Friday, January 30, 2015

High School Career and Technical Education

Roughly two-thirds of the US students who graduate from high school in a given spring go on to attend a college or university that fall. The breakdown is that about 40% of all high school graduates attend a four-year college, and 25% attend a two-year college. Along with the 35% of high school graduates that aren't attending college the next fall, there are also those who did not complete high school About 20% of those who attend high school in the US do not graduate on time with a regular diploma--although some of these will later pass a GED or other high school equivalency test. 

How will those who do not attend college, or who end up not finishing college, make a connection to jobs that offer a genuine career path: that is, reasonably stable paychecks, building skills and responsibilities over time, wage raises, and health care and retirement benefits? The most popular answer is that public policy should encourage more of these students should attend college, but I'm skeptical about that answer.

From the student point of view, imagine someone who has struggled to make it through K-12 schooling, perhaps consistently ranking in, say, the 30th percentile of academic performance. That person has for years received a consistent message that academic studies are not their strong point. Telling such a person that the route to adult success involves yet more years of study, this time in a more academically intense environment where they are likely to be closer to the bottom and to struggle even harder, doesn't seem like a positive message to send.

This point is an uncomfortable one to make. It's emotionally much easier to remember true stories about a student who didn't seem to be doing well, but then soared. I like it that the US education system offers a range of multiple chances to those who want to keep trying that path. But it's a hard reality that not all students will soar academically. As a mathematical fact, 50% of all students will always perform below the median, and 25% will fall into the bottom quarter. We need alternative pathways to job and career success that don't assume a college degree is the right path for everyone. 

For example, I've written a number of times on this blog about the need for expanded programs of apprenticeships (for example, here, here, and here). In addition, I regret the trend away from career and technical education at the high school level. The National Center for Education Statistics collects statistics through its Career/Technical Education division. Here's one figure showing trends in the areas where high school students take their credits. Lots of areas are up, but career/technical education (CTE) is down. At a time when one of the major problems of the US economy is connecting those with lower academic skills to decent jobs, this seems like a mistake. My sense is that a lot of high schools are implicitly defining their mission as "pre-college," even while knowing that most of their students will not follow a four-year college path.

Here's another figure showing the breakdown within areas of career/technical education from the National Center for Education Statistics. The big growth areas since 1990 are communications and design, health care, and public services. The biggest drops since 1990 are in business, manufacturing, and (perhaps surprisingly) computer and information services.

There are of course many reasons for the decline in U.S. manufacturing jobs (starting points for discussion are here and here) or for the decline in U.S. rates of entrepreneurship (as discussed here and here). But if fewer high school students are being prepared to consider careers in these areas, then perhaps it shouldn't be a surprise when these areas don't flourish.  

Wednesday, January 28, 2015

The Moynihan Report: 50 Years Later

Daniel Patrick Moynihan, who died in 2003, was a U.S. Senator from New York for four terms from 1977 to 2001. Before that, he was Ambassador to the United Nations. Before that, he was U.S. Ambassador to India. Back in the 1960s, he held various positions in the Kennedy and Johnson administraions. He was also a Ph.D. sociologist who among his writings included 19 books, leading the newspaper columnist George Will to remark (if I remember correctly) that Moynihan had written more books than most Senators had read.

But in discussing Moynihan's career, the talk inevitably at some point goes to a famous report that he authored a half-century ago in 1965 while working for the Office of Policy Planning and Research
in the Department of Labor, called "The Negro Family: The Case For National Action." (The text of the report is available at the DoL website here, although the tables and figures are not.) Less than a year after the passage of the Civil Rights Act of  1964, Moynihan wrote in the introduction:

In this new period the expectations of the Negro Americans will go beyond civil rights. Being Americans, they will now expect that in the near future equal opportunities for them as a group will produce roughly equal results, as compared with other groups. This is not going to happen. Nor will it happen for generations to come unless a new and special effort is made.
There are two reasons. First, the racist virus in the American blood stream still afflicts us: Negroes will encounter serious personal prejudice for at least another generation. Second, three centuries of sometimes unimaginable mistreatment have taken their toll on the Negro people. The harsh fact is that as a group, at the present time, in terms of ability to win out in the competitions of American life, they are not equal to most of those groups with which they will be competing. Individually, Negro Americans reach the highest peaks of achievement. But collectively, in the spectrum of American ethnic and religious and regional groups, where some get plenty and some get none, where some send eighty percent of their children to college and others pull them out of school at the 8th grade, Negroes are among the weakest.
The most difficult fact for white Americans to understand is that in these terms the circumstances of the Negro American community in recent years has probably been getting worse, not better.
Indices of dollars of income, standards of living, and years of education deceive. The gap between the Negro and most other groups in American society is widening.
The fundamental problem, in which this is most clearly the case, is that of family structure. The evidence — not final, but powerfully persuasive — is that the Negro family in the urban ghettos is crumbling. A middle class group has managed to save itself, but for vast numbers of the unskilled, poorly educated city working class the fabric of conventional social relationships has all but disintegrated. There are indications that the situation may have been arrested in the past few years, but the general post war trend is unmistakable. So long as this situation persists, the cycle of poverty and disadvantage will continue to repeat itself.
The thesis of this paper is that these events, in combination, confront the nation with a new kind of problem. Measures that have worked in the past, or would work for most groups in the present, will not work here. A national effort is required that will give a unity of purpose to the many activities of the Federal government in this area, directed to a new kind of national goal: the establishment of a stable Negro family structure.
This would be a new departure for Federal policy. And a difficult one. But it almost certainly offers the only possibility of resolving in our time what is, after all, the nation's oldest, and most intransigent, and now its most dangerous social problem. What Gunnar Myrdal said in An American Dilemma remains true today: "America is free to chose whether the Negro shall remain her liability or become her opportunity."

Anyone schooled in the ways of political correctness can predict what happened next, even if you have never heard of the Moynihan Report. Moynihan's analysis of the problem and his obvious sympathy with the plight of African-Americans addressing a legacy of government-sanctioned discrimination was ignored. Instead, he was harshly criticized for blaming the victims of discrimination and for being a racist. Sara McLanahan and Christopher Jencks describe the reaction in their essay "Was Moynihan Right?" in the Spring 2015 issue of Education Next. They write:
Moynihan’s claim that growing up in a fatherless family reduced a child’s chances of educational and economic success was furiously denounced when the report appeared in 1965, with many critics calling Moynihan a racist. For the next two decades few scholars chose to investigate the effects of father absence, lest they too be demonized if their findings supported Moynihan’s argument. Fortunately, America’s best-known black sociologist, William Julius Wilson, broke this taboo in 1987, providing a candid assessment of the black family and its problems in The Truly Disadvantaged. Since then, social scientists have accumulated a lot more evidence on the effects of family structure.

The same issue of Education Next includes a group of articles on the state of the American family, timed for the 50th anniversary of the Moynihan report. For example, James T. Patterson offers an overview of the Moynihan report itself, how it was received, and how Moynihan viewed the controversy. A list of the other articles is available here.

Several decades later, Moynihan eventually received considerable credit for the prescience and force of his 1965 arguments, and for his willingness to make those arguments while facing some very ugly rhetoric. But to my knowledge, at least, none of those who so enthusiastically strafed Moynihan's reputation in 1965 took any responsibility for an important subject being pushed off the national radar for the next two decades.

Moynihan's 1965 argument can be broken down into two parts: a claim that family structure was in the process of shifting dramatically, and a claim that this change was injurious to the life prospects of children. The first claim has copious support. The second claim is harder to demonstrate, because disentangling cause and effect is always tricky, but McLanahan and Jencks point to the recent evidence suggesting that it probably holds true as well.

