Friday, December 30, 2016

Improving How Job Markets Function: Active Labor Market Policies

A more fluid labor market is socially valuable, because it helps unemployment rates stay lower and offers broader opportunity. Also, employers who know that employees have decent and readily available outside options have better incentive to treat employees well. But most economists recognize that labor markets are full of "frictions," which is a catch-all term for the costs involved in making connections between willing workers and willing employers. (Indeed, the 2010 Nobel Prize in economics went to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides "for their analysis of markets with search frictions".) There's an old rule of thumb that one should expect a month of job search for every $10,000 you would like to earn, and even though that specific number is probably an unreliable guess, the comment makes the point that the time and information costs involved in finding a new job can be high. One of the very practical barriers for a lot of unemployed workers is a lack of information about available jobs, and a lack of experience in how to find the relevant information.

Active labor market policies are a government attempt to reduce these costs. In a December 2016 Issue Brief, the Council of Economic Advisers discusses the subject of "Active Labor Market Policies: Theory and Evidence for What Works."  The CEA defines active labor market policies as "policies that promote participation in the labor force and help workers match to employment opportunities. These programs include employment services, job search assistance, job training programs, and employment subsidies. But the empirical evidence also finds that not all approaches to supporting employment and earnings are equally successful, with some programs having substantial benefits relative to their costs while others do not."

As I have pointed out here before, US spending on active labor market policies (as a share of GDP) is considerably less than most other high-income countries. Here's a figure from the CEA:

Moreover, even this low US level has been on a generally downward trend for several decades:

Of course, the hard-headed question is whether active labor market policies work--and whether some work better than others. The CEA report cites an array of evidence on this point (for readability, the quotations that follow omit citations and footnotes).

On offering job search assistance and requiring participation from those receiving government benefits: "While job search assistance leads to faster employment, there is little evidence that it affects wages. Job search programs may also yield other benefits. When job search is required of recipients of unemployment insurance (UI), research shows that reemployment assistance typically saves the government several hundred dollars per participant in UI benefits by reducing time to reemployment ..."

On offering job training for various groups: "Job training programs focusing on economically disadvantaged adults, typically those with low earnings or levels of education, consistently yield significant positive effects on employment outcomes. Recent evidence comes from evaluations of WIA [Workforce Investment Act] training programs for disadvantaged adults ...  these training programs increased quarterly earnings between $500 and $800 (in the range of 10 to 25 percent increases) for workers by three years after receiving training, in addition to positive employment effects. ... Sectoral training, one specific type of training program that focuses on training workers for jobs in particular industries and which typically develops and implements training programs in partnership with employers, is an especially promising avenue for disadvantaged workers. ... In one successful example of training leading to positive results for mid-career workers ... when dislocated workers obtain training in the form of community college coursework, the equivalent of one academic year of courses translates into increases in long-term earnings of between seven and ten percent. They also find that these effects are more pronounced when coursework is concentrated on quantitative courses."

On employment subsidies for hiring workers: "While effective at encouraging employment, an important consideration for employment subsidies is that they be designed and administered in ways that mitigate two potential drawbacks: The first is that some portion of their value may be captured by firms who would have hired such workers in any event. A second is that targeted employer-based subsidies may lead to stigmatization of the targeted group among potential employers." I've written before on "What Do We Know about Subsidized Employment Programs?" (April 25, 2016), and noted that there are a couple of large-scale studies underway that should provide fuller evidence here.

Just to be clear, not all the evidence on active labor market policies is positive. The design and context of active labor market policies matters. But in my reading, the evidence is certainly strong enough to support additional large-scale experimentation with these policies, which can be designed in a way to facilitate a later evaluation of the results.

Finally, I'll add that the main focus of the CEA report is on US-based evidence about active labor policies, but an array of international evidence is also available. For a literature review, interested readers might begin with a literature review paper by David Card, Jochen Kluve and Andrea Weber What Works? A Meta Analysis of Recent Active Labor Market Program Evaluations," published by the German Institute for the Study of Labor (IZA Discussion Paper No. 9236, July 2015).

