Thursday, November 23, 2017

The Origins of Thanksgiving as an Official Holiday

Thanksgiving is a day for a traditional menu, and I take a holiday by reprinting this annual column on the origins of the day:

The first presidential proclamation of Thanksgiving as a national holiday was issued by George Washington on October 3, 1789. But it was a one-time event. Individual states (especially those in New England) continued to issue Thanksgiving proclamations on various days in the decades to come. But it wasn't until 1863 when a magazine editor named Sarah Josepha Hale, after 15 years of letter-writing, prompted Abraham Lincoln in 1863 to designate the last Thursday in November as a national holiday--a pattern which then continued into the future.

An original and thus hard-to-read version of George Washington's Thanksgiving proclamation can be viewed through the Library of Congress website. The economist in me was intrigued to notice that some of the causes for giving of thanks included "the means we have of acquiring and diffusing useful knowledge ... the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best."

Also, the original Thankgiving proclamation was not without some controversy and dissent in the House of Representatives, as an example of unwanted and inappropriate federal government interventionism. As reported by the Papers of George Washington website at the University of Virginia.
The House was not unanimous in its determination to give thanks. Aedanus Burke of South Carolina objected that he “did not like this mimicking of European customs, where they made a mere mockery of thanksgivings.” Thomas Tudor Tucker “thought the House had no business to interfere in a matter which did not concern them. Why should the President direct the people to do what, perhaps, they have no mind to do? They may not be inclined to return thanks for a Constitution until they have experienced that it promotes their safety and happiness. We do not yet know but they may have reason to be dissatisfied with the effects it has already produced; but whether this be so or not, it is a business with which Congress have nothing to do; it is a religious matter, and, as such, is proscribed to us. If a day of thanksgiving must take place, let it be done by the authority of the several States.”

Here's the transcript of George Washington's Thanksgiving proclamation from the National Archives.
Thanksgiving Proclamation
By the President of the United States of America. a Proclamation.
Whereas it is the duty of all Nations to acknowledge the providence of Almighty God, to obey his will, to be grateful for his benefits, and humbly to implore his protection and favor—and whereas both Houses of Congress have by their joint Committee requested me “to recommend to the People of the United States a day of public thanksgiving and prayer to be observed by acknowledging with grateful hearts the many signal favors of Almighty God especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness.”
Now therefore I do recommend and assign Thursday the 26th day of November next to be devoted by the People of these States to the service of that great and glorious Being, who is the beneficent Author of all the good that was, that is, or that will be—That we may then all unite in rendering unto him our sincere and humble thanks—for his kind care and protection of the People of this Country previous to their becoming a Nation—for the signal and manifold mercies, and the favorable interpositions of his Providence which we experienced in the course and conclusion of the late war—for the great degree of tranquillity, union, and plenty, which we have since enjoyed—for the peaceable and rational manner, in which we have been enabled to establish constitutions of government for our safety and happiness, and particularly the national One now lately instituted—for the civil and religious liberty with which we are blessed; and the means we have of acquiring and diffusing useful knowledge; and in general for all the great and various favors which he hath been pleased to confer upon us.
and also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech him to pardon our national and other transgressions—to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually—to render our national government a blessing to all the people, by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed—to protect and guide all Sovereigns and Nations (especially such as have shewn kindness unto us) and to bless them with good government, peace, and concord—To promote the knowledge and practice of true religion and virtue, and the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best.
Given under my hand at the City of New-York the third day of October in the year of our Lord 1789.
Go: Washington
Sarah Josepha Hale was editor of a magazine first called Ladies' Magazine and later called Ladies' Book from 1828 to 1877. It was among the most widely-known and influential magazines for women of its time. Hale wrote to Abraham Lincoln on September 28, 1863, suggesting that he set a national date for a Thankgiving holiday. From the Library of Congress, here's a PDF file of the Hale's actual letter to Lincoln, along with a typed transcript for 21st-century eyes. Here are a few sentences from Hale's letter to Lincoln:
"You may have observed that, for some years past, there has been an increasing interest felt in our land to have the Thanksgiving held on the same day, in all the States; it now needs National recognition and authoritive fixation, only, to become permanently, an American custom and institution. ... For the last fifteen years I have set forth this idea in the "Lady's Book", and placed the papers before the Governors of all the States and Territories -- also I have sent these to our Ministers abroad, and our Missionaries to the heathen -- and commanders in the Navy. From the recipients I have received, uniformly the most kind approval. ... But I find there are obstacles not possible to be overcome without legislative aid -- that each State should, by statute, make it obligatory on the Governor to appoint the last Thursday of November, annually, as Thanksgiving Day; -- or, as this way would require years to be realized, it has ocurred to me that a proclamation from the President of the United States would be the best, surest and most fitting method of National appointment. I have written to my friend, Hon. Wm. H. Seward, and requested him to confer with President Lincoln on this subject ..."
William Seward was Lincoln's Secretary of State. In a remarkable example of rapid government decision-making, Lincoln responded to Hale's September 28 letter by issuing a proclamation on October 3. It seems likely that Seward actually wrote the proclamation, and then Lincoln signed off. Here's the text of Lincoln's Thanksgiving proclamation, which characteristically mixed themes of thankfulness, mercy, and penitence:

Washington, D.C.
October 3, 1863
By the President of the United States of America.
A Proclamation.
The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God. In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union. Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consiousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom. No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquillity and Union.
In testimony whereof, I have hereunto set my hand and caused the Seal of the United States to be affixed.
Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the United States the Eighty-eighth.
By the President: Abraham Lincoln
William H. Seward,
Secretary of State

An Economist Chews over Thanksgiving

As Thanksgiving preparations arrive, I naturally find my thoughts veering to the evolution of demand for turkey, technological change in turkey production, market concentration in the turkey industry, and price indexes for a classic Thanksgiving dinner. Not that there's anything wrong with that. [Note: This is an updated and amended version of a post that was first published on Thanksgiving Day 2011.]

The last time the U.S. Department of Agriculture did a detailed "Overview of the U.S. Turkey Industry" appears to be back in 2007, although an update was published in April 2014 . Some themes about the turkey market waddle out from those reports on both the demand and supply sides.

On the demand side, the quantity of turkey per person consumed rose dramatically from the mid-1970s up to about 1990, but then declined somewhat, but appears to have made a modest recovery in the last couple of years The figure below is from the website run by the National Turkey Federation.

On the production side, the National Turkey Federation explains: "Turkey companies are vertically integrated, meaning they control or contract for all phases of production and processing - from breeding through delivery to retail." However, production of turkeys has shifted substantially, away from a model in which turkeys were hatched and raised all in one place, and toward a model in which the steps of turkey production have become separated and specialized--with some of these steps happening at much larger scale. The result has been an efficiency gain in the production of turkeys. Here is some commentary from the 2007 USDA report, with references to charts omitted for readability:

