Monday, February 8, 2016

A Peek at Russia's Economy

Even before the recent plummeting of the price of oil, Russia's economy was showing signs of slowdown and stress. With oil prices now in the neighborhood of $30-$35 per barrel, and maybe with additional declines still to come, Russia's economy is already in recession and probably headed for worse.

Guillaume Vandenbroucke offers some graphs that put the long-term course of Russia's economy in some useful perspective in "Rising Productivity, Declining Population Impact Russia’s Economy," which appears in the January 2016 issue of the Regional Economist published by the Federal Reserve Bank of St. Louis (pp. 10-11). Russia's economy has a truly terrible period in the 1990s, in the aftermath of the breakup of the Soviet Union. This figure shows how the level of per capita GDP has evolved in the Russian Federation, the US, and the world economy since 1989.
Another perspective on the same data is to look at Russia's per capita GDP relative to the United States. Russia started out at 18% of the US level, dropped by 9% of the US level, and is now back to about 15% of the US level. In both figures, you can see that Russia's period of catch-up growth has slowed substantially in the last five years or so.

These figures to up to about 2014, but 2015 was a severe recession for Russia and 2016 could be worse. Simeon Djankov gives a sense of the long-term trajectory of Russia's economy under Vladimir Putin in "Russia’s Economy under Putin: From Crony Capitalism to State Capitalism," written as
Policy Brief PB 15-18 for the Peterson Institute for International Economics in September 2015. Djankov wrote (citations omitted):
However, the last five years have witnessed a significant slowdown in Russian economic growth (figure 1). The OECD growth forecast for this year is a decline of 3 percent, followedby a modest growth of about 1 percent in 2016. The World Bank projects an economic contraction by 2.7 percent in 2015, before reaching 0.7 percent growth in 2016 ... 
Here's Djankov's figure showing the slowdown of Russian growth rates over five year intervals up through 2010-2014. As I'll argue in a minute, the forecasts he was citing last fall for a stagnant Russian economy in 2016 are probably too optimistic.

Here's Djankov's summary of the overall direction of Russia's economy under Putin (again, citations and footnotes omitted):
Vladimir Putin’s career at the helm of Russian politics started in 1999 and will likely continue beyond 2018, the year of the next presidential elections. Under President Putin’s leadership—the longest of either the Soviet or modern Russian era—the Russian economy has shifted from crony capitalism to state capitalism, distinguished by five features. 
First, state ownership in sectors like finance, energy, transportation, and the media have increased—reversing a previous trend towards more private property. The role of the state in industry has also been strengthened through the creation of vertically-integrated national champions. 
Second, strategic energy exports are increasingly used as instruments of foreign policy. In Europe, Russia has undermined the rival gas pipeline project Nabucco—which was supposed to supply Central and Southern Europe—by buying Turkmen gas and redirecting it into Russian pipelines. Russia also diversified its exports to include markets in China, Japan, and Korea by building the Trans-Siberian oil pipeline, as well as the Sakhalin–Khabarovsk–Vladivostok gas pipeline in the Russian Far East. Under Putin, Russia has also restored its nuclear industry, with $50 billion allocated from the federal budget to nuclear power since 2003. Nuclear projects—for example in Bulgaria, Hungary, and Slovakia—serve as diplomatic weapons.
Third, plentiful revenues from extractive industries have obfuscated the need for structural reforms in Russia since 2004, the end of Putin’s first presidential term. Pension, healthcare, and education reforms have stalled, and efforts to decentralize public finances were reversed towards the end of his second term in 2008. With economic growth stagnating recently, however, reforms may become a necessity.
Fourth, the share of extreme wealth in the Russian economy has risen, with 111 Russians on the 2014 Forbes World’s Billionaires list, up from 42 a decade earlier. These billionaires may account for as much as a third of the country’s wealth. Large infrastructure projects like the Sochi 2014 Olympics, the 2018 World Cup, and the Kerch Strait bridge linking Russia with Crimea, are entrusted to a group of billionaires with close links to the president.
Fifth, Putin’s assertive foreign policy has incurred economic sanctions by the European Union and the United States. So far, the Russian economy has weathered these sanctions better than most economic analysts predicted. Still, the resulting stagnation has brought about a policy of import substitution. This has increased corruption for government-funded projects, especially in procuring financing for projects with dubious rates of return, and has reduced access to new technologies in many industries. Retaliatory trade policies have increased the prices of basic food and consumer products and have made it more difficult for foreign companies to invest and operate in Russia.
Many of same issues some up, if stated in more bureaucratic language, in the International Monetary Funds "Country Report No. 15/211Russian Federation,"  published in August 2015. For example, the IMF wrote:
Over 2011–14, Russia’s growth decelerated more (relative to pre-crisis performance) than in most other countries and comparator groups. While some of Russia’s growth deceleration is attributable to the stabilization of oil prices, it also reflects stalled structural reforms, weak investment, declining total factor productivity (TFP), and adverse population dynamics. In particular, excessive regulation, weak governance, and a large government footprint in the economy have discouraged efficiency-enhancing investment. ...
Adverse population dynamics have contributed to the decline in the labor force, while low statutory retirement ages have reduced workers’ incentives to extend their working life. Administrative barriers, high regulation, weak governance (including perceptions of corruption and weak property rights protection), and poor infrastructure have limited investment and growth. The significant presence of state-owned enterprises (SOEs) in key sectors of the economy has also made it difficult to increase competition and efficiency. Several new anti-crisis initiatives aimed at supporting different sectors through subsidies, guarantees, restrictions on the participation of foreign producers in public procurement, and import substitution-like polices, have introduced additional distortions which will put a drag on growth. Finally, the banking system is highly concentrated, lacks depth, and is inefficient at channeling savings to investment.
Back in August 2015, the IMF estimates of Russia's economic growth were similar to those mentioned above by Djankov: that is, the IMF was expecting  -3.4% growth in 2015, followed by 0.2 percent in 2016. But those estimates were based on assuming the world price of oil was above $60/barrel through 2015 and 2016, while the world price of oil now seems likely to be half that level or less, perhaps even through 2017.