Thursday, December 29, 2016

The Diocletian Edict: Price-Fixing in History

In the year 301, Diocletian, who was Emperor of the Roman Empire, enacted widespread price ceilings for many good. How did that work out One canonical source for a discussion of what happened at that  time is an essay by Roland G. Kent,  "The Edict of Diocletian Fixing Maximum Prices," which appeared in 1920  in the University of Pennsylvania Law Review (69: pp. 35-47). It's available at various places on the web, like JSTOR and here). The heart of the article is to offer a translation of the Diocletian Edict. Here, I'll just offer some of Kent's description of what happened. He writes:
In the year 284 A. D., Diocletian (as we now know the Dalmatian soldier of lowly origin) was by his soldiers proclaimed Augustus or Emperor of the Roman Empire, stretching from the Atlantic Ocean to Mesopotamia. ... In these and the following years the prices of commodities of all sorts and the wages of laborers reached unprecedented heights. In the year 301, consequently, Diocletian felt obliged to issue an Edict fixing maximum prices for practically all articles and services. Of this Edict we know but little from literary sources; but as it was published in inscriptional form throughout the countries to which it applied, we have the actual text recorded in stone. ...
After providing a translation of the edict, which as one might expect is heavy on expressions of piety and condemnations of avarice and greed, Kent summarizes it in this way:
The provisions of the Edict are, in simple language, that maximum prices are set for articles of trade and for services, and that these are not to operate in such a way as to raise prices where the current level of prices is lower; that traders shall not buy in localities where prices are low and transport and sell the goods elsewhere at the maximum price; that the penalty for the violation of the law is death, and that leniency is not to be expected in return for a conciliatory attitude in court; further, that the same penalty applies to him who purchases at an illegally high price, and to him who hoards goods and refuses to put them on the market at legal price. After the preamble come the price lists arranged in schedules.
How did the Diocletian Edict work out? Kent wrote:
"Before passing to the text of the Edict, we might consider briefly its working; the available material, in fact, permits only a brief treatment. The writer De Mortibus Persecutorum, in the seventh chapter, says, "He (Diocletian) likewise, when by his varied unreasonable tax-levies he caused an immeasurable rise in prices, tried to regulate the prices of merchandise. Then much blood was shed over trifling and cheap articles; through fear, wares were withheld from market, and the rise in prices became much worse, until after the death of many men the law was through very necessity rescinded."  In other words, the price limits set in the Edict were not observed by the traders, in spite of the death penalty provided in the statute for its violation; would-be purchasers, finding that the prices were above the legal limit, formed mobs and wrecked the offending traders' establishments, incidentally killing the traders, though the goods were after all of but trifling values; the other traders, rather than sell at prices which would bankrupt them, hoarded their goods against the day when the restrictions should be removed, and the resulting scarcity of wares actually offered for sale caused an even greater increase in prices, so that what trading went on was at illegal prices, and therefore performed clandestinely.
"Ultimately the Edict was of necessity rescinded; how long it remained in force is unknown. But Diocletian is known to have abdicated the imperial power in 305, four years after the promulgation of the Edict; the cause assigned was ill-health resulting from the strain and burden of government. It would not be going very far from likelihood to assume that the failure of the Edict to restore business stability was a considerable factor in his poor health and abdication, and that the Edict was rescinded very soon after his abdication, if not indeed before. It remained law, therefore, not much if at all over four years."
As anyone with a smattering of economics--or just knowledge about human nature--might expect, it's highly unlikely that a sudden and unprecedented upsurge in greed and avarice circa 300 AD caused the rapid price rises. Instead, the more likely causes stem from high spending to finance the courts of the time, which in turn was financed by a currency (the denarius) in which the amount of silver was continually being reduced and which Diocletian turned to copper. As the value of the currency fell, prices increased--and the short-lived Diocletian Edict was the result.

Wednesday, December 28, 2016

Interview with Gita Gopinath: The Dollar and Effects of Exchange Rate Fluctuations

Douglas Clement has an "Interview with Gita Gopinath" in The Region, published by the Federal Reserve Bank of Minneapolis (December 20, 2016). As the subheading says, the main topics include
the "dollar’s unique status, crises & productivity, and policy spillover to emerging markets." Here are a couple of comments that caught my eye:

On the role of the fluctuations in the US dollar exchange rate in inflation and output: 
"What we have known for a while is that the dollar has a unique role in international trade since most of trade invoicing is done in dollars. More recent research shows that these dollar prices tend to be sticky—that is, these dollar prices are far more stable than exchange rates. For non-U.S. economies, therefore, a depreciation of their currency relative to the dollar leads to almost a one-to-one increase in the price of imported goods in their own currency and, therefore, the pressures on inflation are high. On the other hand, because dollar prices of traded goods are relatively stable, the inflationary pressures on the U.S. economy are weak.
"This, of course, begs the question, why do most exporters rely on dollar pricing? There are a couple of explanations. Firstly, as world trade has become more competitive, firms that wish to preserve their market shares prefer to keep their prices stable relative to their competitors’. If your competitors price in dollars and keep these prices sticky, this gives the firm an incentive to also price in dollars. ... Secondly, most exporters also use imported inputs for their production. If these inputs are priced in dollars that are relatively stable, then the exporters’ cost of production is relatively stable in dollar terms and, consequently, they prefer to price in dollars. ... Outside of the U.S., most nations are far more exposed to inflation driven by exchange rate fluctuations. What this also points to is that from most countries’ perspective, the exchange rate that matters is the value of their currency relative to the dollar. ...

"A weaker dollar has very little effect on inflation in the U.S., has an expansionary effect on exports and has a negligible effect on imports. On the other hand, a weaker rupee is highly inflationary for India, has a significant impact on its imports and has a negligible impact on exports. This expectation that a weaker currency for a non-U.S. economy is good for a country’s exports does not line up with the facts. ... What it basically means is that central bankers in developing countries have to respond pretty aggressively to exchange rate depreciations."
Using fiscal policy as a substitute for exchange rate policy: 
"So what we analyzed in our paper is a set of fiscal instruments that would deliver the same outcomes as a currency devaluation. This idea goes back to Keynes, as you said, who proposed import tariffs and export subsidies as a substitute for currency devaluation. Given the illegality of using tariffs of this nature, we instead explored the role of value-added taxes and payroll subsidies or, more specifically, raising value-added taxes and cutting payroll taxes. What we found, surprisingly, is that this form of intervention did extremely well in mimicking the outcomes of a currency devaluation, not approximately but exactly.

"The mechanism works as follows. When a country raises its value-added tax, foreign exporters selling to the country increase their prices, making them less competitive. Domestic firms that sell locally also face the high value-added taxes, but because these prices are slow to adjust and because the government provides them with a payroll tax cut, their prices do not rise as much. That makes them more competitive in the same way that an exchange rate devaluation would. Moreover, a fiscal devaluation has the same effect on inflation and the same effect on redistribution as an exchange rate devaluation.

"In terms of policy traction, France did implement a partial fiscal devaluation. They cut payroll taxes but did not raise value-added taxes, despite the announcement that they would. So they went only halfway there. Despite the virtues, there are political challenges to implementing a large fiscal devaluation. Countries live through a 10 percent exchange rate depreciation without immense anxiety, but if you raise value-added taxes by 10 percent, that would be very salient and likely politically infeasible.
But the broader point we made was that there are instruments other than exchange rate devaluations that a country can use to gain trade competitiveness."

