketch this brief overview of the potential benefits of migration (again, footnotes omitted):

"Migration can generate very large benefits for migrants, their families and countries of origin. The wages that migrants earn abroad can be many multiples of what they could earn doing similar jobs at home. For example, a study conducted in 2009 found that the ratio of wages earned by workers in the United States to wages earned by identical workers (with the same country of birth, years of schooling, age and sex, and rural/urban residence) abroad ranges from 15.45 (for workers born in Yemen) to 1.99 (workers born in the Dominican Republic), with a median ratio of 4.11. The wage differences and relative income gains from migration are largest for lower-skilled workers, whose international movements around the world are the most restricted. ...  Importantly, the beneficial effects of migration for migrants and their families go beyond economic impacts and frequently include improvements in other dimensions of human development, such as education and health. For example, according to a recent report by the World Bank, immigrants from the poorest countries, on average, experienced a 15-fold increase in income, a doubling of school enrolment rates, and a 16-fold reduction in child mortality after moving to a developed country, 
"In addition to benefiting individual migrants and their families, there is a large research literature that evidences the wider beneficial effects that emigration can have for migrants’ countries of origin. Emigration can reduce unemployment and underemployment, contribute to poverty reduction, and – with the appropriate supportive policies – foster broader economic and social development in origin countries in a variety of ways. ... Remittances are generally a less volatile and more reliable source of foreign currency than other capital flows in many developing countries. According to the World Bank, in 1990 migrants remitted around USD 29 billion to lower- and middle-income countries in 1990. This amount had more than doubled to USD 74 billion in 2000 and reached USD 429 billion in 2016. Globally, remittances are now more than three times the amount of official development assistance. Migration can also result in the transfer of skills, knowledge and technology – effects that are hard to measure, but that could have considerable positive impacts on productivity and economic growth. Beyond these economic impacts, emigration can generate beneficial societal consequences for countries of origin, including poor and fragile States. For example, it is increasingly recognized that migrants can play a significant role in post-conflict reconstruction and recovery.
"There is widespread agreement that migration can also generate economic and other benefits for destination countries. The precise nature and size of these benefits at a given time critically depends on the extent to which the skills of migrants are complementary to those of domestic workers, as well as on the characteristics of the host economy. In general, immigration adds workers to the economy, thus increasing the gross domestic product (GDP) of the host country. There are also a variety of ways in which migrants can have positive effects on labour productivity and GDP per head, e.g. if migrants are more skilled than national workers and/or if immigration has positive effects for innovation and skills agglomeration. By nature or necessity, migrants are often more likely to be risk takers, and this quality has led to enormous contributions to many destination countries in areas such as technology, science, the arts and a range of other fields.  ... Immigration increases both the supply of and the demand for labour, which means that labour immigration (including of lower-skilled workers) can generate additional employment opportunities for existing workers. Of course, immigration can also have adverse labour market effects (e.g. on  wages and employment of domestic workers), but most of the research literature finds that these negative impacts tend to be quite small, at least on average. Beyond the labour market and macroeconomy, the immigration of young workers can also help with easing pressures on pensions systems of high-income countries with rapidly ageing populations. Finally, in contrast to popular perceptions, a recent OECD study found that the net fiscal effects of immigration, i.e. the taxes migrants pay minus the benefits and government services they receive, tend to be quite small and – for most OECD countries analysed in the study – positive."
My own sense of these arguments is that the case that migration offers very large benefits of migrants is extremely strong. The case that it benefits countries of origin is probably true, but with a lot of variation. For example, in an emerging market economy with good growth prospects, where people migrate, keep previous contacts, send remittances, and return now and then, migration can be a plus. However, in a low-income economy with poor growth prospects, where anyone who wants upward mobility feels a need to cut ties and leave, migration may not provide much benefit. The question of how migrants affect those in destination countries is most controversial of all. I tend to believe the evidence that there are overall gains, but the gains do not seem to be especially large, and there may well be some unwelcome distributional consequences. Much depends here on the specifics of how a nation implements its immigration policy.

Improvements in the technology of transportation and communication seem likely to lead to pressures for additional migration in the future. Consider three figures from the report, one showing a fall in costs of air transportation, one showing a rise in international tourism, and one showing a rise in internet and mobile phone use. To the extent that barriers of transportation costs or lack of information have been barriers to international migration in the past, those barriers have been declining.






However, there are also some factors that may tend to reduce international migration: namely, the great improvement in the growth prospects of China, India, Mexico, and other emerging markets. When people have improved opportunities for

As I've argued on this blog in the past, it seems likely that the main hot spot for global migration in the next few decades will involve movement from African and the Middle East to nations of Europe. Population growth remains relatively high in many nations across Africa and the Middle East, while growth prospects are relatively low. There are many methods of finding out about immigration possibilities, many transportation routes, and a wealth of historical connections and groups of already-established migrants. For the US, the enormous wave of immigrants from Mexico and other nations in Latin America has eased and even gone slightly into reverse; in fact, immigration to the US from China and India now exceeds that from Mexico. But I suspect that apprehensions across Europe about a rise in immigration are only just beginning.