The IMF report include a useful figure giving a sense of the connection between oil prices and Russia's economy. The dashed red line shows the price of oil, measured on the left-hand axis. The blue line shows the annual growth rate of Russia's economy, measured on the right-hand axis. When the price of oil was rising from 2000-2007, Russia's economy was growing at 8-10% per year. When the the price of oil dropped in the worldwide Great Recession, so did Russia's economy. The price of oil rebounded, but it was no longer rising, and Russia's rate of growth was slower and declining.  To think about what will happen for Russia's economy in 2016, keep extending the red dashed line down--because the price of oil is now lower and still falling. The blue line that is already in recession for 2015 seems very likely to worsen.
The IMF also note many of the structural shortcomings in Russia's economy that are limiting its resilience and growth. Here's a figure with some comparisons. When it comes to property rights, Russia ranks below Vietnam and Mexico; when it comes to quality of roads, Russia is behind Brazil, Philippines, and India; when it comes to burden of government regulation, Russia is behind Indonesia and China; and when it comes perceptions of corruption, Russia appears worse than Nicaragua, Kazakhstan, and Gambia.

The discussions by Djankov and the IMF imply a broader policy agenda, but I wanted to take note of a particular issue for Russia at the intersection of its education system and its labor markets. This issue is discussed at greater length in a paper by Lilas Demmou and Andreas Wörgötter called "Boosting Productivity inRussia: Skills, Education, and Innovation," published as OECD Economics Department Working Papers No. 1189 in March 2015. The authors point out that Russia's has a fairly flexible labor market, with fairly low unemployment and decent job creation, but "many new jobs are also of low quality." New job creation often tend to be low productivity and low-paid, jobs, often in the informal economy, not much protected by labor laws, without benefits or options for building skills and training.

One result is a high level of wage result is high wage inequality, higher than in the US economy.  Another outcome is very high labor market turnover, often with more than 30% of Russia's entire workforce separating from their job in a given year.

Russia has high levels of educational attendance, up through the "tertiary" college and university level. It continues to have some strong examples of high-quality of scientific and technical research. But much of the education system is of low quality. Demmou and Wörgötter cite an international survey of employers that ranks the quality of Russia's education system 78th out of the 140 countries surveyed. The education system is often disconnected from needs of labor markets in general. Moreover, it's hard to start new high-productivity firms that would offer a promise of higher-paying jobs in a Russian economy that is politically oriented, dominated by billionaires running "national champion" firms, with lousy infrastructure and poor governance, and struggling with international sanctions.

Friday, February 5, 2016

The Life of US Workers 100 Years Ago

Carol Boyd Leon has written "The Life of American Workers in 1915" for the February 2016 issue of the Monthly Labor Review, which is published by the US Bureau of Labor Statistics.  A century ago in 1915 was when publication of the Monthly Labor Review started. It's roughly when my grandparents were born. I confess that I'm a sucker for these kinds of historical comparisons: for me, it's like a glimpse through a time machine. Here are some of the comparisons that caught my eye (with footnotes omitted throughout).

"More than half (52.4 percent) of the 100 million people living in the United States [in 1915] were less than 25 years old; by comparison, the U.S. population has grown over the last century to more than 321 million, and only one-third of that total is under age 25. Not quite 5 percent of the population in 1915 was age 65 or older, compared with 14 percent today. Life expectancy at birth for people born in 1915 was just 54.5 years, whereas the most recent life expectancy estimate is 78.8 years."

"About half the population in 1915 lived in rural areas, meaning areas with fewer than 2,500 residents. In 2010, by contrast, only 1 in 5 people lived in a rural area. Not surprisingly, mobility within the United States was more limited than it is now, and people born in the United States were likely to stay within their home state. In 1915, about 78 percent of U.S.-born individuals were living in the state in which they had been born, compared with 59 percent in 2010."

Labor force participation rates (which of course measure only paid employment outside the home) show a substantial fall for men in every age group, and a large rise for women in every age group.

"[I]n 1915, only an estimated 18 percent of the population ages 25 and older had completed high school, and only about 14 percent of people ages 14–17 were in high school. ... While failure to graduate remains a concern, more than 86 percent of the U.S. population age 25 in 2010–14 had completed high school or more."

Nearly one-third of Americans were farmworkers back in 1910, compared with less than 1% of the workforce today. However, less than 5% of workers in 1910 were professional or technical workers, compared with about 28%  of the workforce today, and less than 10% of workers in 1910 were service workers, compared with more than 17% today.

In terms of the nonfarm industries where people worked, about one-third of the workforce was in manufacturing in 1910, compared with under 9% today. The share of the nonfarm workforce in construction was about twice as high in 1910 as today (9.1% then vs. 4.5% now), and the share working in transportation and public utilities was three times as high in 1910 as today (12.6% then vs. 3.8% now). Nearly 15% of the workforce was in domestic or personal service back in 1910, compared with about 1% today. On ther other side, the share of workers in "other professional services" has climbed from 3% in 1910 to 28.9% today, and the share working in wholesale and retail trade and in government have also climbed notably.