"In 1975, there were 180 turkey hatcheries in the United States compared with 55 operations in 2007, or 31 percent of the 1975 hatcheries. Incubator capacity in 1975 was 41.9 million eggs, compared with 38.7 million eggs in 2007. Hatchery intensity increased from an average 33 thousand egg capacity per hatchery in 1975 to 704 thousand egg capacity per hatchery in 2007.
Some decades ago, turkeys were historically hatched and raised on the same operation and either slaughtered on or close to where they were raised. Historically, operations owned the parent stock of the turkeys they raised while supplying their own eggs. The increase in technology and mastery of turkey breeding has led to highly specialized operations. Each production process of the turkey industry is now mainly represented by various specialized operations.
Eggs are produced at laying facilities, some of which have had the same genetic turkey breed for more than a century. Eggs are immediately shipped to hatcheries and set in incubators. Once the poults are hatched, they are then typically shipped to a brooder barn. As poults mature, they are moved to growout facilities until they reach slaughter weight. Some operations use the same building for the entire growout process of turkeys. Once the turkeys reach slaughter weight, they are shipped to slaughter facilities and processed for meat products or sold as whole birds.
Turkeys have been carefully bred to become the efficient meat producers they are today. In 1986, a turkey weighed an average of 20.0 pounds. This average has increased to 28.2 pounds per bird in 2006. The increase in bird weight reflects an efficiency gain for growers of about 41 percent."
The 2014 report points out that the capacity of eggs per hatchery has continued to rise (again, references to charts omitted):
"For several decades, the number of turkey hatcheries has declined steadily. During the last six years, however, this decrease began to slow down. As of 2013, there are 54 turkey hatcheries in the United States, down from 58 in 2008, but up from the historical low of 49 reached in 2012. The total capacity of these facilities remained steady during this period at approximately 39.4 million eggs. The average capacity per hatchery reached a record high in 2012. During 2013, average capacity per hatchery was 730 thousand (data records are available from 1965 to present)."
U.S. agriculture is full of examples of remarkable increases in yields over perionds of a few decades, but they always drop my jaw. I tend to think of a "turkey" as a product that doesn't have a lot of opportunity for technological development, but clearly I'm wrong. Here's a graph showing the rise in size of turkeys over time from the 2007 report.

The production of turkey remains an industry that is not very concentrated, with three relatively large producers and then more than a dozen mid-sized producers. Here's a list of top turkey producers in 2015 from the National Turkey Federation:
Given this reasonably competitive environment, it's interesting to note that the price markups for turkey--that is, the margin between the wholesale and the retail price--tend to decline around Thanksgiving, which obviously helps to keep the price lower for consumers. Mildred Haley of the US Department of Agriculture spells this out in the "Livestock, Dairy, and Poultry Outlook" report of October 2017. The vertical lines in the figure show that the markups clearly fall around Thanksgiving.

In the past, the US turkey industry has at some times suffers from outbreaks of HPAI
(Highly Pathogenic Avian Influenza): for discussion of the 2015 outbreak, see the November 17, 2015 issue of the "Livestock, Dairy, and Poultry Outlook" from the US Department of Agriculture, Kenneth Mathews and Mildred Haley offer some details. But for Thanksgiving 2017, supply seems to have remained strong and turkey prices are down a bit.

For some reason, this entire post is reminding me of the old line that if you want to have free-flowing and cordial conversation at dinner party, never seat two economists beside each other. Did I mention that I make an excellent chestnut stuffing?

Anyway, the starting point for measuring inflation is to define a relevant "basket" or group of goods, and then to track how the price of this basket of goods changes over time. When the Bureau of Labor Statistics measures the Consumer Price Index, the basket of goods is defined as what a typical U.S. household buys. But one can also define a more specific basket of goods if desired, and since 1986, the American Farm Bureau Federation has been using more than 100 shoppers in states across the country to estimate the cost of purchasing a Thanksgiving dinner. The basket of goods for their Classic Thanksgiving Dinner Price Index looks like this:

The cost of buying the Classic Thanksgiving Dinner actually declined by a bit in 2017, falling to $49.12 from $49.87 in 2016. The top line of the graph that follows shows the nominal price of purchasing the basket of goods for the Classic Thanksgiving Dinner. The lower line on the graph shows the price of the Classic Thanksgiving Dinner adjusted for the overall inflation rate in the economy. The line is relatively flat, which means that inflation in the Classic Thanksgiving Dinner has actually been a pretty good measure of the overall inflation rate.

Thanksgiving is a distinctively American holiday, and it's my favorite. Good food, good company, no presents--and all these good topics for conversation. What's not to like?

Wednesday, November 22, 2017

The Dominance of Peoria in the Processed Pumpkin Market

As I prepare for a season of pumpkin pie, pumpkin bread (made with cornmeal and pecans), pumpkin soup (especially nice wish a decent champagne) and perhaps a pumpkin ice cream pie (graham cracker crust, of course),  I have been mulling over why the area around Peoria, Illinois, so dominates the production of processed pumpkin.

The facts are clear enough. As the US Department of Agriculture points out (citations omitted): In 2016, farmers in the top 16 pumpkin-producing States harvested 1.1 billion pounds of pumpkins, implying about 1.4 billion pounds harvested altogether in the United States. Production increased 45 percent from 2015 largely due to a rebound in Illinois production. Illinois production, though highly variable, is six times the average of the other top eight pumpkin-producing States (Figure 2).
Production increased 45 percent from 2015 largely due to a rebound in Illinois production. Illinois production, though highly variable, is six times the average of the other top eight pumpkin-producing States.

Not only does Illinois produce more pumpkins, but a much larger share of pumpkins from this state end up being processed, rather than used fresh. The USDA reports:
Illinois harvests the largest share of processing pumpkin acres among all States—almost 80 percent. Michigan is next with a little over 10 percent. Other States harvest less than 5 percent processing pumpkins.

It's not really the entire state of Illinois, either, but mainly an area right around Peoria. The University of Illinois extension service writes: "Eighty percent of all the pumpkins produced commercially in the
U.S. are produced within a 90-mile radius of Peoria, Illinois. Most of those pumpkins are grown for processing into canned pumpkins. Ninety-five percent of the pumpkins processed in the United States are grown in Illinois. Morton, Illinois just 10 miles southeast of Peoria calls itself the `Pumpkin Capital of the World.'"

Why does this area have such dominance? Weather and soil are part of the advantage, but it seems unlikely that the area around Peoria is dramatically distinctive for those reasons alone. This also seems to be a case where an area got a head-start in a certain industry, established economies of scale and expertise, and has thus continued to keep a lead. The Illinois Farm Bureau writes: "Illinois earns the top rank for several reasons. Pumpkins grow well in its climate and in certain soil types. And in the 1920s, a pumpkin processing industry was established in Illinois, Babadoost [a professor at the University of Illinois] says. Decades of experience and dedicated research help Illinois maintain its edge in pumpkin production." According to one report, Libby’s Pumpkin is "the supplier of more than 85 percent of the world’s canned pumpkin."

The farm price of pumpkins varies considerably across states, which suggests that it is costly to ship substantial quantities of pumpkin across moderate distances. For example, the price of pumpkins is lowest in Illinois, where supply is highest, and the Illinois price is consistently below the price for other nearby Midwestern states. This pattern suggests that the processing plants for pumpkins are most cost-effective when located near the actual production.

While all States see year-to-year changes in price, New York stands out because prices have declined every year since 2011. Illinois growers consistently receive the lowest price because the majority of their pumpkins are sold for processing.

Finally, although my knowledge of recipes for pumpkin is considerably more extensive than my knowledge of supply chain for processed pumpkin, it seems plausible that demand for pumpkin is neither the most lucrative of farm products, nor is it growing quickly, so it hasn't been worthwhile for potential competitors in the processed pumpkin market to try to establish an alternative pumpkin-producing hub somewhere else.

Tuesday, November 21, 2017

Will Artificial Intelligence Recharge Economic Growth?