Tuesday, December 27, 2016


The New England states experimented with price controls starting in 1777, and the results were very much what an introductory economic textbook would predict. (Indeed, I offer a much-shortened version of this example in my own Principles of Economics textbook. A fourth edition will be out next fall, and of course I encourage anyone teaching the intro course to take a look.)

The story is told by William R. Staples in the Annals of the Town of Providence, From its First Settlement to the Organization of the City Government in June 1832,  published in 1843, and available via the magic of Google Books (for example, here). The passages quoted here run from pp. 271-277,  Staples describes the background of the price control legislation in this way.
"In January 1777, a convention of deputies from the New-England States met in Providence, to state the prices of goods and labor. ... Congress and the states too, had thus carried on the war by issuing bills of credit,  The issues of these were regulated by the wants of army and navy. They constituted the currency the country. Every successive issue of them, tended to depreciate their value, as it necessarily increased the amount, and consequently rendered day of payment more distant and less certain. This depreciation of the currency produced an increase in the prices of all the necessaries of life, and this convention was called to regulate these prices. 
"They met, and after some deliberation, agreed upon certain prices to be paid and received for labor and almost every necessary article. The General Assembly of this state being in session, at same time, the convention reported to them immediately passed an act with the following popular title. "An act to prevent monopolies and oppression, by excessive and unreasonable prices, for many of the necessaries and conveniences of life, and for preventing engrossers, and for the better supply of our troops in the army, with such necessaries may be wanted. This act embodied and adopted the report of the convention, and added other articles to it, so that it included almost every article, called necessary or convenient, from a bushel of wheat down to a quart of milk. He who bought or for a higher rate, was to "be accounted oppressive, an enemy to his country, and guilty of a breach of this act," and to be subject to a fine." 
"The General Assembly were not unanimously in favor of this act There were some who saw how futile must be every attempt to fix the prices of articles, when the currency in which they were to be paid for was constantly depreciating in value, or in fact had no fixed value."
What effects did these price controls have? The following June, the town of Providence was sending representatives to the Rhode Island General Assembly. The town adopted a report with instructions for what its representatives should do and say. Staples reproduces these instructions, which started by telling the representatives to try to get better payment and support for the troops and their families. They argued that the costs of these supplies should be paid for by a "general tax" on the citizens, and once that tax was in effect, it would then be possible to repeal of the price control laws. Here is part of their description of the problems caused by the price controls:
As soon as adequate provision shall be made for supplying our troops, in the abovesaid, or any other equitable mode, you are instructed and directed to move for and exert your best endeavors to obtain, an immediate and total repeal of the late act of this state regulating prices, &c. ...  
Because, we find by experience, that the subject of said act is so intricate, variable, and complicated, that it cannot be and remain any term of time equitable, and hath a tendency to frustrate and defeat its own purposes. It was made to cheapen the articles of life, but it has in fact raised their prices, by producing an artificial, and in some articles a real, scarcity. It was made to unite us in good agreement respecting prices, but hath produced animosity and ill will between town and country and between buyers and sellers, in general. It was made to bring us to some equitable standard of honesty, and make fair dealers; but hath produced a sharping set of mushroom pedlers, who adulterate their commodities, and take every advantage to evade the force of the act, by the most pitiful evasions, quibbles and lies. It was made to give credit to our currency; but hath done it much injury; it tends to introduce bartering, and makes a currency of almost every thing, but money, and; 
Because, by experience, we, as well as the inhabitants of the other states, find it almost impossible to execute such acts, at least without a degree of rigor and severity heretofore unknown in these free states; and, while it remains in its present situation, it tends only to weaken government, and bring all laws into contempt, and even if it could be executed, it would operate as a very heavy and unreasonable tax upon the sellers, who are generally the enterprising and the industrious: It would prevent foreigners from shipping goods to our coasts, and cause our own merchants to order theirs to the southern states, and, in general, discourage foreign trade, in carrying on which, the risk is great and very uncertain and variable, according to circumstances, from time to time, and therefore not accurately computable three years before hand. It would also tend to discourage agriculture and manufactures among ourselves, as the prospect of some extraordinary gain generally excites men to extraordinary exertions in all the different branches of business.
It hath a tendency to exclude from our markets every thing extraordinary in its kind, and of course, to prevent all improvement; to discourage industrious laborers, by allowing the indolent the same wages;  for the scarcity of laborers will find employment for all, as the scarcity of goods will bring nearly all qualities up to the prices of the first rate, by which means, articles of inferior quality will be sold dearer to the poor, than what they would be afforded at if those of the first rate quality should be sold higher.
It would multiply oaths and lawsuits, otherwise needless, and prove a strong temptation to perjury and knavery of every kind, and in some cases put a man to needless expense in the disposal of his own property. It would render a man's house and stores liable to be opened and searched in a manner most ignominious and unworthy of a freeman, and deprive him of the privilege of complaining of it, under the penalty of ten pounds. It would promote suspicion and jealousies in neighborhoods, and a meddling with other folks' goods and business, ruinous to the peace and good order of society. ...
This has been our case, and if the whole money only measure the whole property a proportionable part of the money ought to measure the same proportionable part of the property, and neither more or less, for either would be injustice. Therefore, stipulating prices below this proportion, is as real injustice, as raising them above it, and this proportion is so nice a point, that nothing but the wants of mankind, can accurately hit upon it. Trade, when left free from fetters and embarrassments, will of itself settle down nicely to this proportion, and keep to it closer, than any force whatever can bring it.