"If you were alive in 1915, chances are you rented your house or apartment; the ratio of renters to homeowners was about 4 to 1 in 1920. In contrast, by 2004, 69 percent of American families owned rather than rented their residence, although that proportion slipped to 64 percent by the fourth quarter of 2015.24 The cost of a home in 1915 was about $3,200 ($75,600 in 2015 dollars), compared with today’s median home value of $183,500. ... Mortgages were typically for just 5 to 7 years and required downpayments ranging from 40 to 50 percent of the home purchase price. In contrast, the median downpayment on a new mortgage in 2015 was 10 percent of the purchase price. Ethnic groups formed their own loan associations because banks could raise the mortgage rate, reduce the loan term to 3 years, and foreclose after two late payments."

"Whether or not your abode was a single-family home or a crowded tenement, it probably was heated by a potbelly stove or by a coal furnace in the basement. It wasn’t until the coal shortage during World War I that oil or gas-powered central heating became a popular replacement for the hand-fired coal furnaces and stoves. Your home probably wasn’t yet wired for electricity; less than a third of homes had electric lights rather than gas or kerosene lamps. However, electricity was the byword of new middle-class homes, which sported electric toasters and coffee pots. ... Telephones could be found in at least a few million homes. However, direct dialing did not exist until the 1920s. If your home had an indoor toilet, the toilet likely was located in a closet or a storage area. It would be a few more years until it was common for toilets, sinks, and bathtubs to share a room. ... Although some households had running water in 1915, many rural families and city dwellers did not. Less affluent residents still heated a boiler full of water on a coal or wood range, rubbed clothes on a washboard, used a hand ringer, and hung clothes to dry. Homes without gas or electric heat were harder to clean because of soot from the fireplace or wood stove."

"A high percentage of people in cities and factory towns walked to work. If you were like most people at the time, however, you lived in a nonurban area. If you didn’t work at home, you also may have traveled to your job by foot, or you may have gotten there on horseback or by mule. ... In urban areas, 1915–20 was the heyday of streetcars: miles of track peaked just 2 years later at nearly 73,000. Horse-drawn streetcars and buses led to home construction some 3 to 5 miles from downtown. Within the city, electric streetcars and trolleys may have been your means of transportation, speeding you to your job at 20 miles per hour. ... Although automobiles had only recently been invented, an estimated 2.3 million cars were registered in 1915. Olds Motor Works, which was early on the scene, produced some 5,000 cars in 1904, but these were overshadowed by the popularity of the more affordable Ford Motor Company’s Model T, colloquially referred to as “Tin Lizzy.""

"The latest workplace rage was scientific management, which involved motion and time studies to determine the most efficient way to perform a work task. In 1911, Frederick Winslow Taylor wrote a seminal work on the subject—The Principles of Scientific Management—which suggested that greater workplace efficiency can be achieved by training employees to do a single job, such as opening mail, inspecting ball bearings, performing accounting tasks, or selling products. Taylorism pushed the division of labor to its logical extreme but did not take into account worker satisfaction. Similarly, in 1913, Henry Ford instituted the assembly line into his Ford Model-T car manufacturing plants to boost both efficiency and production."

"For workers who were hired on a full-time basis, the workweek—when not reduced to part time— was generally long. Workers in manufacturing averaged 55 hours at work per week, and production workers in manufacturing averaged about 49 weekly hours of paid work. The latter figure may reflect that few workers indeed were compensated for time off, and factory workers hours could be shortened from one day to the next. It wasn’t until 1919 that close to half of American workers had a 48-hour workweek; in 1915, only one-eighth of workers had a workweek capped at 48 hours."

"BLS reported about 23,000 industrial deaths in 1913 among a workforce of 38 million, equivalent to a rate of 61 deaths per 100,000 workers. In contrast, the most recent data on overall occupational fatalities show a rate of 3.3 deaths per 100,000 workers."

"According to a U.S. News and World Reports article comparing income in 1915 and 2015, “back in 1915 . . . you were doing about average if you were making $687 a year, according to the Census. That is, if you were a man. If you were a woman, cut that number by about half.” In terms of 2015 dollars, the average pay of $687 for men is equal to $16,063, which is well below today’s income. Median annual earnings for men ages 15 and over in 2014 were $40,638 ($50,383 for men who worked full time), and median annual earnings for women in 2014 were $28,394 ($39,621 for women who worked full time). ... The wage comparison becomes even more dramatic if one considers that benefits now add substantially to the total compensation of some workers. By contrast, benefits were meager or, more commonly, nonexistent a hundred years ago."

"Although some employers were subject to minimum pay regulations, many workers, especially
women, earned less than minimum wage. For instance, Tentler reported that “in New York City’s
garment industry, operating under a minimum wage protocol, an economist found in 1914 that from
one-fourth to one-half of the workers in the different occupations investigated were earning less than
minimum pay, ‘the employers claiming that the workers in question were learners.’” The learning
period was sometimes unpaid, and employers would lay off apprentices after one season rather than
increase their pay."