There may be no more important question for the future of the US economy than whether the ongoing advances in information technology and artificial intelligence will eventually (and this "eventually" is central to their argument) translate into substantial productivity gains. Erik Brynjolfsson, Daniel Rock, and Chad Syverson make the case for optimism in "Artificial Intelligence and the Modern Productivity Paradox: A Clash of Expectations and Statistics" (NBER Working Paper 24001, November 2017). The paper isn't freely available online, but many readers will have access to NBER working papers through their library. The essay will eventually be part of a conference volume on The Economics of Artificial Intelligence

Brynjolfsson, Rock, and Syverson are making several intertwined arguments. One is that various aspects of machine learning and artificial intelligence are crossing important thresholds in the last few years and the next few years. Thus, even though we tend to think of the "computer age" as having already been in place for a few decades, there is a meaningful sense in which we are about to enter another chapter. The other argument is that when a technological disruption cuts across many parts of the economy--that is, when it is a "general purpose technology" as opposed to a more focused innovation--it often takes a substantial period of time before producers and consumers fully change and adjust. In turn, this means a substantial period of time before the new technology has a meaningful effect on measured economic growth. 

As one example of a new threshold in machine learning, consider image recognition. On various standardized tests for image recognition, the error rate for humans is about 5%. In just the last few years, the error rate for image-recognition algorithms is now lower than the human level--and of course the algorithms likely to keep improving. 
There are of course a wide array of similar examples. The authors cite one study in which an artificial intelligence system did as well as a panel of board-certified dermatologists in diagnosing skin cancer. Driverless vehicles are creeping into use. Anyone who uses translation software or software that relied on voice recognition can attest to how much better it has become in the last few years. 

The author also point to an article from the Journal of Economic Perspectives in 2015, in which Gill Pratt pointed out the potentially enormous advantages of artificial intelligence in sharing knowledge and skills. For example, translation software can be updated and improved based on how everyone uses it, not just on one user. They write about Pratt's essay: 
[Artificial intelligence] machines have a new capability that no biological species has: the ability to share knowledge and skills almost instantaneously with others. Specifically, the rise of cloud computing has made it significantly easier to scale up new ideas at much lower cost than before. This is an especially important development for advancing the economic impact of machine learning because it enables cloud robotics: the sharing of knowledge among robots. Once a new skill is learned by a machine in one location, it can be replicated to other machines via digital networks. Data as well as skills can be shared, increasing the amount of data that any given machine learner can use.
However, new technologies like web-based technology, accurate vision, drawing inferences, and communicating lessons don't spread immediately. The authors offer the homely example of the retail industry. The idea or invention of of online sales became practical back in the second half of the 1990s. But many of the companies founded for online-sales during the dot-com boom of the late 1990s failed, and the sector of retail that expanded most after about 2000 was warehouse stores and supercenters, not  online sales. Now, two decades later, online sales have almost reached 10% of total retail. 

Why does it take so long? The theme that Brynjolfsson, Rock, and Syverson emphasize is that a revolution in online sales needs more than an idea. It needs innovations in warehouses, distribution, and the financial security of online commerce. It needs producers to think in terms of how they will produce, package, and ship for online sales. It needs consumers to buy into the process. It takes time. 

The notion that general purpose inventions which cut across many industries will take time to manifest their productivity gains, because of the need for complementary inventions, turns out to be a pattern that has occurred before. 

For economists, the canonical comment on this process in the last few decade is due to Robert Solow (Nobel laureate '87) who wrote in an essay in 1987, "You can see the computer age everywhere but in the productivity statistics" (“We’d better watch out,” New York Times Book Review, July 12, 1987, quotation from p. 36). After all, IBM had been producing functional computers in substantial quantities since the 1950s, but the US productivity growth rate had been slow since the early 1970s. When the personal computer revolution, the internet, and surge of productivity in computer chip manufacturing all hit in force the 1990s, productivity did rise for a time. Brynjolfsson, Rock, and Syverson write: 
"For example, it wasn’t until the late 1980s, more than 25 years after the invention of the integrated circuit, that the computer capital stock reached its long-run plateau at about 5 percent (at historical cost) of total nonresidential equipment capital. It was at only half that level 10 years prior. Thus, when Solow pointed out his now eponymous paradox, the computers were finally just then getting to the point where they really could be seen everywhere."
Going back in history, my favorite example of this lag that it takes for inventions to diffuse broadly is from the invention of the dynamo for generating electricity, a story first told by economic historian Paul David back in a 1991 essay. David points out that large dynamos for generating electricity existed in the 1870s. However, it wasn't until the Paris World Fair of 1900 that electricity was used to illuminate the public spaces of a city. And it's not until the 1920s that innovations based on electricity make a large contribution to US productivity growth. 

Why did it take so long for electricity to spread? Shifting production away from being  powered by waterwheels to electricity was a long process, which involved rethinking, reorganizing, and relocating factories. Products that made use of electricity like dishwashers, radios, and home appliances could not be developed fully or marketed successfully until people had access to electricity in their homes. Large economic and social adjustments take time time.

When it comes to machine learning, artificial intelligence, and economic growth, it's plausible to believe that we are closer to the front end of our economic transition than we are to the middle or the end. Some of the more likely near-term consequences mentioned by Brynjolfsson, Rock, and Syverson include a likely upheaval in the call center industry that employs more than 200,000 US workers, or how automated driverless vehicles (interconnected, sharing information, and learning from each other) will directly alter one-tenth or more of US jobs. My suspicion is that the changes across products and industries will be deeper and more sweeping than I can readily imagine.

Of course, the transition to the artificial intelligence economy will have some bumps and some pain, as did the transitions to electrification and the automobile. But the rest of the world is moving ahead. And history teaches that countries which stay near the technology frontier, and face the needed social adjustments and tradeoffs along the way,  tend to be far happier with the choice in the long run than countries which hold back. 

Monday, November 20, 2017

Why Has Life Insurance Ownership Declined?

Back in the first half of the 19th century, life insurance was unpopular in the US because it was broadly considered to be a form of betting with God against your own life. After a few decades of insurance company marketing efforts, life insurance was transformed into a virtuous purchase for any good and devout husband. But in recent decades, life insurance has been in decline.

Daniel Hartley, Anna Paulson, and Katerina Powers look at recent patterns of life insurance and bring the puzzle of its decline into sharper definition in "What explains the decline in life insurance ownership?" in Economic Perspectives, published by the Federal Reserve Bank of Chicago (41:8,   2017). The story of shifting attitudes toward life insurance in the 19th century US is told by Viviana A. Zelizer in a wonderfully thought-provoking 1978 article, "Human Values and the Market: The Case of Life Insurance and Death in 19th-Century America," American Journal of Sociology (November 1978, 84:3, pp. 591-610).

With regard to recent patterns, Hartley, Paulson, and Powers write: "Life insurance ownership has declined markedly over the past 30 years, continuing a trend that began as early as 1960. In 1989, 77 percent of households owned life insurance (see figure 1). By 2013, that share had fallen to 60 percent." In the figure, the blue line shows any life insurance, the red line shows the decline in term life, and the gray line shows the decline in cash value life insurance.