For those interested in digging into the economics, the Fall 2016 issue of the Journal of Economic Perspectives, where I labor in the fields as Managing Editor, included a three-paper symposium on "immigration and labor markets":
Also, back in the Summer 2011 issue, the JEP had a three-paper symposium on "Emigration":

Friday, December 15, 2017

Occupational Licensing Under Fire

Let's be clear: an "occupational license" means that if you don't have the license, you don't have government permission to do the job. If you do the job without such a license, you can be legally punished, even put in jail.

There are a number of alternative of methods that seek to reassure buyers about quality that don't involve requiring an occupational licensing. For example, many occupations have a certification exam (sometimes done by the government, sometimes by third parties), but anyone who wishes to hire an uncertified worker is free to do so. Providers can become bonded or insured voluntarily, or states can impose requirements for bonding or insurance. States can require providers to register with a legal name and address. States can provide inspections, as is done with restaurants, for example, and on many building projects. Thus, occupational licensing is not just a method of seeking to ensure quality, but an especially restrictive method. The Institute for Justice digs into these issues in the second edition of its report "License to Work: A National Study of Burdens from Occupational Licensing," written by Dick M. Carpenter II, Lisa Knepper, Kyle Sweetland and Jennifer McDonald (November 2017). They write (footnotes omitted):
"The share of American workers needing a license to work has climbed steadily in recent decades, from 1 in  20 workers in the 1950s to roughly 1 in 4 today ... Research suggests this growth is not primarily due to more workers leaving the farm and the factory for traditionally licensed fields like medicine and law. Instead, the main driver is new laws expanding licensing into previously unlicensed occupations." 
The IJ report looks at occupational licensing rules across states in a sample if 102 lower- and middle-wage occupations; that is, it doesn't look at occupational licensing in higher wage jobs like doctors, lawyers, teachers. Of these jobs that require occupational licenses, "[s]ome, such as family child care home operator, public school preschool teacher and non-instructional teacher assistant, cater to the needs of children. Others, like dental assistant, dietetic technician, optician and psychiatric worker, come from the health care sector. Still others represent the service sector and the construction and transportation trades. These include barber, bartender, cosmetologist, massage therapist, manicurist and skin care specialist; various contractor designations; and bus, taxi and truck driver. ... The list of 102 occupations includes some that are commonly licensed—and commonly recognized as such—including barber and cosmetologist, two ubiquitously and long-licensed occupations. Also on the list are many occupations that are generally familiar to the public, though the fact that they are licensed may not be. Such occupations include florist, funeral attendant, home entertainment installer, locksmith and upholsterer. Finally, there are some occupations on the list that are, along with their licenses, highly obscure: milk sampler, conveyor operator and dairy equipment still machine setter, for example."

When you start looking at the state occupational licensing laws across these kinds of occupations, all sorts of inconsistency and strangeness becomes apparent.

For example, Louisiana requires 500 hours of training get an occupational license to braid hair, and in 2012 had 32 hair-braiders in the state. Neighboring Mississippi has zero hours of required training, although it does require hair-braiders to register their business with the state, and had over 1,200 hair-braiders.

As another example, Maryland doesn't license auctioneers, but the city of Baltimore does. "The city of Baltimore requires licenses or registrations for at least 26 occupations in addition to the 59 low- and middle-income occupations licensed by the state of Maryland. For example, Maryland is one of the 21 states that do not license auctioneers, but auctioneers in Baltimore must get a license from the city to work. And that license is relatively onerous, requiring $1,600 in licensing fees and either a one-year apprenticeship or an expensive training course."

"EMTs hold lives in their hands, yet 73 other occupations have greater average licensure burdens. This includes barbers and cosmetologists, home entertainment installers, interior designers, log scalers, manicurists and numerous contractor designations. For perspective, while the average cosmetologist must complete 386 days of training, the average EMT must complete a mere 34. Even the average tree trimmer must complete more than 16 times the amount of education and experience as the average EMT."

Locksmiths require a state license in 14 states. Opticians require a state license in 22 states. It seems unlikely that locks or eyes differ substantially across states. Thus, defenders of such licenses need to justify why they don't seem necessary in other states. ""On average, the 102 occupations studied here are licensed by just 27 states. Only 23 occupations are licensed by 40 states or more. Such inconsistency is suspect. The vast majority of these occupations are practiced in at least one state—and typically many more than one—without need of permission from the state and evidently without widespread harm."

The common argument for occupational licenses is that they are needed for purposes of quality or safety. But for the kinds of jobs discussed in the IJ study, evidence doesn't back up that claim, "Studies of licensing and service quality have examined a wide range of occupations, including florists, tour guides, hair braiders and cosmetologists, without finding positive effects. Even research
on occupations where health risks may be more pronounced, such as dental hygienists, nurse practitioners and opticians, has found that licensing restrictions raise the cost of services without
improving quality.Put differently, research suggests that consumers are paying more without getting better results."