Thursday, February 4, 2016

Keynes on "Ruthless Truth-Telling"--and the IMF Connection

Back in 2006, Mervyn King--who was then the Governor of the Bank of England--gave a talk about "Reform of the International Monetary Fund," in which he offered a lovely snippet of rhetoric from John Maynard Keynes. In talking about how the IMF must persuade, rather than order or mandate, King said: 
With countries naturally reluctant to cede any control over their own monetary and fiscal policies, it is likely that the IMF will have as instruments only the powers of analysis, persuasion, and, in Keynes’ own favourite words, “ruthless truth-telling”.
That phrase "ruthless truth-telling" struck a chord, and  quick Google search will confirm that it has been cited in many places since. I ran across it again in editing the article by Barry Eichengreen and Ngaire Woods in their article on "The IMF’s Unmet Challenges," which appears in the just-released Winter 2016 issue of the Journal of Economic Perspectives.  But what I hadn't known, until the authors told me, was that when Keynes mentioned "ruthless truth-telling," he wasn't actually commenting about the IMF at all. Instead, the phrase appears in a letter that Keynes wrote to General Jan Smuts on November 27, 1919. It appears in The Collected Writings of John Maynard Keynes, edited by Elizabeth Johnson and Donald Moggridge, in Volume 17, Activities 1920–1922: Treaty Revision and Reconstruction (pp. 7-8)

At the time, Keynes is about to publish The Economic Consequences of the Peace, which suggested that the Versailles Treaty at the end of World War I was far too harsh toward Germany, and thus was likely to lead to future conflict. The book was a best-seller, and it's one reason why the very different approach of the Marshall plan was politically acceptable after World War IL But back in 1919, copies of the manuscript have been circulating, and Keynes has been receiving mostly friendly criticism from a variety of early readers. Here's a snippet from the letter that Keynes wrote to Smuts on November 27, 1919:

My book is completed and will be issued in a fortnight's time. I am now so saturated with it that I am quite unable to make any judgement on its contents. But the general condition of Europe at this moment seems to demand some attempt at an éclairecissement of the situation created by the treaty, even more than when I first sat down to write. We are faced not only by the isolation policy of the U.S., but also by a very similar tendency in this country. There is a growing an intelligible disposition to withdraw (like America), so far as we can, from the complexity, the expense, and the unintelligibility of the European problems: and particularly as regards financial assistance, the Treasury is inclined, partly as a result of our own financial difficulties and partly because of the hopelessness of doing anything effective in the absence of American help, to let Europe stew. Also anti-German feeling here is, still, stronger than I should have expected.  But perhaps most alarming is the lethargy of the European people themselves. They seem to have no plan; they take hardly any steps to help themselves; and even their appeals appear half-hearted. It looks as though we were in for a slow steady deterioration of the general conditions of human life, rather than for any sudden upheaval or catastrophe. But one can't tell. 
Anyhow, attempts to humour or placate Americans or anyone else seem quite futile, and I personally despair of results from anything except violent and ruthless truth-telling--that will work in the end, even if slowly.  
There is of course some irony that a phrase about "ruthless truth-telling" is often used out of its context as if Keynes was referring to the IMF. But the hope that "violent and ruthless truth-telling ... will work in the end, even if slowly," remains perpetually relevant.

(Full disclosure: I've been Managing Editor of the Journal of Economic Perspectives since the inception of the journal in 1987. All JEP articles back to the first issue are freely available on-line compliments of the journal's publisher, the American Economic Association.)

Wednesday, February 3, 2016

Winter 2016 Journal of Economic Perspectives Available Online

For about 30 years now, my actual paid job (as opposed to my blogging hobby) has been Managing Editor of the Journal of Economic Perspectives. The journal is published by the American Economic Association, which back in 2011 made the decision--much to my delight--that the journal would be freely available on-line, from the current issue back to the first issue in 1987. Here, I'll start with Table of Contents for the just-released Winter 2016 issue. Below are abstracts and direct links for all of the papers. I will almost certainly blog about some of the individual papers in the next week or two, as well.