Early the 19th century, the costs of death and funerals were largely a family and neighborhood affair. As Zelizer points out, attitudes at the time, life insurance was commercially unsuccessful because it was viewed as betting on death. It was widely believed that such a bet might even hasten death, with with blood money being received by the life insurance beneficiary. For example, Zelizer wrote:

"Much of the opposition to life insurance resulted from the apparently speculative nature of the enterprise; the insured were seen as `betting' with their lives against the company. The instant wealth reaped by a widow who cashed her policy seemed suspiciously similar to the proceeds of a winning lottery ticket. Traditionalists upheld savings banks as a more honorable economic institution than life insurance because money was accumulated gradually and soberly. ...  A New York Life Insurance Co. newsletter (1869, p. 3) referred to the "secret fear" many customers were reluctant to confess: `the mysterious connection between insuring life and losing life.' The lists compiled by insurance companies in an effort to respond to criticism quoted their customers' apprehensions about insuring their lives: "I have a dread of it, a superstition that I may die the sooner" (United States Insurance Gazette [November 1859], p. 19). ... However, as late as the 1870s, "the old feeling that by taking out an insurance policy we do somehow challenge an interview with the 'king of terrors' still reigns in full force in many circles" (Duty and Prejudice 1870, p. 3). Insurance publications were forced to reply to these superstitious fears. They reassured their customers that "life insurance cannot affect the fact of one's death at an appointed time" (Duty and Prejudice 1870, p. 3). Sometimes they answered one magical fear with another, suggesting that not to insure was "inviting the vengeance of Providence" (Pompilly 1869). ... An Equitable Life Assurance booklet quoted wives' most prevalent objections: "Every cent of it would seem to me to be the price of your life .... it would make me miserable to think that I were to receive money by your death .... It seems to me that if [you] were to take a policy [you] would be brought home dead the next day" (June 1867, p. 3)."
However, over the course of several decades, insurance companies marketed life insurance with a message that it was actually a loving duty to one's family for a devout husband. As Zelizer argues, the rituals and institutions of what society viewed as a "good death" altered. She wrote:
"From the 1830s to the 1870s life insurance companies explicitly justified their enterprise and based their sales appeal on the quasi-religious nature of their product. Far more than an investment, life insurance was a `protective shield' over the dying, and a consolation `next to that of religion itself' (Holwig 1886, p. 22). The noneconomic functions of a policy were extensive: `It can alleviate the pangs of the bereaved, cheer the heart of the widow and dry the orphans' tears. Yes, it will shed the halo of glory around the memory of him who has been gathered to the bosom of his Father and God' (Franklin 1860, p. 34). ... life insurance gradually came to be counted among the duties of a good and responsible father. As one mid-century advocate of life insurance put it, the man who dies insured and `with soul sanctified by the deed, wings his way up to the realms of the just, and is gone where the good husbands and the good fathers go' (Knapp 1851, p. 226). Economic standards were endorsed by religious leaders such as Rev. Henry Ward Beecher, who pointed out, `Once the question was: can a Christian man rightfully seek Life Assurance? That day is passed. Now the question is: can a Christian man justify himself in neglecting such a duty?' (1870)."
Zelizer's work is a useful reminder that many products, including life insurance, are not just about prices and quantities in the narrow economic sense, but are also tied to broader social and institutional patterns.  

The main focus of Hartley, Paulson, and Powers is to explore the extent to which shifts in socioeconomic and demographic factors can explain the fall in life insurance: that is, have socioeconomic or demographic groups that were less likely to buy life insurance become larger over time? However, after doing a breakdown of life insurance ownership by race/ethnicity, education level, and income level, they find that the decline in life insurance is widespread across pretty much all groups. In other words, the decline in life insurance doesn't seem to be (primarily) about socioeconomic or demographic change, but rather about other factors. They write: 
"Instead, [life insurance] ownership has decreased substantially across a wide swath of the population. Explanations for the decline in life insurance must lie in factors that influence many households rather than just a few. This means we need to look beyond the socioeconomic and demographic factors that are the focus of our analysis. A decrease in the need for life insurance due to increased life expectancy is likely to be an especially important part of the explanation. In addition, other potential factors include changes in the tax code that make the ability to lower taxes through life insurance less attractive, lower interest rates that also reduce incentives to shelter investment gains from taxes, and increases in the availability and decreases in the cost of substitutes for the investment component of cash value life insurance." 
It's intriguing to speculate about what the decline in life insurance purchases tells us about our modern attitudes and arrangements toward death, in a time of longer life expectancies, more households with two working adults, the backstops provided by Social Security and Medicare, and perhaps also shifts in how many people feel that their souls are sanctified (in either a religious or a secular sense) by the purchase of life insurance. 

Friday, November 17, 2017

Brexit: Still a Process, Not Yet a Destination

I happened to be in the United Kingdom on a long-planned family vacation on June 23, 2016, when the Brexit vote took place. At the time, I offered a stream-of-consciousness "Seven Reflections on Brexit" (June 26, 2016). But more than year has now passed, and Thomas Sampson sums up the research on what is known and what might come next in "Brexit: The Economics of International Disintegration," which appears in the Fall 2017 issue of the Journal of Economic Perspectives.

(As regular readers know, my paying job--as opposed to my blogging hobby--the Managing Editor of the JEP. The American Economic Association has made all articles in JEP freely available, from the most recent issue back to the first. For example, you can check out the Fall 2017 issue here.)

Here's Sampson's basic description of the UK and its position in the international economy before Brexit. For me, it's one of those descriptions that doesn't use any weighted rhetoric, but nonetheless packs a punch.
"The United Kingdom is a small open economy with a comparative advantage in services that relies heavily on trade with the European Union. In 2015, the UK’s trade openness, measured by the sum of its exports and imports relative to GDP, was 0.57, compared to 0.28 for the United States and 0.86 for Germany (World Bank 2017). The EU accounted for 44 percent of UK exports and 53 percent of its imports. Total UK–EU trade was 3.2 times larger than the UK’s trade with the United States, its second-largest trade partner. UK–EU trade is substantially more important to the United Kingdom than to the EU. Exports to the EU account for 12 percent of UK GDP, whereas imports from the EU account for only 3 percent of EU GDP. Services make up 40 percent of the UK’s exports to the EU, with “Financial services” and “Other business services,” which includes management consulting and legal services, together comprising half the total. Brexit will lead to a reduction in economic integration between the United Kingdom and its main trading partner."
A substantial reduction in trade will cause problems for the UK economy. Of course, the estimates will vary according to just what model is used, and Sampson runs through the main possibilities. He summarizes in this way: 
"The main conclusion of this literature is that Brexit will make the United Kingdom poorer than it would otherwise have been because it will lead to new barriers to trade and migration between the UK and the European Union. There is considerable uncertainty over how large the costs of Brexit will be, with plausible estimates ranging between 1 and 10 percent of UK per capita income. The costs will be lower if Britain stays in the European Single Market following Brexit. Empirical estimates that incorporate the effects of trade barriers on foreign direct investment and productivity find costs 2–3 times larger than estimates obtained from quantitative trade models that hold technologies fixed."
What will come next after Brexit isn't yet clear, and may well take years to negotiate. In the meantime, the main shift seems to be that the foreign exchange rate for the pound has fallen, while inflation has risen, which means that real inflation-adjusted wages have declined. This national wage cut has helped keep Britain's industries competitive on world markets, but it's obviously not a desirable long-run solution.

But in the longer run, as the UK struggles to decide what actually comes next after Brexit, Sampson makes a distinction worth considering: Is the opposition to Brexit about national identity and taking back control, even if it makes the country poorer, or is it about renegotiating trade agreements and other legislation to do more to address the economic stresses created by globalization and technology? He writes:

"Support for Brexit came from a coalition of less-educated, older, less economically successful and more socially conservative voters who oppose immigration and feel left behind by modern life. Leaving the EU is not in the economic interest of most of these left-behind voters. However, there is currently insufficient evidence to determine whether the leave vote was primarily driven by national identity and the desire to “take back control” from the EU, or by voters scapegoating the EU for their
economic and social struggles. The former implies a fundamental opposition to deep economic and political integration, even if such opposition brings economic costs, while the later suggests Brexit and other protectionist movements could be addressed by tackling the underlying reasons for voters’ discontent."
For me, one of the political economy lessons of Brexit is that relatively easy to get a majority against a specific unpopular element of the status quo, while leaving open the question of what happens next. It's a lot harder to get a majority in favor of a specific change. That problem gets even harder when it comes to international agreements, because while it's easy for UK politicians to make pronouncements on what agreements the UK would prefer, trade negotiators in the EU, the US, and the rest of the world have a say, too. Sampson discusses the main post-Brexit options, and I've blogged about them in "Brexit: Getting Concrete About Next Steps" (August 2, 2016). While the process staggers along, this "small open economy with a comparative advantage in services that relies heavily on trade with the European Union" is adrift in uncertainty.