As a starting  point, here's some facts about changes in family structure as presented by McLanahan and Jencks. The percentage of U.S. children under the age of 18 living with an unmarried mother rose sharply from the 1960s up through the mid-1980s.



ednext_XV_2_mclanahan_fig01-small

As they point out, these kinds of comparisons over time need to be made with care. For example, back around 1960 most children living with an unmarried mother had been born to married parents, but the couple had separated, divorced, or the father had died. In addition, in 1960 unmarried cohabitation was rare. Children living with an unmarried mother in one year were often not in that category a few years later, if their mother remarried. As time went on, children born out of wedlock became much more common and cohabitation became more common. In other words, the situation of living with an unmarried mother was not the same experience in 1960 as in 1970 or 1980. As one example, unmarried motherhood spread fastest among those with lower levels of education who were most likely to be in poverty. Also, as McLanahan and Jencks write:
The historical shift from formerly married to never-married mothers has meant that single motherhood usually occurs earlier in a child’s life. Mothers who marry and then divorce typically spend a number of years with their husband before separating. Today, many women become single mothers when their first child is born. The shift to never-married motherhood has probably weakened the economic and emotional ties between children and their absent fathers.
It's tricky to think about how growing up with a single parent might affect the life prospects for a child. For example, it would obviously be foolish just to compare children with single parents and children with two parents, because children with single parents are not an event that is randomly distributed across all other population characteristics. As one of many possible examples, single parents on average have lower education levels, so perhaps differences are traceable to the education level of the parent, not the marital status. Or perhaps a mother is less likely to marry or live with a father who she suspects might be a negative influence on their children. 

But social scientists have come up with a number of more plausible ways to look at causal effects of single parenthood.  Sara McLanahan, Laura Tach, and Daniel Schneider review a number of studies concerning "The Causal Effects of Father Absence" in the Annual Review of Sociology (July 2013, pp, 399–427). For example, one can use statistical techniques to adjust for various observable parental and family characteristics--including characteristics that existed before the child was born.  One can compare across children in a given family, including full-siblings, half-siblings, and unrelated siblings, as well as looking at how events like divorce affect the path that children are on over time. One can look at the difference in the effect of parental death, which can be taken as a random event, and the effect of divorce or separation, which are clearly not random. One can compare across states that have more or less permissive laws about divorce. One can use "propensity score matching," which seeks to compare children who look the same on all other measurable characteristics, but some of whom are growing up with one parent while others are growing up with two. 

The authors look at about four dozen differerent studies of father absence using these techniques and others. Here is part of their summary of their findings across the studies:

We find strong evidence that father absence negatively affects children’s social-emotional development, particularly by increasing externalizing behavior. These effects may be more pronounced if father absence occurs during early childhood than during middle childhood, and they may be more pronounced for boys than for girls. There is weaker evidence of an effect of father absence on children’s cognitive ability.
Effects on social-emotional development persist into adolescence, for which we find strong evidence that father absence increases adolescents’ risky behavior, such as smoking or early childbearing. The evidence of an effect on adolescent cognitive ability continues to be weaker, but we do find strong and consistent negative effects of father absence on high school graduation. The latter finding suggests that the effects on educational attainment operate by increasing problem behaviors rather than by impairing cognitive ability.
The research base examining the longer-term effects of father absence on adult outcomes is considerably smaller, but here too we see the strongest evidence for a causal effect on adult mental health, suggesting that the psychological harms of father absence experienced during childhood persist throughout the life course. The evidence that father absence affects adult economic or family outcomes is much weaker. A handful of studies find negative effects on employment in adulthood, but there is little consistent evidence of negative effects on marriage or divorce, on income or earnings, or on college education.
What changes would help to address to the dissolution of the family that so many children experience as their day-to-day reality? In their Education Next essay, McLanahan and Jencks conclude:

Unmarried parents are not that different from married parents in their behavior. Both groups value marriage, both spend a long time searching for a suitable marriage partner, and both engage in premarital sex and cohabitation. The key difference is that one group often has children while they are searching for a suitable partner, whereas the other group more often has children only after they marry.
Changing this dynamic would require two things. First, we would need to give less-educated women a good reason to postpone motherhood. The women who are currently postponing motherhood are typically investing in education and careers. These women use contraceptive methods that are more reliable, and they use these methods more consistently. Postponing fertility in these ways would also have benefits for women who currently do not do so. They would be more mature when they became mothers, and they would probably do a better job of selecting suitable partners.
Nonetheless, postponing fertility will not solve the problem of nonmarital childbearing unless the economic prospects of the young men who father the children also improve. Women are not likely to marry men whom they view as poor providers, regardless of their own earning capacity. Thus, in addition to encouraging young women to delay motherhood, we also need to improve the economic prospects of their prospective husbands, especially those with no more than a high school diploma. This will not be easy. But it would improve the lives of the men in question, perhaps reduce their level of antisocial behavior, and improve the lives of their children, through all the benefits that flow from a stable home.
I know, I know: Easy to say, hard to do. But when the terrain is difficult, it's useful to know what direction to take.  

Tuesday, January 27, 2015

The Surprising Stability of the US Federal Budget

Federal budget issues are often debated at high volume. It seems like either the all-powerful liberals have been raising taxes and spending to unprecedented and unbearably high levels, or the all powerful conservatives have been slashing spending and taxes to unprecedented and unbearably low levels. Thus, I always smile a bit in looking at actual budget numbers over the last half-century or so, which reveal a remarkably level of consistency over time. For some recent specifics, turn to
The Budget and Economic Outlook: 2015 to 2025, just published by the Congressional Budget Office.

For simplicity and clarity, focus on federal spending and taxes expressed as a share of GDP in each year. Then, here's a figure showing the pattern over time. The blue line shows outlays, which average 20.1% of GDP over the period from 1965-2014. The green line shows average federal revenues, which average 17.4% of GDP over that same half-century. In 2014, federal spending was 20.3% of GDP and federal revenue was 17.5% of GDP, almost bang-on their historical averages. 

Now, it's true that expressing the totals as a share of GDP can be a little misleading. After all, the GDP for 2015 will be about $18 trillion, so while a movement of 1 percentage point on the vertical axis might look small, it represents $180 billion in spending or taxes--certainly enough to be worth a lively political dispute. 

On the other hand, the figure put many of the major budget movements of the last few decades into a long-run perspective. For example, you can see the early 1980s combination of tax cuts and higher defense spending under President Reagan, You can see in the 1990s how a combination of a buoyant "new economy," along with tax increases on those with high incomes, lower defense spending, and less need for government services led to a few years of budget surpluses. You can see the Bush tax cuts in the early 2000s. You can see the extraordinary drop in tax revenues during the Great Recession from 2007-2009, and the extraordinary increase in federal spending in an attempt to stimulate the U.S. economy. And even after all those changes, as the U.S. economy has staggered back toward recovery in the last few years, federal spending and taxes by 2014 returned to their historical averages. 

Of course, this descrption of long-run averages offers no reason to assume that the long-run levels of spending and taxes are optimal, or that the composition of spending on one side or taxes on the other side should not be adjusted. But it does suggest that the political forces pushing on federal taxes and spending have tended to balance each other out over the last five decades. 

Monday, January 26, 2015

Productivity of High-Income Countries in the Long-Run

Over time, the rise in productivity as measured by output per hour is what makes the standard of living rise. For some people, I've found that the power that statement is stronger if it's put in reverse: unless productivity as measured by output per hour rises, the average standard of living can't rise. Morever, if output per hour isn't rising and the size of the economic pie (per person) isn't rising, then we move closer to zero-sum society in which all social and policy tradeoffs--helping the environment, or the poor, or the schools--become tougher to address.

Thus, my eye was caught by a figure showing long-run rates of labor productivity over time that apperared in a short article called "Productivity’s wave goodbye?" in the recent issue of OECD Observer, (2014 Q3). The red line is the U.S. economy; the blue line is the euro area; the green line is Japan; and the gray line is the United Kingdom. No matter how you slice it, productivity growth is low all around.


The figure appears in a paper called "Productivity trends from 1890 to 2012 in advanced countries," by  Antonin Bergeaud, Gilbert Cette et RĂ©my Lecat, published as a February 2014 by the Bank of France. The authors summarize the long-run patterns in this way (citations omitted):

We can mainly distinguish four periods from 1890 to 2012 ...
1. From 1890 to WWI, productivity was growing moderately and was characterized by a UK leadership and a catch-up by the other countries.
2. After the WWI slump, the Interwar and WWII years were characterized by a heightening of the US leadership, as it experienced an impressive big wave of productivity acceleration in the 1930s and 1940s, while other countries struggled with the Great Depression legacy and WWII.
3. After WWII, European countries and Japan benefited from the big wave experienced earlier in the United States.
4. Since 1995, the post-war convergence process has come to an end as US productivity growth overtook Japan and other countries’, although it is not up to its 1930s or 1940s pace. Shorter and smaller than the first one, a second big wave appeared in the US and, in a less explicit way, in the other areas.
Hence, all countries experienced that one big wave of productivity acceleration, but in a staggered manner: first the United States in the 1930s and 1940s, next the European countries and Japan after WWII. This wave was the strongest in the Euro Area and Japan, but starting from a much lower starting level than the United States. ... After several leaps forward of the US relative productivity level during each World War and its own big wave, this gave rise to a convergence process after WWII which appeared completed in the 1990s for the Euro Area - but not yet for Japan or the United Kingdom- when this process came to an end.

The data in the graph above is smoothed out (that's what "Hodrick-Prescott filtering" means in the title of the figure.) Here's a figure showing post-World War II quarterly data on U.S. output per hour worked (one standard measure of productivity), generated by the ever-useful FRED website run by the Federal Reserve Bank of St. Louis.

The quarterly data on rate of productivity growth is volatile, since it reflects both changes in output (the numerator) and in hourss worked (the denominator) in a given quarter. But if you squint a bit, some patterns are visible. For example, productivity growth usually falls during recessions (the gray areas) because at that time output growth falls faster in recessions than the decline in hours worked. Conversely, productivity growth usually rises right after a recession, because at that time output growth rises faster than the rise in hours worked.

Over the longer run, you can see that productivity levels are consistently higher in the 1950s and 1960s than they are in the 1970s and into the 1980s. You can see the take-off of productivity growth durign the "new economy" of the 1990s and how that lasted into the early 2000s. And you can see that despite an short-term upward blip in productivity growth right after the Great Recession, U.S. productivity growth was disappointingly low before the recession, and has stayed low since then.


Alan Blinder, the prominent macroeconomist, summed up the recent U.S. experience in an op-ed he wrote for the Wall Street Journal last November:

In sum, here’s what we know—and do not know—about productivity growth. First, it’s been dismal for the past four years. Second, economists cannot predict swings in productivity growth. Each sharp swing shown in the chart took us by surprise. Third, while the Fed is now forecasting something near 2% productivity growth over the next several years, it really has little basis for choosing that number. That’s not a criticism; no one else has a better basis for a different number. We are all in the dark.
So maybe some of the copious attention now being devoted to assessing labor-market slack should be redeployed to studying productivity growth. It might be more productive.

Saturday, January 24, 2015

The EU Economy as Quantative Easing Arrives

The European Central Bank launched a new wave of quantitative easing last week: that is, a policy in which central bank buys debt directly, in an attempt to stimulate additional spending and demand in the economy. As the head of the ECB Mario Draghi announced on Thursday: "Under this expanded programme, the combined monthly purchases of public and private sector securities will amount to €60 billion. They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term."

To see why the European Central Bank thought that committing to debt purchases of  €60 billion per month until late next year was a useful step, take a quick look at the unemployment, inflation, and economic growth statistics for the European Union.  Here are unemployment statistics released earlier in January from Eurostat. The lighter line shows the unemployment rate for the 18 countries that use the euro; the darker line shows the unemployment rate for all 28 countries of the European Union. The good news is that unemployment rates did drop in 2014. The really bad news is unemployment rates in the EU is are higher now than they were at the worst of the Great Recession back in 2009. 


In the U.S., many of us worry that the drop of the US unemployment rate from 10% in October 2009 to 5.8% in December 2014 has happened so slowly, and that the decline may overstate the real improvement in US labor markets because of those who are no longer looking for work and are thus "out of the labor force." American readers, try to imagine the political, economic, and social conversation we would be having in the United States if the unemployment rate at the end of 2014 was higher than late in 2009!

Here's a table showing the spread of unemployment rates across countries. As noted under the table; "The EU28 includes Belgium (BE), Bulgaria (BG), the Czech Republic (CZ), Denmark (DK), Germany (DE), Estonia (EE), Ireland (IE), Greece (EL), Spain (ES), France (FR), Croatia (HR), Italy (IT), Cyprus (CY), Latvia (LV), Lithuania (LT), Luxembourg (LU), Hungary (HU), Malta (MT), the Netherlands (NL), Austria (AT), Poland (PL), Portugal (PT), Romania (RO), Slovenia (SI), Slovakia (SK), Finland (FI), Sweden (SE) and the United Kingdom (UK)."The unemployment rate for those under age 25 is 21.9% across the 28 EU countries. 
The high unemployment rates, not unexpectedly, have been accompanied by slow economic growth. Here are the  Eurostat estimates of GDP growth published in early December. The data is for growth from the previous quarter, seasonally adjusted. The thin line shows the US economy. The dark line shows the euro area countries, and the dashed line shows all 29 countries of the EU. Quarterly changes bounce up and down a bit for idiosyncratic reasons, but still, the pattern is fairly clear. Both the U.S. and the EU had steep recessions around 2008-2009. Both seeemed to have entered a slow period of recovery from late 2009 up through 2010. But since about 2011, the U.S. economy has continued its slow but real recovery, while the EU actually went back into recession for much of 2011 and 2012, and barely edged back into positive growth in 2013. 

Here's the country-by-country data for quarterly rates of GDP growth in the third quarter of 2014. 

The U.S. Federal Reserve legally has what is called a "dual mandate": that is, it is legally required to worry both about inflation and also about growth and unemployment. When the European Central Bank was created, it was given a single target: keeping the inflation rate at 2%. At that time, the main focus was on holding the inflation rate to no higher than 2%. But in recent years, it has often been pointed out that the euro inflation rate is substantially less than 2%, and thus the ECB is not fulfilling its legal mandate. In the Draghi quotation noted above, for example, he says that the program of quantitative easing is justified until the euro inflation rate is back to 2% in the medium term. 

Here are inflation statistics released by Eurostat in mid-January, with euro-area inflation shown by the solid yellow line and inflation for the EU as a whole shown by the blue dashed line. As many commenters have noted, the inflation rate in the EU peaked back around summer 2011, and has been in steady decline since then. It has now been below the 2% target--and getting farther from the 2% target--for more than two years. As of December 2014, the inflation rate tipped negative. My suspicion is that this shift into deflation made the ECB decision to announce a large program of quantitative easing look relatively easy. 
While I think the ECB is making the correct decision, I do worry about how the decision is viewed. 
I'm of course a complete outsider to the EU policy process. But it seems to me that there is a tendency for political leaders and public discourse to often talk as if the European Central Bank has the power to fix Europe's unemployment and growth problems. The ECB can be part of a solution, and its actions may be necessary for a solution, but it isn't close to sufficient. In Draghi's press conference announcing the quantitative easing, he made this point a couple of times. For example, in his prepared remarks Draghi said:
Monetary policy is focused on maintaining price stability over the medium term and its accommodative stance contributes to supporting economic activity. However, in order to increase investment activity, boost job creation and raise productivity growth, other policy areas need to contribute decisively. In particular, the determined implementation of product and labour market reforms as well as actions to improve the business environment for firms needs to gain momentum in several countries. It is crucial that structural reforms be implemented swiftly, credibly and effectively as this will not only increase the future sustainable growth of the euro area, but will also raise expectations of higher incomes and encourage firms to increase investment today and bring forward the economic recovery. Fiscal policies should support the economic recovery, while ensuring debt sustainability in compliance with the Stability and Growth Pact, which remains the anchor for confidence. All countries should use the available scope for a more growth-friendly composition of fiscal policies.

In answer to a question later in the press conference, Draghi repeated:

Finally, let me add something here, because it’s actually quite important. What monetary policy can do, I’ve said this many times, but I think it is worthwhile repeating it. What monetary policy can do is to create the basis for growth, but for growth to pick up, you need investment. For investment you need confidence, and for confidence you need structural reforms. The ECB has taken a further, very expansionary measure today, but it’s now up to the governments to implement these structural reforms, and the more they do, the more effective will be our monetary policy. That’s absolutely essential, as well as the fiscal consolidation side. So structural reforms is one thing, budget and fiscal consolidation is a different issue. It’s very important to have in place a so-called growth-friendly fiscal consolidation for confidence strengthening. This combined with a monetary policy which is very expansionary, which has been and is even more so after our decisions today, is actually the optimal combination. But for this now, we need the actions by the governments ...  Speed is of the essence.
Maybe I'm just cynical, but I'm not expecting the European governments to follow up with a wave of structural reforms and "growth-friendly fiscal consolidation." I'd love to be proven wrong.




Friday, January 23, 2015

Where Has Welfare Reform Taken Us?

Back in the 1980s and early 1990s, there was much talk of "welfare reform," which referred specifically to a program called Aid to Families with Dependent Children (AFDC). The concern was that the cash assistance given to low-income families through this program was helping to create a culture of dependency. For a sense of the tone of this discussion, consider these comments from Democratic President Bill Clinton to a National Governors' Association Conference on July 16, 1996:
I have been committed to ending welfare as we know it. ... Today, after long years of effort, I believe we are poised for a real breakthrough in welfare reform. Real welfare reform requires work, imposes time limits, cracks down on deadbeat parents by enforcing child support, provides child care. ...  We've cut through red tape and worked with you to set up 67 welfare reform experiments in 40 states, with more to come. We've granted more than twice as many waivers as the previous two administrations combined, and now, 75 percent of all welfare recipients are already under new rules. The New York Times called this a quiet revolution in welfare. Well, I'm proud that there are 1.3 million fewer people on welfare now than the day I took office, and that child support collections are up 40 percent.
But there's more to do. As you know, the state of Wisconsin has submitted a bold plan to reform welfare. We're working closely with Governor Thompson's staff, and I am committed, as I've said before, to getting this done. I'd just like to emphasize the things about this Wisconsin plan which are compelling to me: The idea that people should be required immediately to be ready to go to work, but that in return, they would have health care and child care guaranteed; and that the welfare money could be used to pay income supplements or wage supplements to private employers to put these people to work; and that if there is no private employment, these folks will be given community service jobs. That's what we ought to be doing everywhere. If we can create these jobs, we ought to require people to take them.
Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act into law soon after, on August 22, 1996. The main thrust of the bill was to put limits on how long one could receive welfare, along with adding programs intended to push recipients toward work and self-sufficiency. These programs vary across states, but can include support for training, job search, child care subsidies, programs to reduce out-of-wedlock pregnancies, and more. The program was renamed as Temporary Assistance for Needy Families (TANF). For a sense of what has happened since then, and what may happen next, a useful starting point is the January 2015 report from the Congressional Budget Office: "Temporary Assistance for Needy Families: Spending and Policy Options."

Here's a figure showing total national spending on TANF, and on AFDC before it, since 1994. The program includes both federal and matching state-level spending. The total amount spent has not change much, after adjusting for inflation. However, the composition of that spending has shifted substantially. Back in 1994 almost all of the spending was cash assistance, while the spending now comes primarily in the form of work support and other services.

One big change in the aftermath of welfare reform was that when work requirements and time limits were added, the number of recipients fell sharply. Some of this change may be due to the strong economy and low unemployment rates in the second half of the 1990s, but even in the recessions of 2001 and 2007-9, the number of recipients barely budged. The dark line shows the number of recipients of TANF and AFDC; the green line shows the average cash benefits per household, adjusted for inflation. In other words, the similar spending on TANF/AFDC over time, combined with a lower level of recipients, means that the remaining recipients could get roughly the same level of cash benefits, but also receive a number of other work support and other services.
AFDC was controversial back in the day in part because it was a cash payment: that is, it wasn't provision of health care to the poor through Medicaid, nor was it provision of food stamps. The value of AFDC was not especially large compared to other means-tested programs for assisting the poor, and with the passage of time since welfare reform, it has become relatively even smaller.

Here's a figure showing federal spending on means-tested programs and tax credits. (Thus, the state-level spending contributions to TANF spending are not included here, but they are less than half the total and would not substantially alter the shape of the figure.)

Cash spending through TANF is the very thin grey area at the bottom of the figure. TANF noncash assistance is shown by the very thin area above that. the next two areas show Supplemental Security Income, which goes to the low-income elderly as well as to low-income people of all ages with disabilities; and the effect of refundable tax credits like the earned income tax credit and the child credit. (The credits are called "refundable" because they not only can reduce the tax liability of those eligible to zero, but they can also generate a payment to the household.) Above this are the main noncash assistance programs, including food stamps and Medicaid.

In short, AFDC was a small share of means-tested assistance to the poor back in 1994--but it was a primary form of cash assistance to a number of recipients. Since welfare reform, the US has continued along this path: a focus on providing health care and food through targetted noncash programs to those with low incomes, while trying to tie cash assistance for the able-bodied to work effort, either through the earned income tax credit or through the work supports in TANF.  

Thursday, January 22, 2015

Where Will the Future Global Jobs Come From?

Economies all around the world need to create jobs. In part, this is to continue the process of recovery from the Great Recession. In part, it is to address expanding workforces in the countries that are still experiencing population growth. And and all around the world, jobs need to be created so that those who have unsatisfactory or insecure jobs have the prospect of something better. The International Labor Organization offers some background on these issues in the January 2015 issue of World Employment and Social Outlook: Trends 2015..

As a starting point: here is an overview of how the ILO sees the need for creating 280 million jobs worldwide in the next five years:
"[T]he global employment outlook will deteriorate in the coming five years. Over 201 million were unemployed in 2014 around the world, over 31 million more than before the start of the global crisis. And, global unemployment is expected to increase by 3 million in 2015 and by a further 8 million in the following four years. The global employment gap, which measures the number of jobs lost since the start of the crisis, currently stands at 61 million. If new labour market entrants over the next five years are taken into account, an additional 280 million jobs need to be created by 2019 to close the global employment gap caused by the crisis."
This estimate of a need for 280 million new jobs covers the unemployed and population growth, but from a global view, it seems a lowball estimate to me. The reason is that the ILO counts many people around the world as holding jobs in what it calls the "vulnerable employment" sector, which is defined as "own-account work and contributing family employment." Thus, a low-income subsistence farmer is counted as counted as holding a job.  The ILO writes: "[A]lmost half of the world’s employed population are still working in vulnerable conditions, pre-dominantly women, and are thus prevented from accessing basic necessities and decent work. ... In particular, nearly eight out of ten employed persons in Sub-Saharan Africa were in vulnerable forms of employment. Accordingly, the vulnerable employment rate – the share of own account workers and unpaid family workers in total employment – was estimated at 76.6 per cent in 2014, significantly higher than the global average of 45.3 per cent, and followed closely by South Asia at 75.6 per cent."

Here's a figure for "vulnerable employment" as a share of total employment in regions around the world. In many parts of the world, robust job creation is needed to help large proportions of the population shift from "vulnerable employment" to jobs with better wages and prospects.


It is of course impossible to specify in advance where hundreds of millions of new jobs going to come from. But it is possible to identify where they are most likely to come from--and to note some challenges posed by this answer.

The hundreds of millions of new jobs are not likely to be generated by agriculture. Indeed, the more common pattern in economic development is that as agricultural productivity rises, the share and absolute number of workers should diminish. The hundreds of millions of new jobs are not likely to come predominantly from the public sector. Although many countries around the world certainly could benefit from an expansion of government spending in areas like health care, education, and infrastructure, many governments around the world are also struggling with deficit spending and accumulated debts. Even with some additional public support, increased jobs in these areas will involve a substantial private sector presence.

Within the private sector, it seems highly unlikely that hundreds of millions of new jobs are going to be generated in the manufacturing sector. The reason lies in what the report calls the theory of "premature industrialization." In past episodes of economic development around the world, a common progression has been for workers to move from agricultural jobs to low-skilled manufacturing jobs, and then on to higher-skilled manufacturing jobs and service jobs. However, in a world of high-technology, many countries without especially high income levels seem to have already seen a peak in their manufacuturing  jobs--and the peak level of manufacturing jobs seems to be happening at lower levels of the workforce.

Here's a figure from the ILO report, where the point for each country shows the year on the horizontal axis in which the share of manufacturing workers in its economy was at its peak, while the vertical axis shows what that peak level was. For example, in the upper left of the figure manufacturing jobs in Argentina peaked at about 24% of the workforce in 1992. As the figure shows, it's common for manufacturing jobs to peak at around 15% of the workforce, and that level seems to be on average declining over time (as shown by the yellow line).



So what is left? Service jobs. The ILO writes:
"The bulk of new jobs are being created in private sector services, which will employ more than a third of the global workforce over the next five years ... Public services in health care, education and administration will also see smaller increases, still reaching more than 12 per cent of total employment. In contrast, industrial employment is expected to stabilize globally at slightly below 22 per cent of total employment, mainly driven by a continuous rise in employment in construction whereas manufacturing industries continue to lose jobs. The advanced economies still account for the largest share of manufacturing jobs across the globe, but current trends will bring their employment share to below 12 per cent by the end of 2019. Some emerging countries
have also seen a fall in their share of manufacturing employment, despite the fact that their manufacturing industries have not yet reached levels similar to those in advanced economies. In general, industrial employment is not likely to contribute strongly to employment recovery, despite its important role in structural transformation particularly in the emerging economies. Rather, service sector employment will remain the most dynamic area of job creation over the next five years."
The jobs question all around the world is the extent to which service-sector jobs can provide a broad base of careers for a wide range of skill levels. As the ILO notes in discussing the idea of premature deindustrialization, "the extent to which services can take over the role of manufacturing and facilitate the convergence of developing to developed countries is still under scrutiny ..." In high-income countries, there are concerns that service industry jobs can tend to be polarized, with options for low-skill workers who do service jobs where a physical presence is needed, and high-skill workers who make heavy use of information and communications technology, but a hollowing out of options for the middle class.

The question of how new technologies might be combined with workers of all skill levels to create middle-class career paths for the future will manifest itself in very different ways in countries all around the world. But in every country, it's one of the fundamental challenges for the global economy in the next few decades.


Wednesday, January 21, 2015

Rising Fears About Losing and Replacing Jobs

The General Social Survey is a nationally representative survey carried bout by the National Opinion Research Center at the University of Chicago and financially supported by grants from the National Science Foundation. Starting in 1977 and 1978, and intermittently over the years since then, it has included these two questions:
Thinking about the next 12 months, how likely do you think it is that you will lose your job or be laid off—very likely, fairly likely, not too likely, or not at all likely?
About how easy would it be for you to find a job with another employer with approximately the same income and fringe benefits you have now? Would you say it would be very easy, somewhat easy, or not easy at all?
Back in 1980, Charles Weaver wrote an article about the patterns of the answers in the first wave of this data. He updates the results and looks for patterns over time in "Worker’s expectations about losing and replacing their jobs: 35 years of change," in the January 2015 issue of the Monthly Labor Review, published by the US Bureau of Labor Statistics.

Before looking at the results, it's useful to ponder what one might expect to find. At times when unemployment is relatively high or the economy has gone through a substantial disruption, for example, one would expect fears over losing or replacing jobs to be higher.  But it's worth remembering that the 1977 and 1978 were a time of considerable economic uncertainty. The economy was gradually recovering from a recession that had lasted 16 months from November 1973 to March 1975. There were fears related to the global economy, including the rise of OPEC and higher energy prices, the growth strength of competition from Japan, and the end of the Bretton Woods agrreement for stabilizing global exchange rates. Inflation was viewed as such a severe problem that President Nixon had imposed national wage and price controls in 1971 and 1972.  Thus, comparing job fears in 1977 and with fears in 2010 and 2012 has some plausibility.

Both simple comparisons and more sophisticated analyses suggests that fear about losing and replacing jobs has been rising over time. Here's the simple comparison from Weaver: "Compared with workers in 1977 and 1978, workers in 2010 and 2012 expressed significantly less job security. They were more afraid of losing their jobs (11.2 percent versus the earlier 7.7 percent) and were less likely to think that they could find comparable work without much difficulty (48.3 percent versus the earlier 59.2 percent)."

The more detailed breakdown of the data shows which groups have seen their labor market fears increase the most. On the question how likely you are to lose your current job, the answer for the population as a whole rose 3.5 percentage points from 1977-78 to 2010-12. But for blue-collar craft workers the increase was 11.1 percentage points, and for blue collar operatives the rise was 9.7 percentage points. Also, from the early to the most recent survey, those in the age 50-59 age bracket were 8.2 percentage points more likely to think that they were likely to lose their job.

On the issue of whether workers expected to be able to find a comparable job, the answer for the population as a whole dropped 10.9 percentage points from 1977-78 to 2010-12. For those with "some college," but not a college degree, the expectation fell by 23.1 percentage points, and for white collar workers in clerical jobs it fell by 23.9 percentage points. Interestingly, for workers 60 and over the confidence in being able to fine a comparable job was actually 1.7 percentage point greater in the 2010-12 results than in the 1977-78 results.

An obvious question is whether the greater fears about losing jobs and replacing jobs are a relatively recent development--in particular, whether they happened only in the aftermath of the Great Recession--or whether this has been a steady trend over time. Stewart runs through a number of different statistical exercises to consider this point: for example, one can look at whether there was a trend toward greater fears of losing and replacing jobs in earlier time periods (and there was). Or one can look at whether the statistical relationship between the unemployment rate  and the fears about losing and replacing jobs has gotten higher over time (actually, this relationship has stayed about the same over time).

Stewart writes: "In 2010 and 2012, more workers feared losing their jobs, and far fewer workers said that it would be easy to find a comparable job, than in 1977 and 1978. Comparing the slopes suggests that job security diminished more than 3 times as much for ease of finding comparable jobs than for the fear of losing jobs. ... Some may infer that the lower job security felt by Americans in 2010 and 2012 was an aberration, based upon the unusual conditions presented by the recent recession. But the reality is that the downward trend in feelings of job security has been going on for the last 35 years, apart from the “extra push” it has received from the “\`Great Recession,' ..."

As I mentioned in yesterday's blog post, I think the most powerful fear in the current labor market is not about mass unemployment, but instead is a concern that the available alternative jobs may be of lower quality in terms of wages, benefits, work conditions, job security, and the prospect for a future career path.

Tuesday, January 20, 2015

Global Economic Growth: All Productivity, All the Time

The growth of an economy can be divided into two parts: growth of population, and growth of output per person, which is commonly known as "productivity."  The McKinsey Global Institute looks at these patterns over the last 50 years in its January 2015 report "Global growth: Can productivity save the day in an aging world?" The report calculates that over the last 50 years, the global economy has grown at about 3.6% per year, with roughly  half of that coming from more workers and half coming from higher productivity per worker. But in the next 50 years, the rate of workforce growth is going to decline substantially, as population grows more slowly and ages more rapidly. We are headed toward a global economy where growth is determined almost entirely by the rise in productivity.

I'm fond of figures that offer an image of the global economy. To set the stage, here's a figure from the report showing growth of the world economy during the half-century from 1964 to 2014. The horizontal axis shows the the world population, divided up by country. The vertical axis shows the per capita GDP for different countries, ranked from highest per capita GDP on left to lowest on the right. For example, you can see the wide bars showing the populations of China and India, the most populous countries in the world, and their per capita GDP shown by the height of the bars. The gray bars show the results of doing this exercise in 1964; the blue bars show the results for 2014. The size of the world economy is captured by the shaded area; that is, population multiplied by per capita GDP. Thus, the gray area represents the size of the world economy in 1964, while the blue area (which should be understood to overlap with the gray area and include it) shows the size of the world economy in 2014.

But looking ahead, many countries and indeed the world as a whole are headed for "peak employment." The nubmer of employees has already peaked in Germany, Japan, Italy, and Russia. Global employment is projected to peak around 2050. Encouraging greater labor force participation can influence these dates by a bit--for example, making it easier for older people to retire later--but the overall demographic trends are inexorable.

Thus, the growth of the global economy in the future is becoming less affected by population growth, and more heavily reliant on productivity growth. This raises some hard questions where the answers will only become apparent with the passage of time.

1) Can global productivity growth in the future be sustained and increased?

From a global perspective, there are two main contributors to economic growth: catch-up growth taht builds on already existing knowledge, and cutting-edge growth based on new discoveries and products. The McKinsey report suggests an number of opportunities for catch-up growth.

For low and middle-income countries: "Overall, it is striking that the absolute gap between productivity in emerging and developed economies has not narrowed. Productivity in developed economies today remains almost five times that of emerging economies. Narrowing this gap is one of the biggest opportunities for—and challenges to—long-term global growth."

For high-income countries: "In developed economies, more than half—55 percent—of the productivity gains that MGI’s analysis finds are feasible could come from closing the gap between low-productivity companies and plants and those that have high productivity. There are opportunities to continue to incorporate leaner supply-chain operations throughout retail, and to improve the allocation of the time spent by nurses and doctors in hospitals and health-care centers, for example. Across countries, large differences in average productivity within the same industry indicate industry-wide opportunities for improvement. For instance, low productivity in retail and other service sectors in Japan and South Korea reflects a large share of traditional small-scale retailers. High costs in the US health-care system partly reflect the excessive use of clinically ineffective procedures. Even agriculture, automotive manufacturing, and other sectors that have historically made strong contributions to productivity growth have ample room to continue to diffuse innovations and become more efficient."

One of the great strengths of the McKinsey Global Institute is its studies looking at productivity levels with specific sectors and industries, where they see all sorts of opportunities for cutting-edge growth:
Online retail productivity, even in developed economies, can be more than 80 percent higher than modern brick-and-mortar retailers. ...
Typically, only one-third of a nurse’s time is spent directly caring for patients: non-core activities account for roughly 66 percent of nurses’ scheduled time ... Shifting health care to more cost-effective settings can reap large savings. ...  The biggest savings can be achieved from shifting inpatient care to outpatient care, shifting from outpatient care in hospitals to primary-care and other settings outside hospitals, empowering patients to treat themselves to a greater degree, and integrating care settings in which different providers that a patient might see are in the same organization. ClickMedix uses mobile phones and digital cameras to capture images, transmit patient information, and deliver remote consultations, resulting in a 25 percent reduction in administrative costs and a four- to tenfold increase in the number of patients seen by doctors and specialists. ...
Some opportunities require simply continuing existing industry research programs, such
as agricultural research into tailoring and improving seeds and agronomical practices to
raise crop yields in new geographies, and automotive industry initiatives to power cars using more efficient fuel technology. Others rely on technological innovations that could potentially transform many different industries. For example, highly efficient and intelligent robots— or bots—are already boosting efficiency in retail warehouses where they are deployed, mobile technology is increasingly being used to deliver health care in remote regions, and automobile manufacturers are installing a broader range of digital features in cars. Advanced materials such as nanolaminates—edible lipids or polysaccharide compounds—can be sprayed on food to provide protection from air or moisture and reduce food spoilage, while carbon-fiber composites can make cars and airplanes both more resilient and lighter. The Internet of Things can cut time spent in production processes by detecting potential failures early, increase crop yields by measuring the moisture of fields, and cut the cost of monitoring health dramatically. Such innovations are not confined to developed economies but are happening in emerging economies, too. For instance, Aravind Eye Care of India, which has become the largest eye-care facility in the world, performs cataract surgeries at one-sixth of the cost and with fewer infections than the National Health Service in the United Kingdom achieves.
More broadly, future productivity growth depends on a confluence of many well-known factors: a workforce with high and growing levels of education and skills; investment in research and development; paying attention to the multiple infrastructures involved with transportation, communication, and shipping; and a regulatory and legal environment that is supportive of innovation and competition.

2) Will the benefits of future productivity growth lead to good jobs at good wages?

There is a long-standing concern that technology growth can eliminate jobs. As the McKinsey report notes, the term “technological unemployment” was coined by John Maynard Keynes in an essay in 1930. I've pointed out on this blog that concerns over technology and automation eliminating jobs were strong enough in the early 1960s to lead to a presidential commission and report. In the last few decades, the concern has been less about the risk of mass unemployment: after all, the U.S. unemployment rate was 6.1% or lower from May 1994 to September 2008, except for a couple of months in 2003 when it rose as high as 6.3%. As of September 2014, it's below 6% again. This pattern does not look like a trend to mass unemployment. As the McKinsey report notes: "Countries that have flexible labor markets have tended to experience rapid changes in the kind of jobs that the economy creates. Take the United States as an example. About one-third of the new jobs created in the United States over the past 25 years were types that did not exist, or barely existed, 25 years ago."

It seems to me the real issue is not the prospect of mass unemployment, but instead the issue of what kinds of jobs people have. Can people who want them find career-type jobs--that is, jobs where you build skills, receive pay raises over time, have a degree of autonomy in your work, take on additional responsibilities over time, and can identify alternative jobs options if you want or need them?  Or are people in job that help pay the bills, but lack these future prospects? If such a change is occurring, is it baked into the pie of technological change and thus something that is difficult to affect with public policy, or might it be that with a different set of policy choices, future technological change has a different effect on labor markets?

Over the very long run, technological change and productivity growth have been extremely disruptive to economies, but have led over time and after many adjustments to a higher average standard of living.  I see articles and receive emails arguing that "this time is different," and the technological changes of the future will be far more disruptive than those of the past. Of course, it's impossible to disprove that the future will be different!

3) Is there an interaction between slower population growth and future productivity growth?

Does the peak workforce affect the prospects for future productivity growth? Or are these separate issues? One can argue that slower growth in the population and the workforce shouldn't really matter, as long as average or per capita growth continues. But when the idea of an economy experiencing "secular stagnation" was first argued by Alvin Hansen back in 1938, one concern was that slower population growth would mean slower economic growth, and the connection has been made in more recent arguments over secular stagnation, too.

The potential connections between population growth and productivity growth are not well-established. But there is some plausibility in the argument that a growing population represents larger future markets, and young consumer who may be especially open to new products, in a way that improves the incentives of firms and entrepreneurs to invest in new ideas and technology. Similarly, there is some plausibility in the argument that a growing workforce has a higher proportion of new workers, who may be more flexible about new practices and innovations, while a peak workforce has a larger share of older workers, who have not traditionally been the main source of innovations. I do not know whether these kinds of factors are large enough to make a substantial difference in productivity growth. But as we head toward a global economy where growth is all about productivity, all the time, more knowledge about these interactions will begin to emerge.

Monday, January 19, 2015

Some Economics for Martin Luther King Jr. Day

On November 2, 1983, President Ronald Reagan signed the leglslation establishing a federal holiday for the birthday of Martin Luther King Jr., to be celebrated each year on the third Monday in January. As the legislation that passed Congress said: "such holiday should serve as a time for Americans to reflect on the principles of racial equality and nonviolent social change espoused by Martin Luther King, Jr.." Of course, the case for racial equality stands fundamentally upon principles of justice, not economics. But here are three economics-related thoughts for the day drawn from past posts.


1) Inequalities of race and gender impose large economic costs on society as a whole, because one consequence of discrimination is that it hinders people in developing and using their talents. Here's a reprint of a post on the subject of "Equal Opportunity and Economic Growth" from this blog  (August 20, 2012).
______

A half-century ago, white men dominated the high-skilled occupations in the U.S. economy, while women and minority groups were often barely seen. Unless one holds the antediluvian belief that, say, 95% of all the people who are well-suited to become doctors or lawyers are white men, this situation was an obvious misallocation of social talents. Thus, one might predict that as other groups had more equal opportunities to participate, it would provide a boost to economic growth. Pete Klenow reports the results of some calculations about these connections in "The Allocation of Talent and U.S. Economic Growth," a Policy Brief for the Stanford Institute for Economic Policy Research.

Here's a table that illustrates some of the movement to greater equality of opportunity in the U.S. economy. White men are no longer 85% and more of the managers, doctors, and lawyers, as they were back in 1960. High skill occupation is defined in the table as "lawyers, doctors, engineers, scientists, architects, mathematicians and executives/managers." The share of white men working in these fields is up by about one-fourth. But the share of white women working in these occupations has more than tripled; of black men, more than quadrupled; of black women, more than octupled.


Moreover, wage gaps for those working in the same occupations have diminished as well. "Over the same time frame, wage gaps within occupations narrowed. Whereas working white women earned 58% less on average than white men in the same occupations in 1960, by 2008 they earned 26% less. Black men earned 38% less than white men in the typical occupation in 1960, but had closed the gap to 15% by 2008. For black women the gap fell from 88% in 1960 to 31% in 2008."

Much can be said about the causes behind these changes, but here, I want to focus on the effect on economic growth. For the purposes of developing a back-of-the-envelope estimate, Klenow builds up a model with some of these assumptions: "Each person possesses general ability (common to
all occupations) and ability specific to each occupation (and independent across occupations). All groups (men, women, blacks, whites) have the same distribution of abilities. Each young person knows how much discrimination they would face in any occupation, and the resulting wage they would get in each occupation. When young, people choose an occupation and decide how
much to augment their natural ability by investing in human capital specific to their chosen
occupation."

With this framework, Klenow can then estimate how much of U.S. growth over the last 50 years or so can be traced to greater equality of opportunity, which encouraged many in women and minority groups who had the underlying ability to view it as worthwhile to make a greater investment in human capital.
"How much of overall growth in income per worker between 1960 and 2008 in the U.S. can be explained by women and African Americans investing more in human capital and working more in high-skill occupations? Our answer is 15% to 20% ... White men arguably lost around 5% of their earnings, as a result, because they moved into lower skilled occupations than they otherwise would have. But their losses were swamped by the income gains reaped by women and blacks."
At least to me, it is remarkable to consider that 1/6 or 1/5 of total U.S. growth in income per worker may be due to greater economic opportunity. In short, reducing discriminatory barriers isn't just about justice and fairness to individuals; it's also about a stronger U.S. economy that makes better use of the underlying talents of all its members.

______

2) Extensions in the period of copyright over time have meant that the speeches and writings of Martin Luther King Jr. and others in the U.S. civil rights movement are not easily available to, say, students in schools or the general public. This was one example I discussed in a post on "Absurdities of Copyright Protection" (May 13, 2014). The post discusses a paper by Derek Khanna called  "Guarding Against Abuse: Restoring Constitutional Copyright," published as R Street Policy Study No. 20 (April 2014). Here, I'll just quote a couple of paragraphs from Khanna.

Excessively long copyright terms help explain why Martin Luther King’s “I Have a Dream” speech is rarely shown on television, and specifically why it is almost never shown in its entirety in any other form. In 1999, CBS was sued for using portions of the speech in a documentary. It lost on appeal before the 11th Circuit. If copyright terms were shorter than 50 years, then those clips would be available for anyone to show on television, in a documentary or to students. When historical clips are in the public domain, learning flourishes. Martin Luther King did not need the promise of copyright protection for “life+70” to motivate him to write the “I Have a Dream” speech. (Among other reasons, because the term length was much shorter at the time.) ...
Eyes on the Prize is one of the most important documentaries on the civil rights movement. But many potential younger viewers have never seen it, in part because license requirements for photographs and archival music make it incredibly difficult to rebroadcast. The director, Jon Else, has said that “it’s not clear that anyone could even make ‘Eyes on the Prize’ today because of rights clearances.” The problems facing Eyes on the Prize are a result of muddied and unclear case law on fair use, but also copyright terms that have been greatly expanded. If copyright terms were 14 years, or even 50 years, then the rights to short video clips for many of these historical events would be in the public domain.

3) For those who would like to know more about the economics of thinking about cause-and-effect in discrimination issues, a starting point might this post with discussion of an interview with Glenn Loury (July 2, 2014). Here's a slice of the discussion from that post: 
_____

A standard approach to studying discrimination in labor markets is to collect data on what people earn and their race/ethnicity or gender, along with a number of other variables like years of education, family structure, region where they live, occupation, years of job experience, and so on. This data lets you answer the question: can we account for differences in income across groups by looking at these kinds of observable traits other than race/ethnicity and gender? If so, a common implication is that the problem in our society may be that certain groups aren't getting enough education, or that children from single-parent families need more support--but that a pay gap which can be explained by observable factors other than race/ethnicity and gender isn't properly described as "discrimination." Loury challenges this approach, arguing that many of the observable factors are themselves the outcome of a history of discriminatory practices. He says:

"By that I mean, suppose I have a regression equation with wages on the left-hand side and a number of explanatory variables—like schooling, work experience, mental ability, family structure, region, occupation and so forth—on the right-hand side. These variables might account for variation among individuals in wages, and thus one should control for them if the earnings of different racial or ethnic groups are to be compared. One could put many different variables on the right-hand side of such a wage regression.
Well, many of those right-hand-side variables are determined within the very system of social interactions that one wants to understand if one is to effectively explain large and persistent earnings differences between groups. That is, on the average, schooling, work experience, family structure or ability (as measured by paper and pencil tests) may differ between racial groups, and those differences may help to explain a group disparity in earnings. But those differences may to some extent be a consequence of the same structure of social relations that led to employers having the discriminatory attitudes they may have in the work place toward the members of different groups.
So, the question arises: Should an analyst who is trying to measure the extent of “economic discrimination” hold the group accountable for the fact that they have bad family structure? Is a failure to complete high school, or a history of involvement in a drug-selling gang that led to a criminal record, part of what the analyst should control for when explaining the racial wage gap—so that the uncontrolled gap is no longer taken as an indication of the extent of unfair treatment of the group?
Well, one answer for this question is, “Yes, that was their decision.” They could have invested in human capital and they didn’t. Employer tastes don’t explain that individual decision. So as far as that analyst is concerned, the observed racial disparity would not be a reflection of social exclusion and mistreatment based on race. ... But another way to look at it is that the racially segregated social networks in which they were located reflected a history of deprivation of opportunity and access for people belonging to their racial group. And that history fostered a pattern of behavior, attitudes, values and practices, extending across generations, which are now being reflected in what we see on the supply side of the present day labor market, but which should still be thought of as a legacy of historical racial discrimination, if properly understood.
Or at least in terms of policy, it should be a part of what society understands to be the consequences of unfair treatment, not what society understands to be the result of the fact that these people don’t know how to get themselves ready for the labor market.

Saturday, January 17, 2015

The Hemingway Law of Motion: Gradually, then Suddenly

Ernest Hemingway's 1926 novel The Sun Also Rises, which is available various places around the web like here, includes the following snippet of dialogue:
"How did you go bankrupt?" Bill asked.
"Two ways," Mike said. "Gradually and then suddenly."
Many economists will recognize this as a version of an apercu offered a number of times over the years by the prominent macroeconomist Rudiger Dornbusch, who liked to say (for example, in this interview about Mexico's economic crisis in the 1990s):
"The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought."
What I am dubbing the Hemingway Law of Motion clearly has wide applicability. It's when the creaking of your back porch doesn't matter much, until the day you put a foot through the floor. It's when the cracks and rust on the bridge don't seem to matter, until the day the bridge goes down. It's the concern that you can see signs that the risk of a financial crisis or a stock market run, but little action is taken until the crisis is upon us. It's the concern that the costs and risks of climate change may look quite reasonable, until something large and perhaps irreversible happens all at once.

The Hemingway Law of Motion is simultaneously a useful reminder in some cases and a rhetorical trick in other cases. It's a useful reminder that the world often isn't smooth and linear. Instead, the world full of tipping points and thresholds. When warning signs exist, they may not steadily rise to a predictably timed crescendo. Instead, those who interpret the warning signs correctly and take action will often look like alarmists, because if they act in time, the negative event never actually materializes--and so was it really necessary for them to make such a fuss in the first place?

But the dynamic of "gradually, then suddenly" can also be an excuse for acting when evidence doesn't yet exist. It's almost always possible to identify some reason for concern, and if you leap from "some reason " to a definitive conclusion, there is a real chance of error. This reaction is related to various logical fallacies, like the "hasty generalization" fallacy of moving from a small piece of evidence to a sweeping conclusion, or the "argument from ignorance" fallacy which holds that because we don't yet know enough, a preferred argument must be treated as correct. Thus, one needs some structure of theory and evidence to evaluate whether the Hemingway Law of Motion is likely to be in effect. Recognizing this point doesn't make controversies evaporate, of course, but at least it channels the controversy toward theory and evidence, rather than grandstanding and assertion.

Homage: I was once a big fan of The Sun Also Rises, although I haven't revisited the book for years. But I saw the snippet of Hemingway dialogue quoted in by Kevin M. Warsh in "Chapter 4: Rethinking Macro: Reassessing Micro-foundations," which appears in the recent book Across the Great Divide: New Perspectives on the Financial Crisis, edited by Martin Neil Baily and John B. Taylor, which triggered the thoughts here.







Thursday, January 15, 2015

How Medicare Spending Rises with Age

The rising costs of Medicare are one of the great question marks for health care policy and federal budget policy. Tricia Neuman, Juliette Cubanski, Jennifer Huang, and Anthony Damico offer a useful analysis of one aspect of Medicare costs--how those costs vary by the age of the recipient--in "The Rising Cost of Living Longer: Analysis of Medicare Spending by Age for Beneficiaries in Traditional Medicare," a January 14, 2015 report for the Kaiser Family Foundation.

As a starting point, remember that the number of elderly in the U.S. population is rising: the number of Americans age 65 and over will more than double from 2010 to 2050; the number of Americans 80 and over will nearly triple; and the number of American 90 and over will quadruple.

It's already true, as one might expect, that older Americans typically have higher health care costs paid by Medicare. (One caveat: The results that follow are based on data from "traditional" Medicare, in which the governmment reimburses service providers as services are paid, and thus don't include the 25% of Medicare Advantage recipients, a program where the government pays the  health care provider a fixed amount each month. Of course, the hope of a fixed payment or capitated health care plan is that it gives the provider an incentive to find ways of holding down costs.) For example, those 80 and older are 24% of those receiving traditional Medicare, but receive 33% of Medicare spending.
Moreover, on a per capita basis, Medicare costs are rising faster for those at later ages. In 2000, for example, Medicare typically spent about 2.4 times as much for a 90 year-old as for a 65 year-old. By 2011, it was spending about 2.8 times as much (if one leaves out Part D, the drug benefit, which didn't exist in 2000).


A more detailed breakdown of per capita Medicare spending by age shows a steady rise with age, although this peaks out around age 95, and also offers a more detailed sense of which expenditures are rising and falling with age. The data also allows separating out the health care costs of those who died in a specific year, which offers at least a rough way of looking at the extent to which end-of-life health care costs are influencing these spending patterns. Thus, the blue line shows per capita payments from traditional Medicare by age in 2011. The orange line, slightly lower, leaves out those who died in 2011. Notice that both lines rise, although the blue line rises more sharply, which suggests that end-of-life costs play a role in the higher costs by age, but are by no means the main factor.

However, the rise in per capita Medicare spending by age is not uniform across the categories of spending. Per capita spending on home health care and on Part B (providers that are not hospitals) peaks at age 83; inpatient care peaks at around 89; per capita spending on home health care peaks at 96; per capita spending on skilled nursing care peaks at 98; and per capita spending on hospice care peaks at age 104. As the share of those over-80 and over-90 rises, the blend of services that Medicare pays for will be shifting, too.
The data offers some additional insight into end-of-life spending. For example, here is per capita Medicare spending on those who died in 2011, by age. Notice that the per capita level of spending for those in their last year of life at more than $33,000 is almost four times as high as the average for those who are not in their last year of life, shown in the earlier figure as about $8,600. In a previous post on "Trends in End-of-Life Care" (February 25, 2013), which found that about 25% of Medicare payments are for those in their last year of life. But in addition, it's interesting that the amount spent in last year of life is highest at about age 70, and falls after that point. The implication would seem to be that more extreme health care spending efforts are being made to assist the "younger old" at around age 70 than the "older old" in their 90s and beyond.


The use of hospice care also seems to have increased substantially in the last decade or so. On a per person basis, about $550 was spent for hospice care for 100 year-olds in 2000; in 2011, about $3,049 was spent on hospice care for 100 year-olds.






Wednesday, January 14, 2015

Lower Oil Prices and the World Economy

What do lower oil prices mean for the world economy? The World Bank offers an overview in one section of Chapter 4 of its January 2015 Global Economic Prospects report. Here are some points that caught my eye. 

The recent drop in oil prices is large, a drop of almost 50% over the last six months of 2014 from slightly over $100/barrel of crude oil to about $50/barrel. However, drops of similar magnitude are not uncommon. The World Bank notes:
Between 1984-2013, five other episodes of oil price declines of 30 percent or more in a six-month period occurred, coinciding with major changes in the global economy and oil markets: an increase in the supply of oil and change in OPEC policy (1985-86); U.S. recessions (1990–91 and 2001); the Asian crisis (1997–98); and the global financial crisis (2007–09). There are particularly interesting parallels between the recent episode and the collapse in oil prices in 1985-86. After the sharp increase in oil prices in the 1970s, technological developments made possible to reduce the intensity of oil consumption and to extract oil from various offshore fields, including the North Sea and Alaska. After Saudi Arabia changed policy in December 1985 to increase its market share, the price of oil declined by 61 percent, from $24.68 to $9.62 per barrel between January-July 1986. Following this episode, low oil prices prevailed for more than fifteen years.
Here's a graph comparing recent drops in oil prices in the last 30 years.

For a longer-term comparison, here's a graph taken from the BP Statistical Review of World Energy 2014. Focus here on the lighter green line, which is adjusted for inflation. This graph is from last summer, so it doesn't show the recent drop of oil prices to the $50/barrel range. Still, you can see at a glance that even after falling to $50/barrel, the current drop doesn't come close (yet!) to matching what happened in the 1980s.
What's the explanation for the fall in oil prices? Through 2014, U.S. shale production has continually exceeded expectation, while forecasts of global demand for oil have been scaled back. OPEC announced in November 2014 that it would not scale back production, thus apparently opting to keep its market share rather than to push the price of oil back up. There had been concerns that oil output might fall sharply in places like Iraq and Libya (because of local wars) and in Russia (because of potential economic sanctions), but neither seemed to cause oil output to decline as feared. The appreciation of the U.S. dollar also had an effect: "In the second half of 2014, the U.S. dollar appreciated by 10 percent against major currencies in trade-weighted nominal terms. A U.S. dollar
appreciation tends to have a negative impact on the price of oil as demand can decline in countries that experience an erosion in the purchasing power of their currencies."

Of course, a drop in the price of oil tends to benefit those who are buyers, including households and industries that use energy, while imposing costs on those who are sellers, like producers of oil. At a national level, the World Bank puts it this way (citations omitted):
Empirical estimates suggest that output in some oil-exporting countries, including Russia and some in the Middle East and North Africa, could contract by 0.8–2.5 percentage points in the year following a 10 percent decline in the annual average oil price. ...  In some countries, the fiscal pressures can partly be mitigated by large sovereign wealth fund or reserve assets. In contrast, several fragile oil exporters, such as Libya and the Republic of Yemen, do not have significant buffers, and a sustained oil price decline may require substantial fiscal and external adjustment, including through depreciation or import compression. Recent developments in oil markets will also require adjustments in macroeconomic and financial policies in other oil-exporting countries, including Russia, Venezuela, and Nigeria. ...
A 10 percent decrease in oil prices would raise growth in oil-importing economies by some 0.1–0.5 percentage points, depending on the share of oil imports in GDP. ... In Brazil, India, Indonesia, South Africa and Turkey, the fall in oil prices will help lower inflation and reduce current account deficits—a major source of vulnerability for many of these countries. Their fiscal and current accounts could see substantial improvements.
Two other points seems worth making. First, investments in energy production, once they are made, often have some element of sunk costs. Lots of investments in greater supply of energy have been made in the last 10 years or so as oil prices rose rapidly--not just investments in oil, but in many forms of energy production including renewables, and in forms of energy conservation like cars that get higher gas mileage. Those investments are now in  place, and remain in place even when oil prices fall. This is part of the reason why the fall in oil prices that happened back in the 1980s persisted for about 15 years: past investments were locked-in. It suggests that the current drop in oil prices may persist for a few years, too.

Second, the historical pattern is that sharp rises and sharp falls in oil prices have asymmetric effects: that is, sharp rises in oil prices are often accompanied by severe economic disruptions in oil-importing countries and industries, while falls in oil prices have positive but milder effects over a period of time, as the savings from lower oil prices filter more broadly through the economy.