Symposium: The Bretton Woods Institutions

"The International Monetary Fund: 70 Years of Reinvention," by Carmen M. Reinhart and Christoph Trebesch
A sketch of the International Monetary Fund's 70-year history reveals an institution that has reinvented itself over time along multiple dimensions. This history is primarily consistent with a "demand driven" theory of institutional change, as the needs of its clients and the type of crisis changed substantially over time. Some deceptively "new" IMF activities are not entirely new. Before emerging market economies dominated IMF programs, advanced economies were its earliest (and largest) clients through the 1970s. While currency problems were the dominant trigger of IMF involvement in the earlier decades, banking crises and sovereign defaults became the key focus after the 1980s. Around this time, the IMF shifted from providing relatively brief (and comparatively modest) balance-of-payments support in the era of fixed exchange rates to coping with more chronic debt sustainability problems that emerged with force in th e developing economies and have now migrated to advanced economies. As a consequence, the IMF has engaged in "serial lending," with programs often spanning decades. Moreover, the institution faces a growing risk of lending into insolvency; this has been most evident in Greece since 2010. We conclude with the observation that the IMF's role as an international lender of last resort is endangered.
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"The IMF's Unmet Challenges," by Barry Eichengreen and Ngaire Woods
The International Monetary Fund is a controversial institution whose interventions regularly provoke passionate reactions. We will argue that there is an important role for the IMF in helping to solve information, commitment, and coordination problems with significant implications for the stability of national economies and the international monetary and financial system. In executing these functions, the effectiveness of the IMF, like that of a football referee, depends on whether the players see it as competent and impartial. We will argue that the Fund's perceived competence and impartiality, and hence its effectiveness, are limited by its failure to meet four challenges—concerning the quality of its surveillance (of individual countries, groups of countries, and the global system); the relevance of conditionality in loan contracts; the utility of the Fund's approach to debt problems; and the Fund's failure to adopt a system of governance that gives appropriate voice to different stakeholders. These problems of legitimacy will have to be addressed in order for the IMF to play a more effective role in the 21st century.
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"The New Role for the World Bank," by Michael A. Clemens and Michael Kremer
The World Bank was founded to address what we would today call imperfections in international capital markets. Its founders thought that countries would borrow from the Bank temporarily until they grew enough to borrow commercially. Some critiques and analyses of the Bank are based on the assumption that this continues to be its role. For example, some argue that the growth of private capital flows to the developing world has rendered the Bank irrelevant. However, we will argue that modern analyses should proceed from the premise that the World Bank's central goal is and should be to reduce extreme poverty, and that addressing failures in global capital markets is now of subsidiary importance. In this paper, we discuss what the Bank does: how it spends money, how it influences policy, and how it presents its mission. We argue that the role of the Bank is now best understood as facilitating international agreements to redu ce poverty, and we examine implications of this perspective.
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"The World Bank: Why It Is Still Needed and Why It Still Disappoints," by Martin Ravallion
Does the World Bank still have an important role to play? How might it fulfill that role? The paper begins with a brief account of how the Bank works. It then argues that, while the Bank is no longer the primary conduit for capital from high-income to low-income countries, it still has an important role in supplying the public good of development knowledge—a role that is no less pressing today than ever. This argument is not a new one. In 1996, the Bank's President at the time, James D. Wolfensohn, laid out a vision for the "knowledge bank," an implicit counterpoint to what can be called the "lending bank." The paper argues that the past rhetoric of the "knowledge bank" has not matched the reality. An institution such as the World Bank—explicitly committed to global poverty reduction—should be more heavily invested in knowing what is needed in its client countries as well as in international coordination. It should be consi stently arguing for well-informed pro-poor policies in its member countries, tailored to the needs of each country, even when such policies are unpopular with the powers-that-be. It should also be using its financial weight, combined with its analytic and convening powers, to support global public goods. In all this, there is a continuing role for lending, but it must be driven by knowledge—both in terms of what gets done and how it is geared to learning. The paper argues that the Bank disappoints in these tasks but that it could perform better.
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"The World Trade Organization and the Future of Multilateralism," by Richard Baldwin
When the General Agreement on Tariffs and Trade was signed by 23 nations in 1947, the goal was to establish a rules-based world trading system and to facilitate mutually advantageous trade liberalization. As the GATT evolved over time and morphed into the World Trade Organization in 1993, both goals have largely been achieved. The WTO presides over a rule-based trading system based on norms that are almost universally accepted and respected by its 163 members. Tariffs today are below 5 percent on most trade, and zero for a very large share of imports. Despite its manifest success, the WTO is widely regarded as suffering from a deep malaise. The main reason is that the latest WTO negotiation, the Doha Round, has staggered between failures, flops, and false dawns since it was launched in 2001. But the Doha logjam has not inhibited tariff liberalization far from it. During the last 15 years, most WTO members have massively lowered barriers to tr ade, investment, and services bilaterally, regionally, and unilaterally—indeed, everywhere except through the WTO. For today's offshoring-linked international commerce, the trade rules that matter are less about tariffs and more about protection of investments and intellectual property, along with legal and regulatory steps to assure that the two-way flows of goods, services, investment, and people will not be impeded. It's possible to imagine a hypothetical WTO that would incorporate these rules. But the most likely outcome for the future governance of international trade is a two-pillar structure in which the WTO continues to govern with its 1994-era rules while the new rules for international production networks are set by a decentralized process of sometimes overlapping and inconsistent mega-regional agreements.
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"Will We Ever Stop Using Fossil Fuels?" by Thomas Covert, Michael Greenstone and Christopher R. Knittel
Scientists believe significant climate change is unavoidable without a drastic reduction in the emissions of greenhouse gases from the combustion of fossil fuels. However, few countries have implemented comprehensive policies that price this externality or devote serious resources to developing low-carbon energy sources. In many respects, the world is betting that we will greatly reduce the use of fossil fuels because we will run out of inexpensive fossil fuels (there will be decreases in supply) and/or technological advances will lead to the discovery of less-expensive low-carbon technologies (there will be decreases in demand). The historical record indicates that the supply of fossil fuels has consistently increased over time and that their relative price advantage over low-carbon energy sources has not declined substantially over time. Without robust efforts to correct the market failures around greenhouse gases, relying on supply and/or demand forces to limit greenhouse gas emissions is relying heavily on hope.
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"Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us," by Christiane Baumeister and Lutz Kilian
It has been 40 years since the oil crisis of 1973/74. This crisis has been one of the defining economic events of the 1970s and has shaped how many economists think about oil price shocks. In recent years, a large literature on the economic determinants of oil price fluctuations has emerged. Drawing on this literature, we first provide an overview of the causes of all major oil price fluctuations between 1973 and 2014. We then discuss why oil price fluctuations remain difficult to predict, despite economists' improved understanding of oil markets. Unexpected oil price fluctuations are commonly referred to as oil price shocks. We document that, in practice, consumers, policymakers, financial market participants, and economists may have different oil price expectations, and that, what may be surprising to some, need not be equally surprising to others.
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"Using Natural Resources for Development: Why Has It Proven So Difficult?" by Anthony J. Venables
Developing economies have found it hard to use natural resource wealth to improve their economic performance. Utilizing resource endowments is a multistage economic and political problem that requires private investment to discover and extract the resource, fiscal regimes to capture revenue, judicious spending and investment decisions, and policies to manage volatility and mitigate adverse impacts on the rest of the economy. Experience is mixed, with some successes (such as Botswana and Malaysia) and more failures. This paper reviews the challenges that are faced in successfully managing resource wealth, the evidence on country performance, and the reasons for disappointing results.
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"Power Laws in Economics: An Introduction," by Xavier Gabaix
Many of the insights of economics seem to be qualitative, with many fewer reliable quantitative laws. However a series of power laws in economics do count as true and nontrivial quantitative laws—and they are not only established empirically, but also understood theoretically. I will start by providing several illustrations of empirical power laws having to do with patterns involving cities, firms, and the stock market. I summarize some of the theoretical explanations that have been proposed. I suggest that power laws help us explain many economic phenomena, including aggregate economic fluctuations. I hope to clarify why power laws are so special, and to demonstrate their utility. In conclusion, I list some power-law-related economic enigmas that demand further exploration.
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"Roland Fryer: 2015 John Bates Clark Medalist," by Lawrence F. Katz
Roland Fryer is an extraordinary applied microeconomist whose research output related to racial inequality, the US racial achievement gap, and the design and evaluation of educational policies make him a worthy recipient of the 2015 John Bates Clark Medal. I will divide this survey of Roland's research into five categories: the racial achievement gap, education policies and reforms, economics of social interactions, the economics of discrimination and anti-discrimination policies, and further topics involving the black-white racial divide.
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"Retrospectives: What Did the Ancient Greeks Mean by Oikonomia?" by Dotan Leshem
Nearly every economist has at some point in the standard coursework been exposed to a brief explanation that the origin of the word "economy" can be traced back to the Greek wordoikonomia, which in turn is composed of two words: oikos, which is usually translated as "household"; and nemein, which is best translated as "management and dispensation." Thus, the cursory story usually goes, the term oikonomia referred to "household management", and while this was in some loose way linked to the idea of budgeting, it has little or no relevance to contemporary economics. This article introduces in more detail what the ancient Greek philosophers meant by "oikonomia." It begins with a short history of the word. It then explores some of the key elements of oikonomia, while offering some comparisons and contrasts with modern economic thought. For example, both Ancient Greek oikonomia and contemporary economics study human behavior as a relationship between ends and means which have alternative uses. However, while both approaches hold that the rationality of any economic action is dependent on the frugal use of means, contemporary economics is largely neutral between ends, while in ancient economic theory, an action is considered economically rational only when taken towards a praiseworthy end. Moreover, the ancient philosophers had a distinct view of what constituted such an end—specifically, acting as a philosopher or as an active participant in the life of the city-state.
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"Recommendations for Further Reading," by Timothy Taylor
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"The Doing Business Project: How It Started," correspondence from Simeon Djankov
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Interview with Timothy Taylor: Thoughts on Business and Government