Thursday, November 16, 2017

US Wages: The Short-Term Mystery Resolved

The Great Recession ended more than eight years ago, in June 2009. The US unemployment rate declined slowly after that, but it has now been below 5.0% every month for more than two years, since September 2015. Thus, an ongoing mystery for the US economy is: Why haven't wages started to rise more quickly as the labor market conditions improved? Jay Shambaugh, Ryan Nunn, Patrick Liu, and Greg Nantz provide some factual background to address this question in "Thirteen Facts about Wage Growth," written for the Hamilton Project at the Brookings Institution (September 2017).  The second part of the report addresses the question: "How Strong Has Wage Growth Been since the Great Recession?"

For me, one surprising insight from the report is that real wage growth--that is, wage growth adjusted for inflation--has actually not been particularly slow during the most recent upswing. The upper panel of this figure shows real wage growth since the early 1980s. The horizontal lines show the growth of wages after each recession. The real wage growth in the last few years is actually higher. The bottom panel shows nominal wage growth, with inflation included. By that measure, wage growth in recent years is lower than after the last few recessions. Thus, I suspect that one reason behind the perception of slow wage growth is that many people are focused on nominal rather than on real wages.

Government statistics offer a lot of ways of measuring wage growth. The graphs above are wage growth for "real average hourly earnings for production and nonsupervisory workers," which is about 100 million of the 150 million workers.

An alternative and broader approach looks what is called the Employment Cost Index, which is based on a National Compensation Survey of employers. To adjust for inflation, I use the measure of inflation called the Personal Consumption Expenditures price index, which is the inflation just for the personal consumption part of the economy that is presumably most relevant to workers. I also use the version of this index that strips out jumps in energy and food prices. This is the measure of the inflation rate that the Federal Reserve actually focuses on.

Economists using these measures were pointing out a couple of years ago that real wages seemed to be on the rise. The blue line shows the annual change in wages and salaries for all civilian workers, using the ECI, while the redline shows the PCE measure of inflation. The gap between the two is the real gain in wages, which you can see started to emerge in 2015.

Not only has the recovery in US real wages been a bit higher than usual for the last few decades, and especially prominent in the last couple of years, but there is good reason to believe that the wage statistics since the Great Recession may be picking up a change in the composition of the workforce that tends to make wage growth look slower. Shambaugh, Nunn, Liu, and Nantz explain (citations and footnotes omitted):
"In normal times, entrants to full-time employment have lower wages than those exiting, which tends to depress measured wage growth. During the Great Recession this effect diminished substantially when an unusual number of low-wage workers exited full-time employment and few were entering. After the Great Recession ended, the recovering economy began to pull workers back into full-time employment from part-time employment ... and nonemployment, while higher-paid, older workers left the labor force. Wage growth in the middle and later parts of the recovery fell short of the growth experienced by continuously employed workers, reflecting both the retirements of relatively high-wage workers and the reentry of workers with relatively low wages. In 2017 the effect of this shifting composition of employment remains large, at more than 1.5 percentage points. If and when growth in full-time employment slows, we can expect this effect to diminish somewhat, providing a boost to measured wage growth."
The baby boomer generation is hitting retirement and leaving the labor force, as relatively highly-paid workers at the end of their careers. New workers entering the labor force, together with low-skilled workers being drawn back into the labor force, tend to have lower wages and salaries. This makes wage growth look low--but what's happening is in part a shift in types of workers. 

One other fact from Shambaugh, Nunn, Liu, and Nantz is that wage growth has been strong at the bottom and the top of the wage distribution, but slower in the middle. This figure splits the wage distribution into five quintiles, and shows the wage growth for production and nonsupervisory workers in each. 

Taking these factors together, the "mystery" of why wages haven't recovered more strongly since the end of the Great Recession appears to be resolved. However, a bigger mystery remains. Why have wages and salaries for production and nonsupervisory workers done so poorly not in the last few years, but over the last few decades?

There's a long list of potential reasons: slow productivity growth, rising inequality, dislocations from globalization and new technology, a slowdown in the rate of start-up firms, weakness of unions and collective bargaining, less geographic mobility by workers, and others. These factors have been discussed here before, and will be again, but not today. Shambaugh, Nunn, Liu, and Nantz provide some background figures and discussion of these longer-term factors, too. 

Wednesday, November 15, 2017

Rethinking Development: Larry Summers

Larry Summers delivered a speech on the subject of "Rethinking Global Development Policy for the 21st Century" at the Center for Global Development on November 8, 2017. A video of the 45-minute lecture is here. Here are a few snippets, out of many I could have chosen:

The dramatic global convergence between rich and poor
"There has been more convergence between poor people in poor countries and rich people in rich countries over the last generation than in any generation in human history. The dramatic way to say it is that between the time of Pericles and London in 1800, standards of living rose about 75 percent in 2,300 years. They called it the Industrial Revolution because for the first time in human history, standards of living were visibly and 2 meaningfully different at the end of a human lifespan than they had been at the beginning of a human lifespan, perhaps 50 percent higher during the Industrial Revolution. Fifty percent is the growth that has been achieved in a variety of six-year periods in China over the last generation and in many other countries, as well. And so if you look at material standards of living, we have seen more progress for more people and more catching up than ever before. That is not simply about things that are material and things that are reflected in GDP. ... [I]f current trends continue, with significant effort from the global community, it is reasonable to hope that in 2035 the global child mortality rate will be lower than the US child mortality rate was when my children were born in 1990. That is a staggering human achievement. It is already the case that in large parts of China, life expectancy is greater than it is in large parts of the United States." 

The marginal benefit of development aid is what is enabled, not what is funded
"I remember as a young economist who was going to be the chief economist of the World Bank sitting and talking with Stan Fischer, who was my predecessor as the chief economist of the World Bank. And we were talking, and I was new to all this. I had never done anything in the official sector. And I said, "Stan, I don't get it. If a country has five infrastructure projects and the World Bank can fund two of them, and the World Bank is going to cost-benefit analyze and the World Bank is going to do all its stuff, I would assume what the country does is show the World Bank its two best infrastructure projects, because that will be easiest, and if it gets money from the World Bank, then it does one more project, but what the World Bank is actually buying is not the project it is being shown, it is the marginal product that it is enabling. And so why do we make such a fuss of evaluating the particular quality of our projects?" And Stan listened to me. And he looked at me. He's a very wise man. And he said, "Larry, you know, it is really interesting. When I first got to the bank, I always asked questions like that." "But now I've been here for two years, and I don't ask questions like that. I just kind of think about the projects, because it is kind of too hard and too painful to ask questions like that."
Funds from the developing world governments and multilateral institutions have much less power
"[O]ur money—and I mean by that our assistance and the assistance of the multilateral institutions in which we have great leverage—is much less significant than it once was. Perhaps the best way to convey that is with a story. In 1991, when I was new to all of this, I was working as the chief economist of the World Bank, and the first really important situation in which I had any visibility at all was the Indian financial crisis that took place in the summer of 1991. And at that point, India was near the brink. It was so near the brink that, at least as I recall the story, $1 billion of gold was with great secrecy put on a ship by the Indians to be transported to London, where it could be collateral for an emergency loan that would permit the Indian government to meet its payroll at the end of the month.  And at that moment, the World Bank was in a position over the next year to lend India $3 billion in conjunction with its economic reform program. And the United States had an important role in shaping the World Bank's strategy. Well, that $3 billion was hugely important to the destiny of a sixth of humanity. Today, the World Bank would have the capacity to lend India in a year $6 billion or $7 billion. But India has $380 billion—$380 billion—in reserves dominantly invested in Treasury bills earning 1 percent. And India itself has a foreign aid budget of $5 billion or $6 billion. And so the relevance of the kind of flows that we are in a position to provide officially to major countries is simply not what it once was."
Protecting the world from pandemic flu vs. the salary of a college football coach
"[T]he current WHO budget for pandemic flu is less than the salary of the University of Michigan's football coach—not to mention any number of people who work in hedge funds. And that seems manifestly inappropriate. And we do not yet have any settled consensus on how we are going to deal with global public goods and how that is going to be funded."

Tuesday, November 14, 2017

Regional Price Parities: Comparing Cost of Living Across Cities and States

Many years ago I heard a story from a member of a committee of a midwestern university that was thinking about hiring a certain economist. The economist had an alternative offer from a southern California university that paid a couple of thousand dollars more in annual salary. The economist offered to come to the midwestern university if it would match this slightly higher salary . But the hiring committee declined to match . As the story was told to me, the hiring committee talked it over and felt: "Spending a couple of thousand dollars more isn't actually the issue. The key fact cost of living is vastly higher in southern California. An economist who isn't able to recognize that fact--and thus who doesn't recognize that the lower salary actually buys a higher standard of living here in the midwest--isn't someone we want for our department."

The point is a general one. Getting a higher salary in California or New York, and then needing to pay more for housing and perhaps other costs of living as well, can easily eat up that higher salary. In fact, the Bureau of Economic Analysis now calculates Regional Price Parities, which adjust for higher or lower levels of housing, goods, and services across areas. Comparisons are available at the state level, the metropolitan-area level, and for non-metro areas within states. To illustrate, here are a couple of maps taken from "Living Standards in St. Louis and theEighth Federal Reserve District: Let’s Get Real," an article by Cletus C. Coughlin, Charles S. Gascon, and Kevin L. Kliesen in the Review of the Federal Reserve Bank of St. Louis (Fourth Quarter 2017, pp. 377-94).

Here are the US states color-coded according to per capita GDP. For example, you can see that California and New York are in the highest category. My suspicion is that states like Wyoming, Alaska, and North Dakota are in the top category because of their energy production.

And now here are the US states color-coded according to per capita GDP with an adjustment for Regional Price Parities: that is, it's a measure of income adjusted for what it actually costs to buy housing and other goods. With that change, California, New York, and Maryland are no longer in the top category. Hoever, a number of midwestern states like Kansas, Nebraska, South Dakota, and my own Minnesota move into the top category. A number of states in the mountain west and south  that were in the lowest-income category when just looking at per capita GDP move up a category or two when the Regional Price Parities are taken into account.

When thinking about political and economic differences across states, these differences in income levels,  housing prices, and other costs-of-living are something to take into account. 

Monday, November 13, 2017

Choice and Health Insurance Coverage

If you think if Medicare and Medicaid as examples of "single payer" health insurance plan, you are at best partially correct. Government health spending (including federal, state, and local) does accounts for about 46% of total US health care spending.  However, a major and largely unremarked change is that government health care spending is being filtered through a system in which those receiving the government health insurance need to make choices between privately-run health insurance plans.

A three-paper symposium in the Fall 2017 issue of the Journal of Economic Perspectives tackles this issue of choice and health insurance coverage. The introductory essay by Jonathan Gruber is called "Delivering Public Health Insurance through Private Plan Choice in the United States."
Then  Michael Geruso and Timothy Layton focus on the issue of "Selection in Health Insurance Markets and Its Policy Remedies," while Keith Marzilli and Justic Sydnor focus on the issue of how difficult it can be for consumers to make wise choices between health insurance plans--especially when the providers of these plans may have incentive to slant those choices in certain directions in "The Questionable Value of Having a Choice of Levels of Health Insurance."  For example, Gruber describes how US government health care spending has moved away from a "single payer" approach over time, and writes:
"Currently, almost one-third of Medicare enrollees are in privately provided insurance plans for all of their medical spending, and another 43 percent of Medicare enrollees have standalone private drug plans through the Medicare Part D program. More than three-quarters of Medicaid enrollees are in private health insurance plans. Those receiving the subsidies made available under the Patient Protection and Affordable Care Act of 2010 do so through privately provided insurance plans that are
reimbursed by the government."
Or here's a figure from Geruso and Layton. When you take into account the people choosing between Medicaid managed care plans, Medicare "Advantage" plans (as part of Medicare Part C), Medicare prescription drug benefits (as part of Medicare Part D), and people choosing between health insurance plans in the insurance "marketplaces" set up by the Patient Protection and Affordable Care Act of 2010, you have a total of nearly 100 million enrollees. Of course, if you're looking at choice in health insurance more broadly, many individual also have some choices in the the health insurance plans supported by their employers, too.
In all insurance markets, not just health insurance, choice can be a double-edged sword. On one side, choice lets people match up the characteristics of different health insurance care plans to their personal preferences and needs, which clearly can be positive. But health insurance providers here have mixed incentives: in this choice-based health insurance universe, they want to encourage people to choose their plans, but they also are trying not to attract disproportionate numbers people who are more likely to have high health care costs in the future. Health insurance plans have a very wide array of characteristics: not just the structure of deductibles, copayments, and annual caps, but also including limits on the breadth of a provider network and how costly (in terms of out-of-pocket costs) or difficult (in terms of paperwork and delay) it can be to go outside that network. Another limit can be on what types of care are covered in extreme health situations.  With these difficulties in mind, a number of conventional problems arise.

Health insurance market will have a tendency to sort people into groups, where those who regard themselves as healthy at present will seek out health insurance that covers less and has a lower cost, while those who know that they are likely to have higher health-care costs will tend to seek out insurance that covers more but has a higher cost. As this dynamic emerges, so to a number of problems:

Insurance companies will have an incentive to structure their insurance plans with the idea of  attracting the more-healthy consumers, while encouraging less health consumers to shop elsewhere, which is sometimes known as "cream-skimming." Health insurance plans that would tend to be more attractive for the less healthy will tend to be packed full of out-of-pocket costs and restrictions on the network of service providers. At an extreme, health insurance plans suitable for those with high costs may become so costly or limited as to be essentially unavailable, which of course defeats the purpose of insurance altogether, which is sometimes known as "death spiral" for that market. Some of the  people who signed up for lower-cost plans, either because they expected to be healthy or just because they focused on the low costs, will instead turn out to be unhealthy--and discover that their low-cost plan provided only limited coverage.

Of course, these are exactly the issues that have been playing out in the state-level insurance "marketplaces" set up under the Affordable Care Act. Economic analysis points out that these kinds of issues are endemic to choice-based insurance markets. These problems lead to a parade of policy interventions in health insurance markets, laid out by Geruso and Layton.

There are often rules for "premium rating," which limits the price differences between insurance plans for different groups, or rules that insurance companies cannot reject an applicant outright, but must offer some kind of plan. These rules seek to avoid the problem that a consumer who is likely to have health care costs can't find an insurance policy at all, but given the many ways in which health insurance can be structured, the available policies can still look rather scanty.

The government can impose penalties for not purchasing health insurance, or subsidies for buying it. In practice, the state-level health insurance marketplaces do both of these.

"Risk adjustment" refers to the situation which a statistical formula is used to predict who is likely to have higher or lower health insurance costs--so that the government pays  that amount to the insurance company.  For example, in the Medicare Advantage program, where Medicare recipients can choose among private insurance plans rather than the government single-payer approach, the government needs to avoid a situation where the private health insurance firms just attract the healthier participants, and so it uses a risk adjustment formula. The evidence is that this risk adjustment is imperfect, in the sense that the higher payments for those expected-to-be-sick don't quite account for the higher costs, but it's better than not having it at all. Medicaid and the state-level insurance marketplaces have risk adjustment procedures, too.

Yet another policy is "contract regulation," to require that insurance firms offer certain benefits. Of course, the question of what coverage is required, and the extent to which firms can require additional payments or limit the providers for certain kinds of coverage, remain controversial.

The bottom line here is that choice in health insurance markets unleashes both good and distressing dynamics. The good dynamic is people who can select the plan that they think best suits their immediate needs, and to some extent it focuses insurance companies on providing what people actually want. The distressing dynamic is that as people do this, the health insurance market for those who need more extensive health insurance will stagger for all the reasons given above. The available public policies that seek to address this issue--premium rating, penalties/subsidies to encourage  buying insurance, risk adjustment, and contract regulations--all have understandable underlying purposes. But they add a great deal of complexity to an already messy market, and only partially address the underlying problems.

The ongoing US shift in how public health insurance is increasingly provided through private health insurance firms should influence the discussion over a "single payer" approach to health care.

Traditionally, the term "single payer" has referred to direct government payments to health care providers. In this sense, a true advocate of "single payer" in the traditional meaning cannot advocate "Medicare for all," at least not as Medicare is currently constructed, because a large part of Medicare (both the choice section in Part C and the pharmaceutical benefits Part D) is no longer a single-payer system in the traditional meaning of the term. Similarly, an expansion of Medicaid is largely an expansion of government paying health care providers directly. A supporter of "single payer" should presumably oppose both the state-level insurance "marketplaces," as well as the provision of private-sector health insurance.

Conversely, those who oppose "single payer" should contemplate whether their concerns about government control over health care are at ameliorated to some extent if the beneficiaries of those programs have a degree of choice across health insurance firms and health providers--albeit in regulated markets.

Saturday, November 11, 2017

Decline in US Mail Leveling Out

The US Postal Service handles over 150 billion pieces of mail each year, which is about 47% of all mail sent in the world. But it has faced financial troubles for years, in part because it is caught in a political vice of that limits its flexibility to make adjustments that could trim costs, and in part because the internet has taken a bite out of mail service. The Office of the Inspector General of the US Postal Service describes some trends in "What’s up with Mail? How Mail Use Is Changing across the United States" (RARC-WP-17-006. April 17, 2017).

Here are volumes of mail-sent-per-adult for three categories that make up over 90 percent of the volume of what is delivered by the USPS: single-piece first class mail, first-class mail presorted, and marketing mail.

Single-piece first-class mail per adult started dropping in 1996, and has fallen by 70% since then.

First-class mail in the presorted category (which is more likely to be mailings sent by firms or government to consumers) continued to rise up until the Great Recession, but has declined by about one-third since then. .

Marketing mail dropped in the Great Recession, and is now down by more than one-quarter from 2007 levels, but its decline has been much smaller in recent years. As the report notes: "Marketing Mail is also playing an increasingly prominent role in the Postal Service’s product portfolio. At approximately 80 billion pieces, Marketing Mail volume is higher than FCM-SP and FCM-Presort combined. In 2015, it made up about 52 percent of total mail volume."
In part, I find these patterns interesting as a reflection of how America communicates, and how the ease and convenience of web-based communication has affected the postal service. 

But in addition, the report notes that the rate of decline in mail use seems to have slowed in the last few years. I've written in the past about steps that the US Postal Service could take to improve its financial outlook,  and I won't repeat that here. After all, the possibilities for innovative change at the Postal Service have been strangled by political infighting which led to a situation in which, by the end of 2016 and since then, none of the nine appointed slots on the Board of Governors of the Postal Service are filled. 

But if the quantity of these core lines of the mail business are not falling as fast, while "packages have become an increasingly prominent product for the Postal Service, with volume growing 68 percent to 5.2 billion pieces between 2009 and 2016," it becomes more feasible to think about how to restructure and right-size the Postal Service in a sensible way.

Friday, November 10, 2017

The Darker Side of Peer-to-Peer Lending

Peer-to-peer lending refers to an economic transaction in which individual investors lend directly to individual borrowers using online platforms. Yuliya Demyanyk, Elena Loutskina, and Daniel Kolliner illuminate the darker side of such arrangements in "Three Myths about Peer-to-Peer Loans," written as an "Economic Commentary" for the Federal Reserve Bank of Cleveland (November 9, 2017). Their more detailed research paper on the topic is available here. In the "Economic Commentary" piece, the summarize this way: 
"Peer-to-peer (P2P) lending came to the United States in 2006, when individual investors began lending directly to individual borrowers via online platforms. In the decade since, the industry has grown dramatically ...  Online lenders and policymakers have suggested that the P2P market offers unique benefits to consumers. Three benefits are often repeated and seem to have become widely accepted. First, P2P loans allow consumers to refinance expensive credit card debt. Second, P2P loans can help customers build their credit history and improve their credit scores. Finally, P2P proponents claim that P2P lending extends access to credit to those who are underserved by traditional banks. 
"But signs of problems in the P2P market are appearing. Defaults on P2P loans have been increasing at an alarming rate ...  We exploit a comprehensive set of credit bureau data to examine P2P borrowers, their credit behavior, and their credit scores. We find that, on average, borrowers do not use P2P loans to refinance preexisting loans, credit scores actually go down for years after P2P borrowing, and P2P loans do not go to the markets underserved by the traditional banking system. Overall, P2P loans resemble predatory loans in terms of the segment of the consumer market they serve and their impact on consumers’ finances. Given that P2P lenders are not regulated or supervised for antipredatory laws, lawmakers and regulators may need to revisit their position on online lending marketplaces."

 The P2P sector is actually misnamed. As one might have predicted, it very quickly because a market where the supply of loans is not coming from individuals, but rather from institutions like "hedge funds, banks, insurance companies, and asset managers." The amount loaned doubled from 2012 to 2016, and now exceeds $100 billion.

The authors have gained access to some useful data:
"We use data from the TransUnion credit bureau, in which we observe about 90,000 distinct individuals who received their first P2P loan between 2007 and 2012. We also observe about 10 million individuals who did not receive P2P loans and whom we label non-P2P individuals. Using a statistical technique called propensity score matching, we identify non-P2P individuals who are financially similar to P2P individuals during the two years prior to the date on which P2P individuals obtained their P2P loan. We match individuals based on the location of their residence, their credit score, their total debt, their income, their number of delinquencies in the past two years, and whether or not they have a mortgage."

Thus, the authors can compare those who take out a P2P loan to a group with similar financial characteristics, and consider whether 1) they have been more successful in reducing their debt burden after a year or two (they haven't); 2) they have been more successful in building up their credit score (they haven't); and 3) they are a group that was less likely to have access to bank loans and other credit before (they aren't).