Several recent academic studies have offered additional evidence. For example, the Federal Reserve Bank of Minneapolis recent published "Is Occupational Licensing a Barrier to Interstate Migration?" by Janna E. Johnson and Morris M. Kleiner ((Staff Report 561, December 6, 2017). From the abstract:
"We analyze the interstate migration of 22 licensed occupations. Using an empirical strategy that controls for unobservable characteristics that drive long-distance moves, we find that the between-state migration rate for individuals in occupations with state-specific licensing exam requirements is 36 percent lower relative to members of other occupations. Members of licensed occupations with national licensing exams show no evidence of limited interstate migration. The size of this effect varies across occupations and appears to be tied to the state specificity of licensing requirements. We also provide evidence that the adoption of reciprocity agreements, which lower re-licensure costs, increases the interstate migration rate of lawyers. Based on our results, we estimate that the rise in occupational licensing can explain part of the documented decline in interstate migration and job transitions in the United States."
In another recent study, Brandon Pizzola and Alexander Tabarrok discuss "The Undertaker's License"
(Cato Institute Research Briefs in Economic Policy #91, December 2017). They focus on funeral directors in Colorado. It turns out that Colorado used to license funeral directors up until 1983, but then repealed the licensing rule. Thus, they can study Colorado's experience as a sort of natural experiment. They find that up to 1983, wages for funeral directors in Colorado were similar to the rest of the country, but by about 1990, they were 11% below the national average--which is roughly where they have remained since. Moreover, other prices associated with funerals also fell in Colorado, which is consistent a belief that as the funeral business became more competitive, there were ways to hold down the other costs as well. There is no evidence that funerals are somehow worse or of lower quality in Colorado than in other states. the underlying economic research paper here is Brandon Pizzola and Alexander Tabarrok, “Occupational Licensing Causes a Wage Premium: Evidence from a Natural Experiment in Colorado’s Funeral Services Industry,” International Review of Law and Economics 50 (2017): 50–59.

The Institute for Justice and the Cato Institute are known for taking takes libertarian positions. Thus, in these partisan times, it seems worth noting that reform of occupational licensing is an issue with some bipartisan support.

For example, the Obama White House published a report in July 2015 called "Occupational Licensing: A Framework for Policymakers."  Here's a sample of the tone:
"When designed and implemented carefully, licensing can offer important health and safety protections to consumers, as well as benefits to workers. However, the current licensing regime in the United States also creates substantial costs, and often the requirements for obtaining a license are not in sync with the skills needed for the job. There is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities, and make it more difficult for workers to take their skills across State lines. Too often, policymakers do not carefully weigh these costs and benefits when making decisions about whether or how to regulate a profession through licensing." 
The Obama administration even provided a few million dollars of funding for a coalition of states to compare and reconsider their occupational licencing rules. In the highly Democratic state of California, an oversight agency called the Little Hoover Commission argued that California should be part of this process in its October 2016 report: "Jobs for Californians: Strategies toEase Occupational Licensing Barriers." The tone of this report is similar as well:
"One out of every five Californians must receive permission from the government to work. For millions of Californians, that means contending with the hurdles of becoming licensed. Sixty years ago the number needing licenses nationally was one in 20. What has changed? What once was a tool for consumer protection, particularly in the healing arts professions, is now a vehicle to promote a multitude of other goals. These include professionalism of occupations, standardization of services, a guarantee of quality and a means of limiting competition among practitioners, among others. Many of these goals, though usually well intentioned, have had a larger impact of preventing Californians from working, particularly harder-to-employ groups such as former offenders and those trained or educated outside of California, including veterans, military spouses and foreign-trained workers.

"In its study on occupational licensing, the Commission sought to learn whether the state properly balances consumer protection with ensuring that Californians have adequate access to jobs and services. It learned the state is not always maintaining this balance, as evidenced by discrepancies in requirements for jobs that pose similar risks to the consumer. Manicurists, for example, must complete at least 400 hours of education, which can cost thousands of dollars, and take a written and practical exam before becoming licensed. ... When government limits the supply of providers, the cost of services goes up. Those with limited means have a harder time accessing those services. Consequently, occupational licensing hurts those at the bottom of the economic ladder twice: first by imposing significant costs on them should they try to enter a licensed occupation and second by pricing the services provided by licensed professionals out of reach. The Commission found that over time, California has enacted a thicket of occupational regulation that desperately needs untangling in order to ease barriers to entering occupations and ensure services are available to consumers of all income levels."
In the Trump administration, the Federal Trade Commission has been  holding a series of roundtable conference to discuss the effects of occupational licensing, too. Often, the political wedge for dealing with occupational licensing issues seems to involve the plight of spouses in military families, who find that when they are transferred to a different state, they are unable to do their previous job without passing some additional costly and time-consuming occupational licensing test. But this issue is a lot broader than military families. With occupational licensing now covering one-fourth of all US jobs, it touches on the opportunities for jobs and upward mobility available to a very wide array of workers. When it seems important to take steps to assure quality of work, lots of other options are available, and occupational licensing should be used much more narrowly than it is. 