Back in late November, I posted about a quotation that I have used in classroom lectures and put up on the bulletin board outside my office about the different roles that should be played by government and business. It's from from an October 1990 opinion column by Donald Kaul, who was a prominent opinion columnist, mainly with the Des Moines Register, from the 1970s through the 1990s. Kaul wrote: 
We have come to rely upon capitalism for justice and the government for economic stimulation, precisely the opposite of what reason would suggest. Capitalism does not produce justice, any more than knife fights do. It produces winners and energy and growth. It is the job of government to channel that energy and growth into socially useful avenues, without stifling what it seeks to channel. That's the basic problem of our form of government: how to achieve a balance between economic vitality and justice. It is a problem that we increasingly ignore.

Russ Roberts, who runs the EconTalk portion of the ever-useful Library of Economics and Liberty website, talked with me about differentiating the roles of economics and government in a conversational ramble posted on that website earlier this week. (If you're not familiar with EconTalk, it's a series of one-hour podcasts that can be listened to online or downloaded with a wide variety of people: for example, the four podcasts posted in January were with Nobel laureate James Heckman, with an expert on the secondary market for collectible sneakers named Josh Luber, with Greg Ip of the Wall Street Journal about his new book Foolproof, and with economist Robert Frank who thinks a lot about economic puzzles in everyday life like "why grooms typically rent tuxedos but the bride usually buys her gown, why bicycles can be more expensive to rent than cars, the effects of the price of corn on the price of pork, and why scammers who invoke Nigeria keep using the same old story."

Regular readers of this website will recognize in the interview with me some issues that have been documented on this website over time. Here are a couple of my comments from the uncorrected transcript. 

On wanting businesses to focus on their capitalistic knife fight
Well, I guess when I look out there for concerns, for example, about health care or about fair wages or benefits for people, there are just a wide variety of things that--you think about companies where we are always sort of telling them to do these things. You know, we are telling them to, you know, provide job training. We tell the private sector, with the housing permits, to build a certain amount of affordable housing. And to build parking spaces, and to clean up the environment. And it's not that the instinct behind those things is necessarily completely wrong. As I was saying at the beginning: I think that there is a role for government regulation of different kinds. But I guess I am often put in mind of the stories about golden geese and eggs and what happens if you don't pay attention to your golden geese.
There is evidence out there, the last 10 or 15 years that the rate of startups in the U.S. economy has been steadily diminishing--not just since the Recession, but since the late 1990s. And that a smaller share of the workforce now works for smaller companies than used to, 10, 15, 20 years ago. I think that--I sometimes think to myself: If someone came along like the modern Henry Ford and had an idea for an enormous factory which would provide an enormous number of jobs to the working middle class, where could that modern Henry Ford build that factory? Would they even be able to build it? At least in any urban area in the United States? Or would they be swamped for 5 or 10 or 15 years in permits and regulations and zoning and traffic and on and on and on? And I think that we are in danger of looking at the private sector as that golden goose, that we can just tell it to do things. And what we really want companies to do, we really want them to engage in that capitalistic knife fight. We really want them to focus their energy on: how do you make things, and things better? We really want them to compete with each. We don't want them to compete on the basis of who can survive the ordeal of getting a zoning permit. And so--I think we are in some danger of making it much harder for both small companies to get started and also for the companies that we tend to glamorize--you know, the old big auto companies, the companies that had huge numbers of middle class jobs--we've made it very difficult for a company like that to keep functioning, if one did come along and was trying to grow. ... 