In a broader view, it's also troubling that each year, even though the economy has been experiencing a mild recovery, the P2P loans seem to be getting riskier. Here is the delinquency rate on P2P loans after one and two years. Each line shows the year in which the loan was made. The delinquency rates are rising over time.

It's useful to be clear on the potential policy problem here. I'm not concerned about the institutions that make P2P loans: they are regulated by the Securities and Exchange Commission, and they can look after themselves. Lots of borrowers seem to be taking on a P2P loan thinking that it's a first step to paying down their existing debt, but for the group as a whole, this expectation isn't being met. If a financial market is in some danger of melting down in a way that could take a few million borrowers along with it--with all the stresses of wage garnishment, charging higher fees for missed payments, property liens, even bankruptcy--that's a public policy problem.

Thursday, November 9, 2017

The Macroeconomy in Ongoing Transition: Mervyn King

Mervyn King delivered a provocative and intriguing 2017 Martin Feldstein Lecture at the National Bureau of Economic Research on the subject of "Uncertainty and Large Swings in Activity" (July 19, 2017). A written version of the presentation is available in the NBER Reporter (2017: 3, pp. 1-10), or you can watch the lecture and download the slides here.

King's argument has both a broad conceptual message for the study of macroeconomics, which is that it is literally impossible to demonstrate with statistics that a certain macroeconomic model is "true." After all, drawing statistical conclusions requires a decent sample size. But to get a sample size of, say, 20 or 30 recessions in a given economy would take a long time--perhaps several centuries--and it is not plausible that any macroeconomic model remains "true" over that length of time. As King puts it (footnotes omitted):
"Let me give a simple example. It relates to my own experience when, as deputy governor of the Bank of England, I was asked to give evidence before the House of Commons Select Committee on Education and Employment on whether Britain should join the European Monetary Union. I was asked how we might know when the business cycle in the U.K. had converged with that on the Continent. I responded that given the typical length of the business cycle, and the need to have a minimum of 20 or 30 observations before one could draw statistically significant conclusions, it would be 200 years or more before we would know. And of course it would be absurd to claim that the stochastic process generating the relevant shocks had been stationary since the beginning of the Industrial Revolution. There was no basis for pretending that we could construct a probability distribution. As I concluded, `You will never be at a point where you can be confident that the cycles have genuinely converged; it is always going to be a matter of judgment.'"
In the current economic context, King takes aim at the macroeconomic perspective which argues that we had a pretty good model of the macroeconomy for the decades leading up to the Great Recession, but the model has broken down since then. The dashed line in the figure shows a trendline for growth of GDP per capita from 1960-2016. For the US economy, you can project that trendline backward to 1900: as I noted a few years ago, long-run US economic growth had a remarkable consistency from the late 19th century up through about 2010. However, the divergence from this long-run path in the aftermath of the Great Recession is quite noticeable. The trendline for the United Kingdom data doesn't project backward as well, but it does show a similar divergence from that trend in recent years.

Looking at the economy as represented in this figure, one might plausibly argue that the macroeconomy can be modeled by a fairly steady long-run trend, with some up-and-down fluctuations of recessions and recoveries around that trend. However, King suggests that this appearance is misleading. Instead, the world economy saw a dramatic shift starting in the mid-1990s that has continued since then, which can be seen in the pattern of real interest rates over time. King says: 
"From around the time when China and the members of the former Soviet Union entered the world trading system, long-term real interest rates have steadily declined to reach their present level of around zero. Such a fall over a long period is unprecedented. ... [M]uch effort has been invested in the attempt to explain why the "natural" real rate of interest has fallen to zero or negative levels. But there is nothing natural about a negative real rate of interest. It is simpler to see Figure 3 as a disequilibrium phenomenon that cannot persist indefinitely."

In King's view, the world economy is still adjusting to this shift, which has a number of components. High savings rates in China and Germany have helped to drive down real interest rates. Moreover, we have moved into a world economy where some countries have seemingly perpetual trade surpluses while others have seemingly perpetual trade deficits. King writes: 
"Both the U.S. and U.K. had substantial current account deficits, amounting in aggregate to around $600 billion, and China and Germany had correspondingly large current account surpluses. All four economies need to move back to a balanced growth path. But far too little attention has been paid to the problems involved in doing that. With unemployment at low levels, the key problem with slower-than-expected growth is not insufficient aggregate demand but a long period away from the balanced path, reflecting the fact that relative prices are away from their steady-state levels. The result is that the shortfall of GDP per head relative to the pre-crisis trend path was over 15 percent in both the U.S. and U.K. at the end of last year. Policies which focus only on reducing the real interest rate miss the point; all the relevant relative prices need to change, too." 
In short, King is offering an alternative diagnosis of our current slow-growth woes. In his view, the slow growth, it's not due to lingering hangover from the high debt burdens that preceded the Great Recession, nor is it due to a decline in technological opportunities, or to a shortfall in investment related to "secular stagnation." Instead, King argues that what needs to happen is a shift in global prices in the sectors of tradeable and nontradeable goods.

I'm adding King's explanation to my list of mental possibilities for what forces are underlying the slow productivity growth in the US economy.  But in addition, it's worth adding a dose of King-size skepticism about economists who arrive at any macroeconomic situation with a given model fixed in their minds, rather than trying to figure out which model is most likely to apply in a given case. King notes:
"Imagine that you had a problem in your kitchen, and summoned a plumber. You would hope that he might arrive with a large box of tools, examine carefully the nature of the problem, and select the appropriate tool to deal with it. Now imagine that when the plumber arrived, he said that he was a professional economist but did plumbing in his spare time. He arrived with just a single tool. And he looked around the kitchen for a problem to which he could apply that one tool. You might think he should stick to economics. But when dealing with economic problems, you should also hope that he had a box of tools from which it was possible to choose the relevant one. And there are times when there is no good model to explain what we see. The proposition that `it takes a model to beat a model' is rather peculiar. Why does it not take a fact to beat a model? And although models can be helpful, why do we always have to have one? After the financial crisis, a degree of doubt and skepticism about many models would be appropriate."

Wednesday, November 8, 2017

A Range of International Poverty Lines

Poverty is inevitably a relative phenomenon; that, whether you are "poor" depends on the typical standard of living in your society. For example, the World Bank has used a poverty line of $1.90 per person per day since 2015. If you multiplied this poverty line by a family of 3, for 365 days in a year, it equates to an annual poverty line of $2,080 per year for that family. For comparison, the US poverty line in 2016 for a three-person family with a parent and two children would be $19,337.

It would take some odd mixture of clueless, heartless, and moral blindness to argue that poverty in the United States or other high-income countries should be defined in the same way as in low-income countries. But by similar logic, it seems unsuitable to use the same poverty line for what the World Bank would classify as "low-income" countries with a per capita GDP of less than $1,005 per year (for example, Afghanistan, Ethiopia, and Haiti), "lower middle income" countries with a per capita GDP between $1,006 TO $3,955 (like Bangladesh, Nicaragua, and Nigeria), and "upper middle-income" countries with a per capita GDP from $3,956 TO $12,235 (like Mexico, China,and Turkey). Thus, the World Bank is now planning to use "A Richer Array of Poverty Lines," in the words of Franciscon Ferreira.

The figure shows per capita income on the horizontal axis, with the groups of countries separated by income level. The corresponding poverty line for each country as determined by that country is plotted on the vertical axis. The horizontal line shows an average poverty line for the countries within that income group.

The underlying data for national poverty lines is from an article by Dean Jolliffe and Espen Beer Prydz, "Estimating international poverty lines from comparable national thresholds," which appeared in the Journal of Economic Inequality (2016, 14, pp. 185-198). An ungated version is available from the World Bank here.