Thursday, December 14, 2017

Ricardo's Comparative Advantage After Two Centuries

Two centuries ago in 1817, the great economist David Ricardo published his most prominent work: "On the Principles of Political Economy and Taxation." Among many other insights, it's the book that introduced the idea of "comparative advantage" (especially in Chapter 7) and thus offered a way of thinking about the potential for gains from trade--both between countries and within areas of a single country--that has been central to economic thinking on these topics ever since. In Cloth for Wine? The Relevance of Ricardo’s Comparative Advantage in the 21st Century, Simon Evenett has edited a collection of 15 short essays thinking through how and when comparative advantage applies to modern economies. The book is published by the Center for Economic Policy Research (CEPR) Press, in association with the UK government Department for International Trade.

Most people have no difficulty with the idea that two countries can at least potentially benefit from trade if each one has a productivity advantage in a certain good. There are places in the Middle East where finding oil doesn't seem to involve a lot more than jamming a sharp stick into the ground. Those places should produce and export oil. The United States has vast areas of fertile soil. Those places should produce and export corn and wheat.

But an immediate issue arises. What about areas that don't seem to have a productivity advantage in any area? How can they possibly benefit from trade? Ricardo's theory establishes the point that the key factor in what areas or nations will choose to export or import is not whether there is an overall productivity advantage, but instead where that productivity advantage is greatest--or where the productivity disadvantage is smallest. It is the "comparative" advantage that matters.

In my own Principles of Economics textbook (which of course I recommend for quality and value), I offer a homely example to build some intuition for this idea, involving whether it is useful for a group of campers to specialize in certain tasks. I wrote:
"[C]onsider the situation of a group of friends who decide to go camping together. The friends have a wide range of skills and experiences, but one person in particular, Jethro, has done lots of camping before and is a great athlete, too. Jethro has an absolute advantage in all aspects of camping: carrying more weight in a backpack, gathering firewood, paddling a canoe, setting up tents, making a meal, and washing up. So here’s the question: Because Jethro has an absolute productivity advantage in everything, should he do all the work?
"Of course not. Even if Jethro is willing to work like a mule while everyone else sits around, he still has only 24 hours in a day. If everyone sits around and waits for Jethro to do everything, not only will Jethro be an unhappy camper, but there won’t be much output for his group of six friends to consume. The theory of comparative advantage suggests that everyone will benefit if they figure out their areas of comparative advantage; that is, the area of camping where their productivity disadvantage is least, compared to Jethro. For example, perhaps Jethro is 80% faster at building fires and cooking meals than anyone else, but only 20% faster at gathering firewood and 10% faster at setting up tents. In that case, Jethro should focus on building fires and making meals, and others should attend to the other tasks, each according to where their productivity disadvantage is smallest. If the campers coordinate their efforts according to comparative advantage, they can all gain."
This way of phrasing the situation clarifies the essential economic issue: not who is most productive at various tasks, but how to allocate all of the available productive power across a range of tasks in the most efficient way. In that problem, everyone has a role to play. Even a party with productivity advantages in every area will have areas where their advantage is smallest; conversely, a party who is least productive at every single task will have an area in which the productivity disadvantage is least. Focusing on those areas will provide gains from trade.

Of course, the camping example is just conceptual way of framing how division or labor and trade among friends can potentially provide gains. It leaves out many real world complications, which are the focus of many of the essays in this book. How large are the gains from trade? How will the gains be distributed across the parties involved in the trade? Does trade provide additional gains over time through heightened competition and incentives for innovation? How will trade affect the distribution of income? What are the underlying reasons why countries differ in their profiles of productivity across activities, and to what extent can those reasons be altered by public policy? What happens when comparative productivity levels shift, so some industries no longer need the same number of workers?  Do the potential gains from trade in goods also apply to gains in services? Do the potential gains apply to a global economy with "value chains" of production that cross and re-cross national borders? How do economies of scale fit into the picture? What about trade in similar-but-not-identical branded products, like cars? What is the appropriate reaction when countries erect barriers to trade or when there are persistent patterns of trade surpluses and deficits?

Ricardo actually had thoughts and analysis about a surprisingly large number of these questions, and the essays in this book take up most of the rest of them. Here, I just want to note a few points that seemed worth particular emphasis.

One is that although Ricardo's theory of comparative advantage never disappeared, and has been a mainstay of basic principles of economics for 200 years, there was a period of some decades when it seemed less relevant to the facts of international trade. As Jonathan Eaton explores in his contribution to this volume, Ricardo's basic example of comparative advantage involved one factor of production (labor) and different technology across countries linked to differences in productivity of labor. By the middle of the 20th century, the focus was on models that had a number of different factors of production, and thus chose different methods of production, although they shared access to the same technology. By the 1980s, emphasis had shifted to models of how large firms would trade similar but not identical goods across countries: for example, international trade in cars or airplanes or machine tools.

But perhaps surprisingly, as economists looked at data on international trade with many different products, and explored models where countries differed in technology and productivity, they were led back to a Ricardian framework. Eaton and his frequent coauthor Samuel Kortum were leaders in this modelling. In an essay discussing this approach in the Spring 2012 issue of the Journal of Economic Perspectives, they wrote in the abstract:
"David Ricardo (1817) provided a mathematical example showing that countries could gain from trade by exploiting innate differences in their ability to make different goods. In the basic Ricardian example, two countries do better by specializing in different goods and exchanging them for each other, even when one country is better at making both. This example typically gets presented in the first or second chapter of a text on international trade, and sometimes appears even in a principles text. But having served its pedagogical purpose, the model is rarely heard from again. The Ricardian model became something like a family heirloom, brought down from the attic to show a new generation of students, and then put back. Nearly two centuries later, however, the Ricardian framework has experienced a revival. Much work in international trade during the last decade has returned to the assumption that countries gain from trade because they have access to different technologies. These technologies may be generally available to producers in a country, as in the Ricardian model of trade, our topic here, or exclusive to individual firms. This line of thought has brought Ricardo's theory of comparative advantage back to center stage."
In short, when it comes to the modern analysis of international trade, Ricardo is back! Of course, this isn't the only approach or only set of questions. Indeed, one of the problems in thinking about the effects of international trade is that the patterns of international trade are deeply interwoven with other political, historical and social variables, so extrapolations are hard. For example, it would probably be unwise to believe that if the nations of Africa or Latin America or Asia sought to form a "Union," it would work out in the same ways (for better or worse) as the European Union. The laws about international trade are not the only relevant differences across regions.

Indeed, there is a long-standing argument in economics over whether trade leads to economic growth, or whether economic growth leads to more trade, or whether other external factors (like improved technology and transportation) affect both.

One other essay in this volume that especially caught my eye is by Ernesto Zedillo, and his title reveals his theme "Don’t blame Ricardo – take responsibility for domestic political choices." He writes:
"In the case of politicians opposed to international trade, the arguments put forward vary a lot, from the subtle to the grotesque, but all have in common the deflection of responsibility for domestic policy failures to external forces as the cause of those failures. The most extreme case of such deflection is to be found in the rhetoric of populist politicians, from both the left and the right. More than any other kind, the populist politicians have a marked tendency to blame others for their countries’ problems and failings. Foreigners who invest in, export or migrate to their country are the populist’s favourite targets to explain almost every domestic problem. That is why restrictions – including draconian ones – on trade, investment and migration are an essential part of the populist’s policy arsenal. Populists praise isolationism and avoid international engagement, except with their foreign populist cronies. The ‘full package’ of populism frequently includes anti-market economics, xenophobic and autarkic nationalism, and authoritarian politics. Populists display their protectionism and xenophobia as proof of their ‘authentic patriotism’ and excel at manipulating the public’s nationalistic sentiments to execute their retrograde economic and political agenda, which invariably includes a strong rejection of open markets.
"Unfortunately, asserting a causal relationship between globalisation and domestic ills is the rule rather than the exception even in countries governed by moderate democratic leaders, left or right. It is a rare event that a government confronting serious domestic problems would look first into its own policy failings rather than external causes in dealing with their citizens’ demands for effective solutions. Blaming imports, foreign capital volatility and migrants would seem always preferable to explain phenomena such as slow GDP growth, external disequilibria, stagnant wages, and high unemployment. Taking responsibility for domestic policies – or the lack of thereof – that may be at the root of such problems, even if the latter is flagrantly the case, would seldom happen without first trying to point to external factors as the culprits for the unwanted conditions." 
To put this point in a US context, think of issues like the extraordinarily high costs of the US health care system,  the disappointing performance of K-12 education, the low levels of investment in infrastructure, stagnant spending on research and development as a share of GDP, the looming problem of rising spending on government entitlement programs, problems with the individual and corporate tax code, concerns about the competitiveness of certain sectors of the economy, the appropriate level financial regulation, and the challenges of adapting to changes in robotics, artificial intelligence, and other technological changes. These issues (and others that could be added) make a tall pile of problems; in contract, the contribution of international trade to the US economic issues is pretty small. But it's always a lot easier to criticize the neighbors than to clean up the mess in your own front yard.

One of the stories that economists tell each other about the idea of comparative advantage (mentioned in a couple of these essays is from 1969 Presidential Address by Paul Samuelson, The Way of an Economist," published in International Economic Relations: Proceedings of the Third Congress of the International Economic Association Held at Montreal (and available via the magic of Google Books, quotation is from p. 9):
"[O]ur subject puts its best foot forward when it speaks out on international trade. This was brought home to me years ago when I was at the Society of Fellows at Harvard along with the mathemetician Stanley Ulam. Ulam, who was to become the originator of the Monte Carlo method and a co-discoverer of the hydrogen bomb, was already at a tender age a world-famous topologist. And he was a delightful conversationalist, wandering lazily over all domains of knowledge. He used to tease me by saying, `Name me one proposition in the social sciences which is both true and non-trivial.' This was a test that I always failed. But now, some thirty years later, on the staircase so to speak,  an appropriate answer occurs to me: The Ricardian theory of comparative advantage; the demonstration that trade is mutually profitable even when one country is absolutely more -- or less -- productive in terms of every commodity. That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them." 
It is of course a little disheartening to me that Paul Samuelson, one of the greatest economists of the 20th century, had difficulty coming up with an economic idea that was both true and nontrivial! But it does make a better story that way. I sometimes say to students that understanding the idea of comparative advantage--both its strengths and its limitations--is one of the dividing lines separating those who actually know some economics from those who don't.

Wednesday, December 13, 2017

Adding Monetary Costs of Lost Lives to the Opioid Crisis

Sometimes if you can justify putting a bigger dollar sign in front of a problem, then you can also justify giving it more attention. This is a useful function of "The Underestimated Cost of theOpioid Crisis," a report recently published by the Council of Economic Advisers (November 2017).  As background, here's a figure showing the rise in opioid-related deaths--more than doubling in the last decade.

Total deaths from opioid overdoses have climbed very close to the number of deaths from motor vehicle accidents, which totaled over 37,000 in 2016. Here's the age distribution of the opioid overdose deaths. They are not concentrated among elderly Americans, but rather in the 25-55 age bracket.
As the CEA report points out, the most prominent recent study of this topic in 2016 calculates the costs of opioid problems by measuring the costs of fatalities in terms of lost potential earnings. Thus, the biggest change in the CEA report is to put a monetary value on the deaths. The report notes:
"Among the most recent (and largest) estimates was that produced by Florence et al. (2016), who estimated that prescription opioid overdose, abuse, and dependence in the United States in 2013 cost $78.5 billion. The authors found that 73 percent of this cost was attributed to nonfatal consequences, including healthcare spending, criminal justice costs and lost productivity due to addiction and incarceration. The remaining 27 percent was attributed to fatality costs consisting almost entirely of lost potential earnings. ... Using conventional estimates of the losses induced by fatality routinely used by Federal agencies, in addition to making other adjustments related to illicit opioids, more recent data, and underreporting of opioids in drug overdose death certificates, CEA finds that the overall loss imposed by the crisis is several times larger than previous estimates."
Putting a monetary value on the loss of life is of course a vexed business. For previous discussions on this website of the "value of a statistical life," see "Value of a Statistical Life? $9.1 Million" (October 22, 2013) and "The Origins of the Value of a Statistical Life Concept" (November 25, 2014). The CEA report gives a quick overview of the academic literature on this point, and also on what numbers are actually used by government agencies:

Three Federal agencies have issued formal guidance on the VSL [value of a statistical life] to inform their rule-making and regulatory decision-making. The U.S. Department of Transportation’s (DOT) guidance (U.S. DOT 2016) suggests using a value of $9.6 million (in 2015 dollars) for each expected fatality reduction, with sensitivity analysis conducted at alternative values of $5.4 million and $13.4 million. According to a recent white paper prepared by the U.S. Environmental Protection Agency’s (EPA) Office of Policy for review by the EPA’s Science Advisory Board (U.S. EPA 2016), the EPA’s current guidance calls for using a VSL estimate of $10.1 million (in 2015 dollars), updated from earlier estimates based on inflation, income growth, and assumed income elasticities. Guidance from the U.S. Department of Health and Human Services (HHS) suggests using the range of estimates from Robinson and Hammitt (2016) referenced earlier, ranging from a low of $4.4 million to a high of $14.3 million with a central value of $9.4 million (in 2015 dollars). The central estimates used by these three agencies, DOT, EPA, and HHS, range from a low of $9.4 million (HHS) to a high of $10.1 million (EPA) (in 2015 dollars).
Putting a monetary value on lives lost raises other issues, too, like whether the same value is appropriate regardless of whether the lives lost are young, middle-aged, or elderly. Rather than trying to resolve these issues, a common approach is to offer a range of possible options. In this report, the preferred estimate is that total costs of the opioid epidemic in 20115 were $504 million, of which $72.3 million is the kinds of costs from the earlier 2016 study, and the costs of lost lives are $431.7 billion. As the report explains: 
"There are several reasons why the CEA estimate is much larger than those found in the prior literature. First, and most importantly, we fully account for the value of lives lost based on conventional methods used routinely by Federal agencies in cost-benefit analysis for health related interventions. Second, the crisis has worsened, especially in terms of overdose deaths which have doubled in the past ten years. Third, while previous studies have focused exclusively on prescription opioids, we consider illicit opioids including heroin as well. Fourth, we adjust overdose deaths upward based on recent research finding significant underreporting of opioid-involved overdose deaths."
I do not claim to be well-versed in this literature, but it seems to me as if lots of people are deploring the opioid epidemic, but not many changes are in the works that would plausibly bring a large reduction in these costs.

Tuesday, December 12, 2017

Snapshots of the US Housing Market: Ten Years Later

Ten years ago, December 2007, was the start of the Great Recession. Have US housing markets recovered? My go-to source for regular updates on the US housing market is "Housing Markets at a Glance," a monthly chartbook published by the Housing Finance Policy Center at the Urban Institute. Here are some snapshots from the most recent (November 2017) issue.

The total value of US housing can be broken down into homeowners' equity and the mortgage debt still outstanding. As this figure shows, during the fall in housing prices from 2006 to 2011, the total value of US housing fell by about $7 trillion--a fall of roughly 30%. Of course, the fall in housing prices didn't reduce the debt that people already owed (the blue line), so it mainly shows up in home equity (the yellow line), which falls by about 50%. Home equity is usually larger than outstanding debt, but that relationship reversed itself for a few years. However, the total value of US housing has now risen again and exceeds its level in 2006, while the amount of housing debt has actually declined a bit.
Here's a figure showing the corresponding annual change in home prices, using two housing price index (HPI) measures, one from CoreLogic and one from Zillow.

Unsurprisingly, the sharp decline in home mortgages led to severe stresses for households. This figure shows the share of home loans in serious delinquency or actual foreclosure. At its worst, about one-tenth of all mortgage loans in the entire US were more than 90 days delinquent or in foreclosure.

A much larger number of households were not delinquent on their mortgage, but found themselves "underwater"--that is, what they owed on the mortgage was more than the house would have been worth in a sale. In 2009, about one-fourth of all US homes with a mortgage had negative equity.

The economic story behind these charts--the loss of value, price meltdown, delinquencies, and negative equity--is cataclysmic.  The charts also provide some evidence on what was happening behind the scenes in mortgage finance. To understand these figures, it's useful to know that most mortgages are now "securitized," meaning that they are financed by investors who purchase financial securities based on the underlying mortgage.  These investors can be banks, pension funds, insurance companies, hedge funds, or others. The process of securitization can happen through the "government-sponsored enterprises" of Fannie Mae, Freddie Mac, and Ginnie Mae, or they can happen through the private sector with "private-label" securities.

One big change the years just before the melt-down in housing prices was that the private-label securities expanded substantially, and in particular expanded into subprime and Alt-A mortgages, which are riskier than the usual "prime" mortgage. (Alt-A is a risk category in-between prime and subprime.)
This share of the housing market going to these private-label securities, which had been rising slowly in the late 1990s, spiked for few years. But in the heat of the housing crisis, they melted away. Now the government-sponsored firms almost totally dominate mortgage-backed securities. Of course, they survive because they received huge federal government bailouts, as well as a promise that the government would stand behind them in the future.
In the aftermath of the housing market meltdown, and the near-demise of private-label mortgage-backed securities, it's no surprise that it's become harder to get a mortgage loan. Indeed, one can make a case that the market is still in overreaction mode. This index offers a calculation of the share of owner-occupied home purchase loans that are likely to default. It separates out the risk that it is due to borrowers not repaying, and the product-risk that is due to higher-risk loans being made.

Thus, you can see the arrival of the larger share of subprime and Alt-A loans arriving in the market--and how the product risk they brought with them pushed up the risk of default. The Urban Institute estimate is that time from about 2001-2003 can be viewed as "Reasonable Lending Standards," which implies that the very low level of expected defaults in recent years is part of an ongoing overreaction to what went so badly lwrong.

There's of course a lot more to this story of the Great Recession. But it does support a concern that when financial regulators see a large and rapid build-up of a new kind of high-risk loan, they should seriously consider putting on the brakes. And it's a reminder to investors that when asset prices shoot up rapidly, as housing prices did in the early 2000s, it's wise to start thinking about how to ensure a soft landing.

Monday, December 11, 2017

Do You Rejoice for China?

Hereby is an op-ed piece I wrote for the Star Tribune, published on Sunday, December 10.

"China's rise: The wealth of a nation (not ours)
By Timothy Taylor"

When the economic histories of our time are written, 30 or 50 or 100 years from now, I strongly suspect that the main topic of discussion will not be U.S. budget deficits and taxes, nor health insurance, nor the struggles of the European Union with the euro, and perhaps not even “globalization” writ broadly.

Instead, history will see our era defined by the extraordinary economic rise of China.

Although this rise has been happening right in front of our eyes for almost 40 years, it has changed the lives of more than a billion people in ways that are not fully appreciated. Here are a few measures of how life in China changed between about 1980 and the present, according to World Bank data:

  • The share of China’s population below the poverty line, modestly defined as having a consumption level of $3.10 per capita per day, has fallen from 99 percent of the population to 11 percent.
  •  Per capita GDP has risen from $200 per person to $8,200 per person.
  •  Life expectancy has risen from 66 years to 76 years.
  •  Infant mortality per 1,000 live births has fallen from 48 to 9.
  • The literacy rate for those 15 and older has risen from 66 percent to 96 percent.
  • The share of China’s total population over age 25 who have completed a secondary-level (high school) education has risen from 6 percent to 22 percent.
Such a list could be extended, of course. But the bottom line is that more than a billion people in China have risen out of a combination of grinding poverty, poor health and low levels of education to what the World Bank classifies as “upper middle income.” A Chinese person who was a young adult back in 1980 has observed the entire process in his or her own lifetime — and hasn’t yet reached retirement age.

So, do you rejoice for China? Adam Smith, who launched the systematic study of economics in 1776 with “The Wealth of Nations,” published an earlier tome in 1759 called "The Theory of Moral Sentiments,” which includes a meditation on how most people in the West think about the welfare of people in faraway China. Smith wrote:
"Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connexion with that part of the world, would be affected upon receiving intelligence of this dreadful calamity.
“He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general.
“And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquillity, as if no such accident had happened. The most frivolous disaster which could befal himself would occasion a more real disturbance.
“If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.”
In Smith’s spirit, one might ask: Do you rejoice that China’s economic growth has lifted hundreds of millions of people out of the most dire and terrible poverty? Or do you wish the process had been considerably more restrained, and slower? Or deep down, does a part of you sort of wish that it had not happened at all?

After all, the earthquake of China’s shift to a moderate prosperity has caused tremors throughout the world economic and political systems. A shortlist of the aftershocks would include economic dislocations experienced in communities throughout the world to wages, interest rates and communities; theft of intellectual property and technology; environmental costs, like severe air pollution experienced mostly in China as well as the global effects of China’s role as by far the leading emitter of carbon and other gases related to climate change; and political disruptions and muscle-flexing, especially with other Asian nations.

Of course, the rest of the world has also experienced positive effects from China’s economic transformation. Consumers of products with Chinese inputs have benefited from lower prices, and now are starting to benefit more from Chinese-developed technology. Investment funds from China have helped to finance U.S. government borrowing and have encouraged economic development in certain parts of Africa and Latin America.

But when thinking about China, it seems to me remarkably easy to focus on negative effects, and more generally on how China’s economic growth has affected the U.S. or other nations outside China. And in doing so, it seems remarkably easy to undervalue the transformative and improved lives of more than a billion of our fellow humans.

Back in 1759, Adam Smith argued that when thinking about the welfare of faraway people, it wasn’t going to be enough to rely on “love of neighbor” or “love of mankind.” He wrote that “it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love.”

Instead, Smith argued that people should listen to a much tougher judge than feelings of love or benevolence — namely their own conscience. He wrote:
“It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration.”
Dramatic and substantial real-world change is messy. In some ways, it was easier to be sympathetic with China back in the 1970s and early 1980s, when it was a poor country. It was picturesque, sentimental and sometimes just a little patronizing to watch some cultural dances and Chinese pingpong players, and sometimes at the end to make a moderate donation to help feed children or support schools.

But those times are done. Even with all the concerns about past side effects of China’s economic growth or future policy decisions that will need to be made, I rejoice for China.


Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul. He blogs at conversableeconomist.blogspot.com.

Friday, December 8, 2017

Natural Fisheries Overtaken by Aquaculture

Fisheries are a standard example for economists of the "tragedy of the commons." For any individual fisherman, it makes sense to catch as many fish as possible. However, if all fishermen act in this way and if the number of fishermen grows substantially over time, the underlying common resource can become depleted and unable to renew itself. In fact, this scenario has actually taken place with the world's natural fisheries, where production peaked a couple of decades ago and has been stagnant or declining since then. The just-published OECD Review of Fisheries: Policy and Summary Statistics 2017  notes: "Production of wild-caught fish in OECD countries is considerably below its peak in the late 1980s and continues to decline."

There are two ways out of this box. One way is to figure out a method of limiting what fishermen catch, which would over time allow natural fishing stocks to rebuild so that the total catch could be greater in the medium- and long-run. I've written about proposals and analysis along these lines in
"Saving Global Fisheries with Property Rights" (April 12, 2016) and"More Fish Through Less Fishing" (May 10, 2017). The obvious difficulty is while would be in the broad interest of a fishing industry to have limits on what can be caught, so that the resource is preserved, the practical issues of determining who should be allowed to catch how much and enforcing such decisions can be difficult.

The other approach is to have the fish-production migrate away from wild catch, and move toward "aquaculture," in which a certain body of water is no longer a common resource, but instead is owned by a fish producer. Aquaculture appears to be on is way to surpassing natural catch. As the OECD report notes:
"Global aquaculture production already exceeds the volume of catch from wild fisheries, if aquatic plants are included. Annual average aquaculture growth in OECD countries has accelerated and now averages 2.1% per year. Globally, it is even more rapid, at 6% per year. Moreover, average prices of aquaculture products are increasing ..."
Most of the OECD report is a point-by-point overview of what is happening in individual countries. There is lots of "reviewing and revising," and "advancing reforms" and "latest major policy developments." But at least to me, it's revealing that "Countries are also working actively to promote the sustainable development of aquaculture, which is seen as the primary source of future growth in fish production." This emphasis suggests that the process of rebuilding natural stocks of fish has a long way to go.

There is also a chapter on government support for the fishing industry. In most countries, other than China, fishermen are not supported directly, but instead the industry received indirect support equal to about one-sixth of its annual production. The OECD report notes:
"The Fisheries Support Estimate (FSE) Database now inventories budgetary support to fisheries that totals USD 13 billion (EUR 11.7 billion) in 33 countries and economies in 2015. For the first time, data for the People's Republic of China (hereafter, "China") is included in the database, revealing the scale of policies in this important fishing nation. Nearly 88% of all support transferred to individual fishers recorded in the database originates in China. In a positive development, China has announced plans to progressively reduce this subsidy. For most other countries and economies in the database, support to general services to the sector, rather than transfers to individual fishers, dominate. Governments invest a significant amount of resources to this kind of support, which includes management, enforcement, research, infrastructure and marketing. On average, these expenditures by government equal 16% of the value of landings: that is, USD 1 in every 6 earned by the sector. While some governments recoup these costs from fishers, this approach is not commonly applied and accounts for only a small percentage of the total outlay on general services to the sector."
The geography and policy issues fisheries is in many ways more national and regional than truly international. But the broader management of ocean resources and ecology is a global issue, with fisheries as one measure of the health of this ecosystem.