It has to come from someplace

[Y]ou are reminding me a little bit of a conversation I had with an old friend of mine a few years back, a non-economist. We were talking about the minimum wage and I was trying to explain sort of an economic viewpoint of the minimum wage--in a nonpartisan kind of way. So what I was sort of saying was, 'Look, minimum wage, the extra money for that minimum wage, it has to come from someplace. And maybe it comes from hiring fewer workers or maybe it comes from more productivity or maybe it comes from cutting certain job perks or it comes from higher prices to consumers or it comes from lower wages--but it comes from some place. And so, without specifying the place, you have to understand where it comes from. And you have to think about that tradeoff.' And my friend looked at me for a long slow moment and said, 'You know, I really don't like to think of the world that way.' ...  And I thought to myself, 'That's just a perfect answer.' Because it was an honest answer and it was an accurate answer. But that sense of:' I just don't like to think of the world that way' seems to me the sort of thing you are talking about. And I guess--we're both trained as economists and so we're both almost forced by our way of thinking to think about the world in that kind of a way. 
[T]here's this movie, I don't know, maybe 20 years ago now, called Dave. I don't know if you remember. It was back in the 1990s. It had Kevin Kline, who I really like. ... And at the tail end of the movie--so the movie is kind of doofus ordinary guy ends up as President; comedy results. And then at the very end of the movie he has his big breakthrough, leadership breakthrough; and his leadership breakthrough was he would just pass a law and guarantee everyone a job so there would no longer be any unemployment. ... And I remember thinking to myself: Yeah, you know, you don't think this has ever occurred to anybody before? It didn't occur to anybody in Sweden or Japan or Germany? No other countries figured out: Oh, yeah, if we just passed that law--you just sort of think--I think a lot of people think that way: Why don't we just get rid of unemployment and give everybody a job? And of course if you think about the tradeoffs, you think to yourself: Do you have to take the job they offer you? Do you have to take the pay they offer you? Can they make you move? How do private sector employers react to these jobs? What would the cost be of it? Can you fire people? It's on and on and on. But as my friend said: 'I just don't like to think about it that way.' So I think that's really an important thing to think about.

Tuesday, February 2, 2016

Interview with Richard Thaler: More on Behavioral Economics

James Guszcza has a lively interview with Richard Thaler in the Deloitte Review (Issue 18, published January 26, 2016). Last week I offered a link to video and slides from Thaler's Presidential Address to the American Economic Association in early January on the subject of "Behavioral Economics: Past, Present and Future." The interview covers the same broad subject, but in a more free-flowing way. Here are a few of Thaler's comments.

On life among the Econ: 
"Economists assume that the people they study, so called homo economicus, or what I call Econs, are really smart. They know as much economics as the best economist. They make perfect forecasts, have no self-control problems and are complete jerks. They’ll steal your money if they can and get away with it. Most of the people I meet don’t have any of those qualities. They have trouble balancing their checkbook without a spreadsheet. They eat too much and save too little. But nevertheless they’ll leave a tip at a restaurant even if they don’t plan to go back. So for the last four decades I’ve been pleading with economists that we should be studying Humans, not these mythical Econ creatures." 
(The description of economists as a tribe of Econ traces back to a very funny satire written in 1973 by an economist named Axel Leijonhufvud, called "Life Among the Econ," which was published in what was then called the Western Economic Journal, now known as Economic Inquiry (Septermber 1973, 11:3, pp. 327-337). The opening lines are: "The Econ tribe occupies a vast territory in the far North. Their land appears bleak and dismal to the outsider, and travelling through it makes for rough sledding; but the Econ, through a long period of adaptation, have learned to wrest a living of sorts from it. They are not without some genuine and sometimes even fierce attachment to their ancestral grounds, and their young are brought up to feel contempt for the softer living in the warmer lands of their neighbours. such as the Polscis and the Sociogs." Now back to Thaler.)