Monday, December 26, 2016

Charles Dickens on Management vs. Labor





Here's a portion of the 1854 essay by Dickens:



Primrose Hill tunnel.






I deferentially enquired, who wanted to be ground?


abruptly, " Was I a delegate?"



"Not at all," said I.


"Not in the least," said I,









when you Preston masters—"










find out."




Sunday, December 25, 2016

Charles Dickens on Seeing the Poor

























"Do you doubt that there are?"


''Are they men? Or women?"


"There all night, do you mean?"

"Very likely."








"Because I can't get into the Workhouse."


"Were you here last night?"


"Do you know any of these others?"



"No. Not all day."

"Where have you been all day?"

"About the streets."

''What have you had to eat?"




She bared her neck, and I covered it up again.


"Yes. I could do that."

"For GOD'S sake get it then!"




way for us in profound silence, and let us go.


Saturday, December 24, 2016

Enviromental Costs of Christmas Trees: Real vs. Artificial


















Friday, December 23, 2016

Ventilating Some US Labor Market Controversies

If you're looking for a overview of how a range of economists see many issues in the labor market, written in a manner that will readily accessible to the general public, you should check out The US Labor Market: Questions and Challenges for Public Policy, , edited by Michael Strain, and freely available online from the American Enterprise Institute. In roughly 300 pages, it includes nine big questions, each followed by two essays from different points of view.

For a sample of what's includes, let me give one example of such an exchange, and then I'll append the full tables of contents. Dean Baker and Robert Z. Lawrence address the big question: "Is Productivity the Most Important Determinant of Compensation?"

Dean Baker writes:
"The notion that workers’ pay is linked to their marginal productivity has enormous appeal to economists. Much of the reason is for the simple logic of the proposition. Why would an employer ever pay a worker more than the value of what she produced? And conversely, if a worker were paid less than her marginal product, why wouldn’t she seek out an employer who was willing to pay a wage equal or close to the value of her marginal product? ... However comforting this view of the labor market may be, there are good reasons for believing it does not apply in important ways to those at both the top and bottom of the distribution. Furthermore, even in the sectors of the labor market where the equation of pay and marginal productivity may be largely true, government policies still play a huge role. The idea that the free market is determining incomes simply does not fit the facts."
In contrast, Robert Z. Lawrence writes:
"I have shown that, when the data are presented in an appropriate way, they actually show that with the exception of a growing profit share since 2000, average economy-wide wages in the US have tended to reflect aggregate productivity growth. This has not meant that these wage gains have been equally or proportionately shared. The failure of the wages of some workers to match aggregate productivity growth, however, should not necessarily be interpreted as a failure of the ability of conventional economics to explain these developments. Indeed, many of the explanations of the role played by globalization and technology in generating increased inequality rely on models in which workers are nonetheless paid their marginal products, i.e., in which wages reflect productivity. The same is true of explanations for the more recent increase in profit shares."
Here's the list of nine questions, with the authors and titles of the essays:

I. Should We Be Concerned About the State of Economic Mobility in the US? 

"How Much Social Mobility? More, but Not Without Other Things," by  Miles Corak
"What Should Be Done to Increase Intergenerational Mobility in the US?," by Bhash Mazumder

II. Is Productivity the Most Important Determinant of Compensation? 

"Marginally True: The Connection of Pay to Productivity." by Dean Baker
"Does Productivity Still Determine Worker Compensation? Domestic and International Evidence,"
 by Robert Z. Lawrence

III. How Can We Build Workers’ Skills? 

"Is “Skill” a Topic for Policy?" by Peter Cappelli
"Worker Skills and the US Labor Market: What Role Should Policy Play?" by Harry J. Holzer

IV. How Can We Make Work Pay? 

"Supporting Work, Inclusion, and Mass Prosperity," by Glenn Hubbard
"What Do We Really Know About the Employment Effects of the Minimum Wage?" by Justin Wolfers

V. Do Public Policies That Reduce the Reward to Work Significantly Diminish Labor Supply? 

"The US Safety Net and Work Incentives: Is There a Problem? What Should Be Done?" by Robert A. Moffitt
"The Rise of Employment Taxation," by Casey B. Mulligan

VI. What Are the Economic Effects of Lesser-Skilled Immigration on Lesser-Skilled Native Workers? 

"Low-Skill Immigration," by George J. Borjas
"Less-Skilled Immigration: Economic Effects and Policy Responses," by Pia M. Orrenius and Madeline Zavodny

VII. Would Cutting the Corporate Tax Rate Significantly Increase Jobs in the US? 

"Would Reducing the US Corporate Tax Rate Increase Employment in the United States?" by  Martin Feldstein
"Business Tax Reform and the Labor Market," Jason Furman and Betsey Stevenson

VIII. What Should We Do About Those Americans Who Are Especially Difficult to Employ? 

"Making Work a Priority for Working-Age People with Disabilities," by Richard V. Burkhauser and Mary C. Daly
"How to Help the Hard-to-Employ: A Focus on Young Men, Especially the Ex-Incarcerated,"  by Timothy M. Smeeding

IX. Should We Be Concerned About Income Inequality? 

"Is the Concept of Inequality the Best Way of Thinking About Our Economic Problems?" by Tyler Cowen
"Should We Be Concerned About Income Inequality in the United States?" by Melissa S. Kearney

Thursday, December 22, 2016

An Appetizer Buffet of Economic Research Highlights

The sort of readers who find this blog interesting might also want to check out the "Research Highlights" blog being run by Tim Hyde for the American Economic Association. The AEA publishes the Journal of Economic Perspectives, where I work as Managing Editor, but it also publishes six other research-oriented journals. Once or twice each week, the blog features a paper chosen from this set of seven journals and offers up a short, readable, nontechnical overview. Here are some examples from the last few weeks:

"Are subsidies for electric cars good for the environment?" (December 14, 2016)This is an overview of Stephen P. Holland Erin T. Mansur, Nicholas Z. Muller, and Andrew J. Yates, ""Are There Environmental Benefits from Driving Electric Vehicles? The Importance of Local Factors," American Economic Review, December 2016, 106:12, pp. 3700-3729. Tim Hyde summarizes:
"When an electric car is charging overnight, it is drawing on a regional power grid and prompting power plants across the network to produce slightly more electricity. Depending on where in the U.S. that car is plugged in, the emissions at those power plants could be pretty dirty in their own right. ... In some cases, electric cars provide a clear win for the environment. The people living in Los Angeles, with its notoriously poor air quality and constricted topography, benefit a lot when a gas-powered car is removed from its freeways. Of course the electric car replacing it has its own emissions, but most electricity generation in the western U.S. is pretty clean. Totaled up across the country, the benefits clearly outweigh the costs.
"Then there’s the case of New York City. When more electric cars plug into the power grid there, they are mostly drawing power from relatively dirty coal-fired plants in Pennsylvania – and a lot of the smoke that billows out of those smokestacks eventually gets blown east back to the New York metro area. ... That cycle plays out over hundreds of miles and is quite a bit less visceral than exhaust coming out of a tailpipe, but the ultimate effect on air quality is about the same for the New York area as a whole. Some suburban counties on Long Island and Connecticut are actually worse off with the extra power plant emissions than the local tailpipe emissions. Among the worst places to switch are North Dakota and Minnesota, where air quality is very good to begin with and additional exhaust from gas-powered cars dissipates quickly. The authors calculate that these regions should have a negative subsidy – actually a tax – of thousands of dollars on each electric car. Meanwhile, switching in western cities with bad air quality and a relatively clean power mix (Los Angeles, Houston, Phoenix) ends up being hugely beneficial for the environment."

"How does the relentless churn of jobs in the modern economy affect happiness?" (December 9, 2016)

This is an overview of Philippe Aghion, Ufuk Akcigit, Angus Deaton, and Alexandra Roulet, "Creative Destruction and Subjective Well-Being," American Economic Review, December 2016 (106: 12), pp. (pp. 3869-97). Hyde writes:
"The authors develop a simple model of job destruction driven by technological change and predict that, for a given level of unemployment, more creative destruction should improve self-reported life satisfaction. Ultimately, this is because economic growth leads to more job openings and higher earnings in the future. In other words, a city that can maintain 8% unemployment in the face of a chaotic job market (with lots of jobs being created and destroyed each year) should be a more satisfying place to live than a city with 8% unemployment and a stagnant labor market. ... The results suggest that job turnover and labor market dynamism might be an underrated factor of quality of life, perhaps nearly as important as unemployment in explaining happiness levels in differents parts of the country."
"Tax cuts for the super rich? (December 5, 2016)

This is an overview of Laurence Ales and Christopher Sleet, "Taxing Top CEO Incomes," American Economic Review, November 2016 (106: 11), pp. 3331-66. Chris Fleisher summarizes:
"[S]ome economists have suggested that CEOs earning tens of millions of dollars should be giving back as much as 80 percent of their income to the government. Carnegie Mellon University economists Laurence Ales and Christopher Sleet don’t agree. Their recent paper ... says the marginal tax rate on top earning CEOs should be closer to 20 percent.  Why? Because rewarding them for their hard work by letting them keep more of their paycheck leads to “spillover” effects that boost corporate profits, which can then be taxed and grow government coffers more quickly than collecting tax revenue from individual executives." 
This link includes audio of a 15-minute interview with the authors.

"Why a carbon tax on shipping would harm the world’s poorest economies" (November 230. 2016) 

This is an overview of Joseph S. Shapiro, "Trade Costs, CO2, and the Environment," American Economic Journal: Economic Policy, November 2016 (8: 4), pp. 220-54. Hyde writes:
"[T]ankers, trucking, and cargo planes pump more than one billion tons of CO2 into the atmosphere each year. This is equivalent to the emissions from the bottom 164 carbon-emitting countries in the world combined. ... [T]he shipping industry is still expecting to be hit with a carbon tax within the next few years. ... [A] carbon tax on shipping could reduce emissions, but also that such a policy would actually slightly hurt some of the countries with the most to lose from climate change. ... But in a cruel twist of fate, it's the same equatorial countries facing the greatest risks from rising temperatures -- especially sub-Saharan Africa, the Indian subcontinent, and southeast Asia -- that are also most reliant on fossil fuels to sell their goods around the globe."

Monday, December 19, 2016

Americans are Moving Less

Americans are moving less. Here's an illustration from the US Census Bureau. The blue bars show the total number of movers (measured on the left-hand axis), while the red line shows the percentage of Americans who moved (measured on the right-hand axis). Back in the 1940s and 1950s, it wasn't unusual to have 20% of Americans move in a year, but now it's down to about 12%.

Moving in America

The Census Bureau has also released a bunch of statistical tables on the various dimensions of geographic mobility, for those with a need to graze through the data. "Geographical Mobility: 2015 to 2016" focuses on the changes in the last year, while "CPS Historical Migration/Geographic Mobility Tables" offers a longer term view.

For example, one figure shows that between the 2002-3 and 2015-16 measurements, the share of moves that were 50 miles or less rose from 32.3% of all moves to 42.3% of all moves. The main offsetting decline was in moves of between 200 to 499 miles, which fell from 20.7% of all moves back in 2002-3 to 13.8% in 2015-16.

Another shows that Compared with the answers in 1998-1999, a large share of movers say that their reason is to establish their own household, be closer to work, or find cheaper housing. On the other side, a smaller share of movers say that the main reason was to own, rather than rent, or because they wanted a new or better home or apartment

It's hard to know if the decline in labor force mobility is a real problem. The difficulty is that explaining why the fall has occurred has proven difficult, for reasons I've discussed in "Less Migration Within the United States" (August 24, 2011) and "Updates on the US Migration Puzzle" (August 6, 2013).

Basically, the problem is that a lot of the explanations that might seem to make sense don't work very well on closer examination. For example, this trend to lower rates of moving has been going on since the 1980s, so it's clearly not related to a specific recession or recovery. It's also not related to patterns like an aging US population, or rising incomes, or patterns of jobs or homeownership. The decline in moving isn't notably greater after adjusting for these kinds of factors.

One possible explanations is that the US has become more similar across regions, so there is just less motivation to move. Another is that information  has become more available between regions, so people are less likely to move when just looking for work, and instead wait until they have a job in hand before moving.

Other hypothesis are potentially more concerning.  It may be that the the lower rate of moving is because over time the US economy is becoming less flexible and dynamic, in the sense that rates of job creation and destruction are declining, as discussed in Are US Labor Markets Becoming Less Fluid?" (January 9, 2015). A related factor could be that the role of new firms in job creation has been declining, as discussed in "The Decline of US Entrepreneurship" (August 4, 2014). I've heard some arguments that a number of big US cities which used to be magnets for in-migration from the rest of the country have experienced big run-ups in housing prices over time, which makes people less likely to relocate to those areas unless they already have a higher-paying job in hand.

When people move, they don't just change their own situation. They also provide a connection and a trustworthy flow of information back to others at their place of origin, which sometimes leads to additional moves. Sure, it's the 21st century and you can learn all sorts of things about a different location with a web search. But a personal connection to someone who knows you, and your location, as well as the new location, is still a meaningful piece of information.

Friday, December 16, 2016

Thomas Schelling and the Agent-Based Discrimination Checkerboard

Thomas Schelling (1921-2016), who died earlier this week, shared the economics Nobel prize in 2005 "for having enhanced our understanding of conflict and cooperation through game-theory analysis." In some ways, he was best-known for his analysis of nuclear strategy, and the arguments expressed in his 19960 work, "The Strategy of Conflict." For example, the New York Times headlined its obituary, "Thomas C. Schelling, Master Theorist of Nuclear Strategy, Dies at 95."  As William Grimes writes in the obituary:
"Professor Schelling analyzed superpower negotiations in the way that he analyzed the conflicts between, say, a blackmailer and his client, a parent and a child, or management and labor. In each case, he wrote, “there is a mutual dependence as well as opposition,” with each side seeking out tests of strength at less than crisis levels. Among other counterintuitive propositions he put forth, Professor Schelling suggested that one side in a negotiation can strengthen its position by narrowing its options, using as an example a driver in a game of chicken who rips the steering wheel from the steering column and brandishes it so his opponent can see that he no longer controls the car. He also argued that uncertain retaliation is more credible and more efficient than certain retaliation."

But Schelling has a remarkably fluid ability to bring strategic and game theory insights to bear on a very wide range of situations. Paul Samuelson, a great economist in his own right who also knew how to turn a phrase, once wrote: "In Japan Thomas Schelling would be named a national treasure. Age cannot slow down his creativity, nor custom stale his infinite variety."

By coincidence, the most recent issue of the Quarterly Bulletin of the Bank of England (2016, Q4)includes an article about "Agent-based models: understanding the economy from the bottom up," in which Arthur Turrell explains one of my favorites in Schelling's work: an effort to investigate whether relatively mild discriminatory feelings can lead to quite segregated outcomes.  As Turrell explains, Schelling tackled the problem this way:
"Imagine there are two species named Econs and Humans who co-exist. Econs are always rational. Humans are emotional and sometimes make mistakes. Although Econs and Humans peacefully co-exist and live in the same city, they each have a slight preference for living closer to the same species. This propensity to want to be near others of their type can be characterised by a number f, which can be thought of as their strength of preference. It represents the fraction of neighbours that they ideally wish to be of the same species, with an f of 1 meaning that they will only be happy if all of their neighbours are of the same species. If agents of either type are unhappy, they can choose to move house and, at random, are given a new property. Over time, more and more agents will be happy with where they live and stop moving." 
Start out with a checkerboard in which the two groups are randomly distributed, which might look like this:

Now say that the strength of preference is a fairly high .7. Over time, this preference for one's own group combined with the process of random moving leads to a completely segregated outcome like this:

But a striking finding from Schelling's work is that much lower levels of preference can still lead to considerable segregation. Indeed, there is often a "tipping point"--a concept brought into wide use by Schelling's work--where a relatively small change in preference leads to a much larger change in the degree of segregation.  Turrell offers the example of what happens as the preference parameter rises from .25 to .26.

This figure shows that at .25, the two groups are still pretty well integrated. Apparently, a mild but non-zero degree of discriminatory feeling  is consistent with a high degree of integration--which is a useful insight.

 But in this example, the rise from .25 to .26 is a tipping point, in which the degree of segregation (which can be measured by how many neighbors the agents have from the other group) rises substantially.
Of course, you may wonder about many potential tweaks to this approach: what if the two groups had different preference, or each group had a range of preferences; are the outcomes different if one group is numerically larger than another: what would happen be like if the surface was not defined by squares within a larger square, but some other shape (like squares within an elongated rectangle, or triangles within a triangle). Agent-based modelling lets you ask all these kinds of questions, and through simulations of what will happen as the agents move, figure out what makes a difference and what doesn't.

Turrell's essay uses Schelling's work as one example, and then delves into a broader discussion of agent-based modelling. The potential advantages of this approach is that you can see what overall outcome emerge from clearly-specified individual incentives. For example, one can explore stock markets or housing markets with different types of buyers and sellers who react differently to new information and to changes in prices.  There are applications in particle physics, biology/ecology, epidemiology, computer science, military strategy, and others.

Turrell enumerates strengths as well as weaknesses of an agent-based approach. He write:
In many ways, the greatest strength — the flexibility to model such a vast range of scenarios — is also the greatest weakness. The sheer extent of choice in constructing agent-based models as compared to more traditional economic models means that modellers face the problem of selecting the right components for the problem at hand. Simulation results can vary dramatically depending on which assumptions are used, so modellers must take great care in choosing them. Further work is needed to develop objective means for choosing the most appropriate assumptions.
One particular concern is that at least in some circumstances, human agents may be able to perceive where a group dynamic is headed--and then change plans or form coalitions to alter that outcome. 

Ranging from nuclear strategy to issues of segregation and integration suggests the ability of Thomas Schelling to range across a wide array of topics and approaches.  His early work introduced the idea of a "focal point," which is an outcome that many people recognize based on preference and tradition. Thus, he asked people where they would meet a stranger in Manhattan, if they had not previously agreed on a time and place to meet, and found that there was (at that time) a focal point of meeting at the information booth in Grand Central Station at noon. For a period in the 1980s, he focused on how to encourage people to stop smoking. For many economists, the first time we started thinking seriously about carbon emissions and the risks of climate chaange as an economic issue was when Schelling, back in 1992, gave his American Economic Association Presidental Address on the subject "Some Economics of Global Warming" American Economic Review, 82: 1, March,  pp. 1-14). Another insight associated with Schelling is that he was involved with formulating  "The Origins of the Value of a Statistical Life Concept"  (November 25, 2014). 
Thomas Crombie Schelling thinks about the essence of phenomena. In scanning everyday behavior, he sees patterns and paradoxes that others overlook. When each driver slows down almost imperceptibly for a look at a minor roadside distraction, he observes, the result can be a massive traffic tie-up. The world can be divided into weak and powerful parties, but in some situations excessive power can be a handicap. Someone who is overweight may pledge fealty to a strict diet, then cheat at night. Schelling assesses the fat man's intramural struggle with the thin man trying to get out, noting that, with variations in the context, the Jekyll-and-Hyde parable may apply to us all. Schelling distills such essences and demonstrates their presence in many important social phenomena. "It's hard to define or categorize Tom's work," notes James Coleman, the sociologist. "If you ask, 'Does he do research?' I have to answer 'No, not exactly.' Then if you ask what he does for a living, I have to answer that he lives by his wits." 

Wednesday, December 14, 2016

FX Market Volume Falls--To a Mere $5.1 Trillion Per Day

The Bank of International Settlements carries out the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, which in 2016 collected data from roughly 1,300 banks and other foreign exchange dealers across 52 countries. Michael Moore, Andreas Schrimpf, and Vladyslav Sushko describe some of the findings in "Downsized FX markets: causes and implications," which appears in the BIS Quarterly Review (December 2016, pp. 35-51).

The headline finding is that the total turnover in foreign exchange markets dipped from $5.4 trillion per day in the 2013 survey to $5.1 trillion per day in 2016. As the figure shows, there had been a dramatic rise in the volume of foreign exchange trading since about 2000, so the dip is especially notable.
Why the decline? The key point to understand is that most foreign exchange trading isn't related to exports and imports of goods and services According to the World Trade Organization, total global exports of merchandise and services approached $24 trillion for the entire year of 2014. Clearly, this isn't going to explain an FX market of $5.1 trillion per day.  Moreover, foreign direct investment isn't the primary drivers of the FX market, either. Foreign direct investment is about $1.0-$1.5 trillion per year.

Instead, the gargantuan FX market is driven by financial investments, both those trying to make money directly from fluctuations in this market, but also those who are buying and selling financial assets in other currencies, as well as hedging the risks of fluctuations in FX rates. Moore, Schrimpf, and Sushko describe in some detail how the FX market is evolving:
More detail on the results of the Triennial Survey is available at the BIS website.  Here's one table that always catches my eye, dividing up the market according to the currency used in the foreign exchange deal. The statistics here include both buying and selling a currency, which of course both happen at the same time, but as a result of counting them separately, the total size of the market is 200%. Measured in this way, the finally column shows that US dollar accounted for 88% of the market volume (although I find it more useful to think of this as 44% out of a market size of 100%). The other nine most traded currencies are the euro (EUR), the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the Swiss franc (CHF), the Chinese yuan (CNY), the Swedish krona (SEK), and the New Zealand dollar (NZD).

Clearly, the US dollar still rule the roost when it comes foreign exchange markets: indeed, it'd size of the market is the same now as back in 1998. Conversely, the share of the euro in foreign exchange markets started strong in 2001 and 2004, but has declined since then. The share of China's yuan in foriegn exchange market was essentially zero as recently as 2007, but it has now risen to 4% in the final column of the table--which I find more useful to think of as 2% of all FX transactions.

Tuesday, December 13, 2016

The Post Office Board of Governors is Down to Zero Appointed Members

In theory, the US Postal Service is run by a Board of Governors, appointed by the President and confirmed by the US Senate.. In practice, the USPS Board is now missing all nine of its appointed members. As the USPS website explains:
The Board of Governors of the U.S. Postal Service is comparable to a board of directors of a publicly held corporation. The Board normally consists of up to nine governors appointed by the President of the United States with the advice and consent of the Senate. The nine governors select the Postmaster General, who becomes a member of the Board, and those 10 select the Deputy Postmaster General, who also serves on the Board. The Postmaster General serves at the pleasure of the governors for an indefinite term and the Deputy Postmaster General serves at the pleasure of the governors and the Postmaster General.
Except that the Obama administration has not been appointing new members to the Board of Governors as the terms of previous members expired.  When the term for James Bilbray expired last week and he was required to leave office, the contingent of nine appointees to the USPS Board of Governors is now down to zero members. As Bilbray said in November 2015, rather plaintively: " “I have the help of my Deputy Postmaster General and my Postmaster General, but I cannot effectively run the United States Post Office by myself. ... We are shocked that somebody out there doesn’t hear us, doesn’t hear how badly we are off. [We are down to] one governor: me.” As the USPS website puts it: "Each governor receives $300 per day for not more than 42 days of meetings each year and travel expenses, in addition to an annual salary of $30,000. Nine vacancies exist on the Board."

The Office of the Inspector General for the US Post Office publishes a report on the subject, "Governance of the U.S.Postal Service" (November 10, 2016, RARC-WP-17-002). For example, it points out that under law there are certain powers that cannot be delegated by the Board to the Postmaster General. With zero Board members, certain changes and activities are not legally possible. For example, the report notes (footnotes omitted):
"While the Board of Governors can delegate many things to the Postmaster General, there are items that, by law, only the presidentially appointed Governors can do. These include, but are not limited to
  •  Appointment, compensation, term of service, and removal of the Postmaster General
  • Compensation of the Deputy Postmaster General 
  • Establishment of rates and classes for competitive postal products
  • Authorization of rate and fee changes for market dominant postal products
  • Authorization of a request to the PRC to add, remove, or reclassify products
  • Appointment and removal of the Inspector General
  • Transmission of the OIG’s Semi-Annual Report to Congress
  • Selection of a firm to conduct required USPS financial audits ...
As part of the executive branch, the Appointments Clause of the Constitution requires the Postal Service to be led by principal officers who are appointed by the president with the advice and consent of the Senate. The Governors fulfill that role, as was confirmed by the Ninth Circuit U.S. Court of Appeals. With no sitting governors, the Postal Service’s constitutional authority to take certain actions could be in question. This would be an unprecedented situation."  
The situation with the USPS Board of Governors raises some big questions, along with specific issues related to the postal service. The US President is now required to appoint people to about 3,800 positions, which can be broken down into four categories: "Presidential Appointments with Senate confirmation (PAS), Presidential Appointments without Senate confirmation (PSs), political appointees to the Senior Executive Service (SES), and Schedule C political appointees."

Thus, while most of the attention for the incoming Trump administration is on high-profile appointments to cabinet-level posts, there are bigger issues. For example, who will get appointed to the thousands of less visible jobs? In addition, given that political appointees may move on to other jobs, and need to be replaced, the reality is that the the Office of the President needs to be on a continual hunt for people with the background and interest to fill thousands of positions--and given the turnover, probably needs to be appointing a few dozen people to a wide variety of slots almost every week.

Filling these appointed slots has been an ongoing  issue for the Obama administration. For example, a report in 2010 from the left-leaning Center for American Progress found: "The Obama administration had in place 64.4 percent of Senate-confirmed executive agency positions after one year, compared to 86.4 for the Reagan administration, 80.1 percent for the George H.W. Bush administration, 73.8 percent for the George W. Bush administration, and 69.8 percent for the Clinton administration. In percentage terms, after one year, the Obama administration ranked last or next to last (out of the five administrations examined) in filling important positions in 10 of 16 major federal agencies." Those problems with filling appointed slots continued: for example, here's a New York Times article on the problems of not filling appointed slots in 2013, and here's a Politico article on the same problems in 2016.

Of course, a structural problem here is that potential presidential appointments are often blocked by grandstanding US Senators, often for reasons that don't have much to do with the actual person being appointed. But in many other cases, the situation is simply that no one is being put forward to fill appointed positions.

In the particular case of the USPS Board of Governors, there are a number of reasons the positions could be difficult to fill. Getting people to sign up for a nine-year term--even if they can quit early--can be a hard sell. The pay means that it's clearly not intended to be a full-time job. The USPS doesn't seem like a stepping-stone to major career advancement or consulting contracts. Perhaps most discouraging of all, the US Postal Service is officially controlled by Congress, and can be overruled by Congress on any decision it makes. As the USPS Inspector General report notes:
The governors of the Postal Service must represent the public interest generally and not any particular group.Yet determining the public’s interest and how best to serve it can be difficult, even in the broadest sense. Some argue it lies in consistent and universally accessible consumer mail services; others in a vibrant commercial mail sector; still others in preserving the dissemination of cultural and civic discourse. When interests conflict, as in the controversies over service levels, network consolidation, and prices, balancing the public’s needs is the classic democratic conundrum. Each governor must decide for himself or herself what serving the public interest means.
Thus, a member of the USPS Board of Governors gets relatively little pay (relative to the qualifications needed for doing the job), has very limited power to make significant changes, and are likely to be vehemently second-guessed if they support any decision that upsets anyone. So I'm not arguing that these slots are easy to fill.

Still, when such a high proportion of appointed positions across government are going unfilled, and at least one board has completely run out of members, its hard to avoid the conclusions that the current system of presidential appointments is dysfunctional, and that the current White House has not done a particularly good job of navigating through the problems.