On whether financial markets are efficient:
"The efficient market hypothesis has two components that I call the “no free lunch” component and the “price is right.” The no-free-lunch component says you can’t beat the market. And I would say that component of the hypothesis is at least approximately true. Most active managers fail to beat their passive benchmarks. The active management industry as a whole doesn’t really provide much in the way of value. I say that as a principal in an active money management firm where we do think we provide value. But the industry we belong to as a whole doesn’t seem to. So I think that part is reasonably true. And nobody’s ever really been hurt by assuming that they can’t beat the market. Certainly individual investors would probably be better off if they believed that.
"The more important part is the “price is right” component, which is saying that asset prices are equal to the true intrinsic value. ... But there are these little cases where we can see “misbehaving” up close and personal. Here’s a current one involving a closed-end mutual fund. I should say a closed-end mutual fund is a kind of mutual fund where the managers collect a pot of money and invest it and then the shares in the fund are traded and the prices of the fund can diverge from the value of the assets that they own. ...  One of these closed-end funds happens to have the ticker symbol CUBA. Now, in spite of having the CUBA ticker symbol, it of course has never invested in Cuba, which would be illegal. And even if it weren’t illegal, there are no securities to buy. So it really has nothing to do with Cuba. For years it was selling for about a 10 or 15 percent discount. The day that President Obama announced his intention to relax relations with Cuba, it went to a 70 percent premium. And it’s now selling for about a 40 percent premium. If anybody can explain to me why that’s rational and what it would have to do with the possible relaxation of relations with Cuba, let me know."
Fairness and long-term profit maximization
"It seems clear to me that firms have lots of social responsibilities that are perfectly consistent with profit maximization if they care about the long run. ... Here’s an example ...The morning after a blizzard, a hardware store that has been selling snow shovels for $15 raises the price to $20. Is that fair? People hate it. Now I asked my MBA students that question and most of them thought it was just fine. After all, that was the correct answer in a different course, right? In their microeconomics class, they would say there’s a fixed supply, demand shifts to the right, and the price goes up. Now what do real firms do? ... Home Depot . . . whoever else is doing this, they want to be around for the long run. And if they double the price of plywood the day after a hurricane, good luck getting people to come in and buy all the stuff they’re going to need to remodel their house. So firms that act responsibly are going to have loyal customers over the long run. And that just makes sense. And so maximize profits, sure, but make sure you’re maximizing  profits over the long run, not over a week."
Nudging for good or evil
"In the book Nudge we coined the term “choice architecture.” The idea is you can design the environment in which people choose to help them make better decisions. ... Now, that said, whenever anybody asks me to sign a copy of Nudge I always write “nudge for good.” And that’s a plea, not an expectation. Firms can nudge for good or for evil."
Rationality May Need Some Nudging
"Keep in mind that I am still an economist at heart. I would like markets to be more efficient. ... I’m a believer in rational behavior as a goal. I just don’t think people are very good at it on their own, so we should help if we can."

Monday, February 1, 2016

Economics of Free Parking

There's an argument a few blocks down from where I work about whether to install parking meters in a small-but-busy shopping district, and judging from some of the rhetoric, we should give strong consideration to amending the Declaration of Independence so that we can be endowed by our Creator with certain unalienable rights, Life, Liberty, Free Parking, and Other Less Important Aspects of the Pursuit of Happiness. Eren Inci asks "Who Pays for Free Parking?" in the Milken Institute Review (First Quarter 2016, pp. 66-74). He starts with the obvious point that a parking space can be a a substantial resource.
"For starters, most economic transactions you make depend in part on the ability of someone (you, a long-haul trucker, the UPS delivery person, an ambulance driver, and so on) to park. And stationary vehicles occupy vast amounts of land everywhere in the world. Indeed, a simple back-of-the-envelope calculation suggests that, in the United States, parking takes up more space than the whole state of Massachusetts. In Europe, where cars are smaller and fewer in number, parking still takes up an area half the size of Belgium."
The discussion in this article focuses on free parking in two particular contexts: Inci suggests that there is a plausible if unexpected economic justification for free parking at shopping malls, but not in residential urban areas. Here's his explanation on free parking at shopping malls.
 One can think of shopping as participation in a lottery of sorts in which shoppers either win (find what they’re looking for) or lose (don’t find it). Shoppers who make the purchases leave the mall satisfied. But, of course, not all mall trips have happy endings: sometimes shoppers leave emptyhanded. Since they “pay” for parking only by making purchases at prices that include an implicit charge for parking, those who buy nothing don’t pay for parking. Thus, in a very real sense, bundling the cost of parking with the price of goods is a form of insurance for shoppers: if they don’t buy, they pay nothing; if they do buy, they effectively pay for the parking of unsuccessful shoppers as well as their own. ...  Shopping-mall parking may appear to be free, but in fact you pay for it every time you buy something at the mall. Happily, though, what looks like distorted pricing serves the broader interests of society as well as those of the mall owners.
Here's the argument about free parking in urban areas:
Although there has been a trend away from free to paid curbside parking almost everywhere as municipalities attempt to generate revenue and ration scarce space, there is still an enormous amount of free curbside parking available.But if you live in a place with free parking, don’t be so sure you’re the lucky one. Our research suggests that at least some of the value of that free parking is reflected in your rent or in the market value of your home. So, the issue is not whether you pay, but how you pay – directly or bundled in the cost of housing. This will all be clearer if we first look at onsite parking that is sold as a bundle with housing. Most cities impose minimum parking requirements that determine how many parking spaces each new land use must include. In most American cities, developers must provide at least one and, in many cases, two spaces for each housing unit. This is no small deal: after taking into account the space allocated for ramps and maneuvering, the area occupied by two parking spaces is usually larger than a two-bedroom apartment. ... In fact, Michael Manville of Cornell University found that in San Francisco bundled parking increases the average asking price for an apartment by $22 per square foot. ... Curbside parking in front of your house may also appear to be free, but in fact its costs are already capitalized in housing prices and rents. Although I can’t claim the last word on the subject, our estimate hints that free curbside parking produces negative welfare consequences.
There's also an interesting discussion of what happened in Istanbul, when the city decided to move away from an "informal" system of paying for parking, in which "self-appointed parking attendants stood by the road and demanded money to “protect” parked cars," to a formal anc city-run system of paying for parking.

For a couple of earlier posts on the economics of parking, see: