April 19, 2021

Today’s Economist: Bruce Bartlett: ‘Financialization’ as a Cause of Economic Malaise


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take.”

Economists are still searching for answers to the slow growth of the United States economy. Some are now focusing on the issue of “financialization,” the growth of the financial sector as a share of gross domestic product. Financialization is also an important factor in the growth of income inequality, which is also a culprit in slow growth. Recent research is improving our knowledge of financialization, which has yet to get the attention of policy makers.

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According to a new article in the Journal of Economic Perspectives by the Harvard Business School professors Robin Greenwood and David Scharfstein, financial services rose as a share of G.D.P. to 8.3 percent in 2006 from 2.8 percent in 1950 and 4.9 percent in 1980. The following table is taken from their article.

Data from the National Income and Product Accounts (1947-2009) and the National Economic Accounts (1929-47) are used to compute added value as a percentage of gross domestic product in the United States.Robin Greenwood and David Scharfstein Data from the National Income and Product Accounts (1947-2009) and the National Economic Accounts (1929-47) are used to compute added value as a percentage of gross domestic product in the United States.

They cite research by Thomas Philippon of New York University and Ariell Reshef of the University of Virginia that compensation in the financial services industry was comparable to that in other industries until 1980. But since then, it has increased sharply and those working in financial services now make 70 percent more on average.

While all economists agree that the financial sector contributes significantly to economic growth, some now question whether that is still the case. According to Stephen G. Cecchetti and Enisse Kharroubi of the Bank for International Settlements, the impact of finance on economic growth is very positive in the early stages of development. But beyond a certain point it becomes negative, because the financial sector competes with other sectors for scarce resources.

Ozgur Orhangazi of Roosevelt University has found that investment in the real sector of the economy falls when financialization rises. Moreover, rising fees paid by nonfinancial corporations to financial markets have reduced internal funds available for investment, shortened their planning horizon and increased uncertainty.

Adair Turner, formerly Britain’s top financial regulator, has said, “There is no clear evidence that the growth in the scale and complexity of the financial system in the rich developed world over the last 20 to 30 years has driven increased growth or stability.”

He suggests, rather, that the financial sector’s gains have been more in the form of economic rents — basically something for nothing — than the return to greater economic value.

Another way that the financial sector leeches growth from other sectors is by attracting a rising share of the nation’s “best and brightest” workers, depriving other sectors like manufacturing of their skills.

The rising share of income going to financial assets also contributes to labor’s falling share. As illustrated in the following chart from the Federal Reserve Bank of St. Louis, that share has fallen 12 percentage points since its recent peak in early 2001 and even more from its historical level from the 1950s through the 1970s.

Labor Share of Nonfarm Business Sector

Bureau of Labor Statistics, Department of Labor

The falling labor share results from various factors, including globalization, technology and institutional factors like declining unionization. But according to a new report from the International Labor Organization, a United Nations agency, financialization is by far the largest contributor in developed economies (see Page 52).

The report estimates that 46 percent of labor’s falling share resulted from financialization, 19 percent from globalization, 10 percent from technological change and 25 percent from institutional factors.

This phenomenon is a major cause of rising income inequality, which itself is an important reason for inadequate growth. As the entrepreneur Nick Hanauer pointed out at a Senate Banking, Housing and Urban Affairs Committee hearing on June 6, the income of the middle class is critical to economic growth because of its buying power. Mr. Hanauer believes consumption is really what drives growth; business people like him invest and create jobs to take advantage of middle-class demands for goods and services, which must be supported by good-paying jobs and rising incomes.

According to research by the economists Jon Bakija, Adam Cole and Bradley T. Heim, financialization is a principal driver of the rising share of income going to the ultrawealthy – the top 0.1 percent of the income distribution.

Research by the University of Michigan sociologist Greta R. Krippner supports this position. She notes that financialization exacerbates the well-known problem of corporate ownership and control: while corporate assets are owned by shareholders, they are controlled by managers who often extract an excessive share of corporate profits for themselves.

One main source of income for financial executives is fees paid to financial asset managers, according to the Princeton economist Burton G. Malkiel. Among the best compensated of these are hedge-fund operators, who typically receive 2 percent of the assets under their control plus 20 percent of any increase, annually. (Additionally, they reap special tax benefits that are widely viewed as unjustified.)

Professor Malkiel has long been a fierce critic of actively managed funds, which seldom deliver better returns than an investor could get by simply buying low-cost index funds. Over the decade ending in 2011, index funds easily outperformed actively managed funds, in part because of the low fees on the former and high fees on the latter.

Among those pointing their fingers at financialization is David Stockman, former director of the Office of Management and Budget, who followed his government service with a long career in finance at Salomon Brothers and elsewhere. Writing in The New York Times, he recently said financialization was “corrosive” and had turned the economy into “a giant casino” where banks skim an oversize share of profits.

It’s not yet clear what public policies are appropriate to deal with the phenomenon of financialization. The important thing at this point is to be aware of it, which does not yet appear to be the case in Washington.

Article source: http://economix.blogs.nytimes.com/2013/06/11/financialization-as-a-cause-of-economic-malaise/?partner=rss&emc=rss

Today’s Economist: Uwe E. Reinhardt: The Culprit Behind High U.S. Health Care Prices


Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

Elizabeth Rosenthal’s eye-opening article about health care costs in The New York Times on Sunday was a reminder of how much more Americans pay for given procedures than citizens in health systems abroad. What was probably more surprising to most readers was the huge price differentials for identical procedures — not only across the United States, but even within American cities, where prices for a given procedure can vary tenfold.

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These price differentials, it should be noted, have never been shown to be related either to the cost of producing health care procedures or to their quality.

The question, not addressed in the article, is who bears the blame for this chaotic, private-sector price system. The only fair answer is: American employers. Who else could it be?

I have been critical of employment-based health insurance in this country for more than two decades. In the early 1990s, for example, at the annual gathering of the Business Council, I bluntly told the top chief executives assembled there, “If you want to find the culprit behind the health care cost explosion in the U.S., go to the bathroom and look in the mirror.” After years of further study, I stand by that remark.

I can imagine that some would look instead to the usual suspects – Medicare, Medicaid and possibly even the Tricare program for the military – but that would be a stretch. The argument would be that the public programs shift costs to the private sector, causing the chaos there. Few economists buy that theory.

Most health-policy analysts I know regret that employers appointed themselves their employees’ agents in the markets for health insurance and health care, developing in the process the ephemeral insurance coverage that is lost to the family when its breadwinner loses his or her job.

Employers were able to capture that agency role during World War II when they successfully walked around the prevailing wage controls simply by having Congress exempt fringe benefits from the wage cap. Employers were able to retain their agency even after the wage controls ended by having Congress exempt employer-paid fringe benefits from the taxable income of employees, a tax preference not granted Americans who purchased health insurance on their own. Retaining their tax-preferred agency role has been of great help to employers in the labor market.

Alas, in their self-appointed role as purchasing agents in health care, American employers have arguably become the sloppiest purchasers of health care anywhere in the world. The chaotic price system for health care is one manifestation of that sloppiness.

For more than half a century, employers have passively paid just about every health care bill that has been put before them, with few questions asked. And all along they have been party to a deal to keep the chaotic price system they helped create opaque from the public and even from their own employees. Only very recently and very timidly have a few of them dared to lift the veil a little.

Employers may protest that they rarely purchase health care for their employees directly. The actual purchases are made by the employers’ agents, private health insurance carriers. But the latter are merely the conduits for the employers’ wishes. When agents perform poorly, one should look first for the root cause at the principals’ instructions.

One reason for the employers’ passivity in paying health care bills may be that they know, or should know, that the fringe benefits they purchase for their employees ultimately come out of the employees’ total pay package. In a sense, employers behave like pickpockets who take from their employees’ wallets and with the money lifted purchase goodies for their employees. Far too many employees have been seduced into believing that their benevolent employer pays for most of their health care.

The result of this untoward pas de deux is the system Ms. Rosenthal describes.

One consequence of this opaque pricing system has been that, according to the 2013 Milliman Medical Index, the average cost of health care of a typical American family of four under age 65, and insured through an employer-sponsored preferred provider plan, is now $22,000, up from about $10,000 a decade earlier. It is a staggering amount, not only by international comparison, but also when compared with the distribution of family income in the United States, with a median income of $50,000 to $60,000.

Another result has been that, according to a recent analysis published in the policy journal Health Affairs, a decade of health care cost growth under employment-based health insurance has wiped out the real income gains for an average family with employment-based health insurance. One must wonder how any employer as agent for employees can take pride in that outcome.

Yet a third consequence of the rampant price discrimination baked into this pricing system is that uninsured Americans with some financial means are often charged the highest prices for health care when they fall ill, exposing them to the prospect of financial bankruptcy.

How long must the opaque and chaotic health care pricing system of employment-based health insurance in the United States persist? I can envisage two alternatives.

The first would be an all-payer system on the German or Swiss model, perhaps on a statewide basis, with some adjustments for smaller regional cost differentials (urban versus rural, for example), as is now the practice in the Medicare price schedules. In those systems, multiple insurance carriers negotiate jointly with counter-associations of the relevant health care providers over common price schedules, which thereafter are binding on every payer and every health care provider in the region (an analysis in Health Affairs offered more details). One can easily link such a system to the growth of gross domestic product.

The second alternative would be a marriage in which the financial risks of ill health are shared up to a point and raw, transparent price competition for the remainder. In such a system, called “reference pricing,” a private insurer, as agent for an employer or for a government program, would cover only the price charged for a medical procedure by a low-cost provider in the insured’s market area, forcing the insured to pay out of pocket the full difference between that low-cost “reference price” and whatever a higher-cost provider in the area charges for the same procedure.

Such a system, of course, presupposes full transparency of the prices charged by alternative providers in the relevant market area.

Because an all-payer system is highly regulatory, I predict the private health care market in the United States will sooner or later lapse into full-fledged reference pricing. It would entail ever more pronounced rationing of quality, real or imagined, by income class.

But such tiering has long been the American way in other important human services – notably justice and education. Why would health care remain the exception?

Article source: http://economix.blogs.nytimes.com/2013/06/07/the-culprit-behind-high-u-s-health-care-prices/?partner=rss&emc=rss

Economix Blog: Simon Johnson: The Myth of a Perfect Orderly Liquidation Authority for Big Banks


Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

On Tuesday, with some fanfare, the Bipartisan Policy Center in Washington rolled out a report, “Too Big to Fail: The Path to a Solution.” Focused on how to “resolve” big financial companies — a technical term for the details of handling the failure of such institutions — the report is elegantly written and nicely laid out. You can either read the very short version, the short version or the long version of the same material. Unfortunately, in all three the authors fail to persuade that the problem of too-big-to-fail is fixed or can be brought under control if only we follow their recommendations.

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Their argument has three elements. First, big financial companies can be resolved either in bankruptcy or, more likely, through using the orderly liquidation authority, or O.L.A., created by the Dodd-Frank Act of 2010. Second, the key to making O.L.A. workable is sufficient “loss-absorbing” long-term debt and equity at the holding-company level. Third, the implication is that most or all of the big banks already have sufficient “loss-absorbing” debt and equity at the holding company level to make this work.

As a result, the authors contend, we (or perhaps financial-sector executives) are in luck — no significant structural changes, like simplification or reductions in scale, are needed at megabanks.

All three parts of this argument are unconvincing — and the bottom-line policy implication, “do little, be happy,” is downright dangerous.

The first point about the workings of bankruptcy and O.L.A. may sound good on paper but is simply not plausible in the real world. We are talking about huge, complex and opaque companies — typically including hundreds of thousands of employees across more than 100 different countries, with 2,000-plus legal entities. Even well-informed investors cannot figure out where the risks really lie — and the recent London Whale experience at JPMorgan Chase raises questions about whether officials or even company managements have much more of a clue.

The exercise of having large bank holding companies draw up “living wills” to show how their failures could be handled under normal bankruptcy procedures (part of the Title I requirements under Dodd-Frank) is widely regarded as having yielded little or nothing of value. There will be a do-over later this year, but I have yet to find a well-informed person — in either the private sector or government — who is optimistic about the outcome.

In addition, the United States authorities have so far failed to designate a single nonbank as systemically important — and thus subject to additional prudential requirements (a technical term, meaning closer scrutiny and supervision), including preparation of a living will. The authors show no awareness of the painful lessons from A.I.G., Lehman Brothers and the run on money funds in September 2008. None of those entities were banks (a specific legal and regulatory term), but this report seems oblivious to the implications.

If the market questions, and it does, whether the Federal Deposit Insurance Corporation could handle the failure of a single big bank holding company (already subject to close supervision, in principle), what are the chances of persuading anyone that a significant nonbank financial institution could be resolved in an orderly fashion?

To be fair, the authors of the Bipartisan Policy Center report would like to modify the bankruptcy code — adding a new Chapter 14 (an idea that originated with the Hoover Institution). But why should the financial sector, or anyone else, get special treatment? If we are going to use bankruptcy when companies fail — and this would be my strong preference, if I thought it could be done without destroying the world economy — surely there should be one set of rules for everyone.

Once you establish special treatment and break with precedents, the entire legal process becomes murky, unpredictable and likely to spread more fear than confidence in the outcomes.

Of course, megabanks and other systemically important financial companies cannot go through bankruptcy today without generating the risk of a broader economic collapse — again, one lesson from the fall of 2008. An obvious response would be to induce these companies to change the structure, scale and nature of their activities in order that their failure could be handled by bankruptcy. This is precisely the intent of Title I in Dodd-Frank.

The authors of this report, however, prefer instead to rely on the orderly liquidation authority, including the proposed “single point of entry” for bank-holding companies. In the current version of this plan, the F.D.I.C. would take over a failing institution and force recapitalization at the holding-company level through wiping out equity holders and converting long-term subordinated debt owed by the holding company into equity, while allowing operating subsidiaries to continue in business and to pay their liabilities in full.

I fully support the F.D.I.C. in its attempt to build a workable O.L.A., and there are presumably situations in which this set of tools could help. (I’m a member of the F.D.I.C.’s Systemic Resolution Advisory Committee, but the views here are mine alone.)

But I have not heard any of the relevant responsible officials express the kind of frothy optimism for O.L.A. that bubbles through in this report.

The authors do cite a recent speech by Mary Miller, under secretary for domestic finance at the Treasury Department, in which she says that too-big-to-fail is substantially fixed by the O.L.A. and other measures. But, as John Parsons and I pointed out at the time, her speech is deeply flawed at many levels and absolutely does not represent the public views of the F.D.I.C. or the Federal Reserve.

Regarding whether she provides a realistic assessment of O.L.A., Ms. Miller’s language actually confuses liquidation — the closing of a company and the winding down of its activities — with resolution (see Page 6 of her speech). I pointed out this problem two weeks ago to the Treasury Department; unfortunately, it has made no discernible attempt to tighten the wording or issue any kind of clarification.

The second point in the Bipartisan Policy Center report’s argument completely misses the key systemic issues, including the basic mechanics of how global crises spread.

The authors do mention the issues of global resolution — handling a financial failure across borders — but only to dismiss the thorny realities as trivial. As for the report’s recommendations, regarding global resolution these amount to exhorting the F.D.I.C. to get foreign countries to cooperate (good luck) and to threatening to bring Congress back in to legislate cross-border cooperation (a legislative and diplomatic impossibility).

The authors are top experts (legal and financial), so surely they have been following the news from Europe, including a series of botched bank rescues, the debacle in Cyprus and now a row at the highest political levels about whether to protect uninsured depositors more or less than bondholders. Not surprisingly, the split is between countries where such depositors have more sway (e.g., France and Spain) and those where bondholders have a stronger voice (e.g., Britain and Denmark). Who will get what kind of support — or be forced to swallow a bail-in (i.e., take losses) in a potential crisis?

It is impossible to say with any accuracy.

Writing in The Financial Times on Monday, Wolfgang Schäuble, Germany’s finance minister, made it clear that we are a long way from having an integrated bank resolution regime in Europe. In a crisis, it’s every finance minister and central banker for himself.

This matters a great deal because, as the Federal Reserve governor Jeremy Stein pointed out in a recent speech, the costs of financial stress are felt not just when there is an outright failure but also when financial institutions suffer losses and come under pressure. In terms of macroeconomic impact, “near collapse” can be almost as damaging as actual failure, particularly amid great uncertainty about who will bear what kind of loss.

And this leads to perhaps the greatest deficiency in this report: a complete failure to discuss the importance of who holds the quasi-mythical “loss-absorbing debt” at the holding company level. If such debt is held by highly leveraged institutions, with or without obvious systemic importance themselves, then a sharp fall in the value of this debt (leading up to the forced conversion into equity) can help spread a crisis far and wide.

The same problem exists for money-market funds, which remain highly susceptible to runs. Would it be stabilizing or destabilizing if a large amount of this debt were held across borders?

And who will be allowed to insure this debt, through credit default swaps or in some other complicated way using derivatives? If Goldman Sachs insures any kind of bail-in liabilities of JPMorgan Chase (or another megabank), that should make us very worried.

Third, all roads lead to equity capital, in a way that the authors of this report fail to appreciate fully.

If the big banks really had sufficient equity to absorb likely losses, we would be discussing equity levels close to those proposed in legislation by Senators Sherrod Brown, Democrat of Ohio, and David Vitter, Republican of Louisiana. (I wrote in more detail last month on Bloomberg View about Brown-Vitter and its impact so far.)

But the Bipartisan Policy Center report takes the view that such levels of equity funding (relative to total assets) are a bad idea. The wording here seems close to that in a recent document issued by Davis Polk Wardwell, a law firm (not surprising, as one of the authors of the center’s report is a senior person at that firm). Both Davis Polk and this report are completely wrong on equity — a point that I made in this blog recently (including the misinterpretation of the pivotal new book by Anat Admati and Martin Hellwig).

At least implicitly, the report is putting great weight on long-term subordinated debt at the holding company level. How much is there?

Moody’s, the rating agency, issued a report on this question in March (“Reassessing Systemic Support in U.S. Bank Ratings – an Update and F.A.Q.”). There is more than one way to do the relevant calculations, but Moody’s entirely plausible methodology suggests that total capital subject to a bail-in (equity plus the right kind of debt at the holding company level) is 4 or 5 percent of total assets for some of our biggest banking conglomerates (see Exhibit 3 in that report).

I’m comparing bail-in capital with total assets, not risk-weighted assets – as the risk weights are wrong in every crisis. However, I would caution that Moody’s does not adjust these debt numbers according to whether they are held by bail-in creditors – i.e., entities on which the F.D.I.C. would actually be willing to impose losses.

Next, we should expect megabanks and their representatives to whine that reasonable levels of bail-in capital (e.g., 20 to 30 percent of total assets; see Pages 7 and 8 of this letter to the Fed by Sheila Bair, Professor Admati, Richard Herring and me) — and a conservative definition of bail-in creditors — will crater the real economy. We hear this assertion every time financial reforms are discussed. For example, the financial consulting firm Oliver Wyman (which is also involved in the Bipartisan Policy Center report) made this point on the Volcker Rule; see my assessment).

The Bipartisan Policy Center report depicts a pair of mythical beasts — the perfect orderly liquidation authority and its partner, the bail-in creditor. More broadly, this appears to be part of a concerted effort by megabanks and their allies to convince you, and the Board of Governors of the Federal Reserve, that the existence of these beasts will hold all other evils at bay.

Such mythical beasts do not exist in the real world.

Article source: http://economix.blogs.nytimes.com/2013/05/16/the-myth-of-a-perfect-orderly-liquidation-authority-for-big-banks/?partner=rss&emc=rss

Economix Blog: Casey B. Mulligan: Patterns of Health Insurance Changes


Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

A number of industries can expect big changes in employee health insurance in the next year or two, while others will continue with business as usual.

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Beginning next year, states and the federal government intend to create opportunities for families to purchase health insurance, separate from their employers, through insurance “exchanges” in the states. Insurers and the federal government will heavily advertise the new plans. Most important, middle- and low-income families may qualify for valuable federal subsidies that will serve to reduce premiums and out-of-pocket health costs.

To qualify for subsidized exchange plans, workers cannot be offered affordable insurance by their employers. Paradoxically, employers will create subsidy opportunities for their middle- and low-income employees whenever they fail to offer health insurance.

On the other hand, an employer dropping its health insurance next year will put its high-income employees in a tough spot, because they will have to buy insurance on their own without the tax advantages they had in the past by obtaining health insurance through their employer. As a result, employers with relatively many high-income employees will be under pressure to keep their insurance, whereas an employer of middle- and low-income employees may find them asking for health insurance to be dropped from the employee benefit menu.

Administrative costs, rising premiums and other costs have already made a number of employers lukewarm about health insurance, but they offered it in order to attract employees who do not care to be uninsured or to end up on Medicaid. The new insurance opportunities that become available next year may give their employees enough of an alternative that the lukewarm employers can drop their plans.

Both of these situations are closely correlated across industries, which leaves me to suspect that we can readily predict the industries that will retain employer insurance and predict those that will drop whatever health benefits they currently have. The scatter diagram below displays Bureau of Labor Statistics data on several industries according to the percentage of their employees in families above three times the poverty line (horizontal axis) and the percentage of employers offering health benefits as of March 2012 (vertical axis).

Bureau of Labor Statistics

I measured employees relative to three times the poverty line because that is the family income threshold beyond which the new exchange subsidies are less valuable than the income tax preference for employer-sponsored health insurance.

Industries like colleges, utilities and banking almost always offer health insurance, and about 80 percent of their employees will be getting a better deal on employer health insurance than they would from the exchange plans because their families are above three times the poverty line. For these reasons, I am confident that these industries will continue to offer health insurance to their employees in much the same way that they have in the past.

A couple of industries like “accommodation and food services” (i.e., restaurants), leisure and hospitality, administrative and waste services, and construction already have a mix of employers in terms of their health insurance offerings, so it would not be unusual from an industry perspective for those that currently have health plans to drop them during the next couple of years.

Moreover, the diagram shows how 45 to 60 percent of their employees do not come from families above three times poverty and therefore will have a significant federal health insurance subsidy waiting for them as soon as their employers drop coverage.

Employers that do not offer health insurance may be subject to penalties, but the penalties are not levied based on part-time employees, or levied on small employers, and even the penalties levied will be less than the subsidy opportunities created by an employer of middle- and low-income people that fails to offer health insurance.

For these reasons, I suspect that the stories we will hear about employers dropping insurance will disproportionately come from the industries shown in the lower left part of the scatter diagram, which collectively employ about 25 million people. Some employers in these industries have already discussed such plans.

Article source: http://economix.blogs.nytimes.com/2013/05/15/patterns-of-health-insurance-changes/?partner=rss&emc=rss

Today’s Economist: Nancy Folbre: The Care and Feeding of Small Business

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

As a growing number of small business organizations pursue a policy agenda distinct from that of corporate America, they may be able to nudge state and local government toward new economic development strategies.

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Currently, the businesses best able to garner generous grants and tax incentives by promising to create jobs within specific political boundaries are large, mobile corporations that can pit communities against one another, demanding ever-higher subsidies.

Greg LeRoy wrote about the problem at length in “The Great American Jobs Scam.” In his 2010 book, “Investment Incentives and the Global Competition for Capital,” Kenneth Thomas estimated the total cost to American taxpayers at about $70 billion a year.

A number of technical issues regarding treatment of tax expenditures and property tax abatements come into play in such estimates, but another accounting based on investigative reporting by The New York Times generated an estimate of $80 billion a year. The details unearthed in the Times series, United States of Subsidies, show that 48 companies have received more than $100 million in state grants since 2007.

A bias toward large companies has been particularly obvious in the retail sector, where big-box stores have been big winners, with adverse effects on small independent businesses. Critics of Walmart have developed an entire Web site devoted to monitoring the public subsidies it receives.

The state of Texas touts its success in luring large companies from other states, offering generous tax subsidies financed by cuts in spending on local education, infrastructure and other public services. But critics of the Texas model contend that corporate relocations have had a “microscopic” impact on the state’s economy.

Meanwhile, alternative economic development strategies are gradually gaining traction. Littleton, Colo., a suburb of Denver, has pioneered an “economic gardening” approach that rejects a “hunting” model in favor of growing its own small businesses, providing supportive services and planning assistance. Its success has inspired pilot projects in several states, including Florida, Iowa, Kansas and Louisiana. The Colorado legislature is currently considering a statewide pilot project.

Economic gardening tends to focus on companies that are well established but ready to move into a growth phase. Many efforts to foster and develop new businesses fall under the rubric of “localist incubation.” My University of Massachusetts student Joseph Costello just completed an undergraduate honors paper on this topic, including a detailed account of the efforts of the Franklin County Community Development Corporation in nearby Greenfield, an area that includes many small farms growing high-quality organic produce.

Their Western Massachusetts Food Processing Center offers food entrepreneurs an industrial kitchen space meeting federal standards for commercial food production, as well as large refrigeration and storage units, and packing machinery. One of its success stories is Real Pickles, a company that supplies high-quality naturally fermented products to about 300 local stores. In business for 11 years, with a current staff of about 12, the company just announced plans to transition to a fully worker-owned cooperative model.

Promotion of worker-owned cooperatives is a way to create entrepreneurs and jobs at the same time. The Evergreen Cooperatives of Cleveland represent a stellar example, recently called out by the Federal Reserve Board member Sarah Bloom Raskin as an effective model of local economic development. A similar effort is on the verge of starting in Springfield, Mass.

States and cities have carried out a variety of other efforts to help small businesses grow. But the level of public investment in such efforts seems tiny compared with the amounts spent on incentives for large companies to relocate. The governor of Texas may dream of winning jobs from California, but the country as a whole would benefit more from the creation of new jobs.

It would be interesting to estimate what $70 billion to $80 billion in subsidies to economic gardening could yield, relative to economic hunting.

Mr. LeRoy explains that the nonprofit organization Good Jobs First has begun a study of relative spending on subsidies for small versus big businesses. In the meantime, he asserts, “Small business groups should put their shoulder to the wheel on state economic development policy reform.”

The jobs they could create, after all, would be their own.

Article source: http://economix.blogs.nytimes.com/2013/05/13/the-care-and-feeding-of-small-business/?partner=rss&emc=rss

Today’s Economist: Casey B. Mulligan: What Job-Sharing Brings


Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

When employer costs are taken into account, it is unclear whether jobs are something that can be efficiently shared.

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The idea behind work-sharing is that employers have a certain amount of work that needs to be done, and that the work can be divided by many employees working a few hours each or a few employees working many hours each. If hours per employee could be limited, by this logic employers would have to hire more employees to get the same amount of work done.

American labor law has traditionally placed some limits on employee hours, such as overtime regulations. While the recent Affordable Care Act does not strictly limit hours per employee, beginning next year it gives employers a strong push toward part-time employment by levying a significant fee per full-time employee and exempting part-time employees from the fee.

A number of employers have said they would change some work schedules to part time from full time to avoid some Affordable Care Act fees. Because part-time workers generally have fewer benefits than full-time employees, this could save employers a considerable sum. From the work-sharing perspective, the part-time employee exemption by itself would be expected to increase employment, because employers would have to hire more people (probably on a part-time basis) to complete work their employees used to accomplish when full time.

But it is possible that work-sharing would reduce employment rather than increase it, because it prevents employers from accomplishing their tasks at minimum cost, adding administrative and coordination expenses. Higher costs for employers may put them out of business, or at least reduce the scale of their business. When companies reduce the scale of their activities, that means fewer employees.

It is also possible that work-sharing would reduce employment by making jobs less attractive to people who desire full-time work. One reason that people sometimes justify commuting long distances to work or enrolling in demanding training programs – trucking and nursing are two such occupations — is that they expect to recoup those cost by taking advantages of opportunities to earn extra by working long hours.

Work-sharing proponents have credited Germany’s comparative low unemployment rate to its adoption of a work-sharing program, because the program encourages German employers to reduce employee hours rather than lay workers off. Work-sharing proponents may be right, although Germany carried out a number of labor-market reforms at the same time, such as allowing businesses to use temporary workers more easily.

As the Affordable Care Act suddenly pushes business toward part-time employment, we economists will have an unusual opportunity to learn whether cutting employee hours creates jobs, or destroys them.

Article source: http://economix.blogs.nytimes.com/2013/05/08/what-job-sharing-brings/?partner=rss&emc=rss

Today’s Economist: Casey B. Mulligan: The Wealthy Keep the Tax Man Guessing


Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

Although wealthy people are a small fraction of the population, their behavior is of great practical interest to Treasury officials.

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Every year, the United States Treasury receives extraordinary amounts of personal income tax revenue in April as individuals file their returns and reconcile the taxes they owe with the taxes that were withheld from their paychecks during the previous calendar year. Most people do not owe much, if anything, when they file their return but a small group of taxpayers has large balances to settle.

The chart below shows the inflation-adjusted amount of individual income tax receipts by the Treasury in April of each year since 1998, as reported by in the Daily Treasury Statement. The amount has fluctuated wildly, from a low of $122 billion to a high of $235 billion. The standard deviation of these April receipts is $36 billion.

United States Treasury

The general state of the economy in the calendar year helps to predict the amount the Treasury receives in following April. At the same time, additional fluctuations in April receipts derive from the situations and behaviors of a small segment of the population not well represented in the unemployment rate and other measures of the business cycle: the wealthy.

First of all, taxes are withheld less often from asset income like dividends and capital gains than they are withheld from wages. The wealthy receive a larger share of their income from assets than from wages, not to mention that by definition the wealthy have more of both types of income. Second, much of the population does not owe any income tax – let alone owe extra in April – and the wealthy pay a disproportionate share of income taxes.

The wealthy have become an even more important driver of tax revenues in recent history, as an increasing share of the nation’s income has accrued to them. Thomas Piketty and Emmanuel Saez have compiled decades of data for the United States (and other countries). They find, for example, that the very wealthiest of America’s households — the top one-tenth of 1 percent — recently received about one-thirteenth of the nation’s income, while they received only one-fiftieth in the 1960s and 1970s.

The wealthy are sometimes idolized and other times envied, and for these reasons alone their behavior is of interest. But Treasury officials have another reason to stay abreast of the wealthy: their activities are an important determinant of the amount of revenue received by the Treasury, and when it is received.

If you have special insights into how the wealthy behave, consider applying for a job at the Treasury.

Article source: http://economix.blogs.nytimes.com/2013/04/17/the-wealthy-keep-the-tax-man-guessing/?partner=rss&emc=rss

Economix Blog: Bruce Bartlett: What People Think About Taxes


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take.”

For most people, the sum total of their opinion about taxes is very, very simple: they hate them — not just the tax payment, but the act of paying taxes: pulling together the information needed to do one’s tax return, filing it, worrying about being audited for some small error and so on.

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These attitudes are confirmed in a new compendium of public opinion on taxes published by the American Enterprise Institute. The editors, Karlyn Bowman and Andrew Rugg, tell us:

In 75 years of surveys, we can find no instance in which more than a tiny percentage of Americans said the amount they paid in taxes was too low. In most polls, pluralities or majorities say the amount is too high.

But the data do suggest that the percentage of people who think their taxes are too high has declined over time. Until the early 2000s, that figure was commonly in the three-fifths to two-thirds range, but it has since trended down to about 50 percent. Conversely, the percentage of people saying their taxes are about right has risen to where in some polls it sometimes exceeds the percentage saying that taxes are too high.

Conservatives like to argue that the greatest unfairnesses of the tax code are that the wealthy are taxed at higher rates and that close to half of those who file income tax returns have no tax liability. But polls indicate that most people believe that the greatest unfairness in the tax system is that the wealthy do not pay their fair share.

A poll in April 2003 sponsored by National Public Radio, the Kaiser Family Foundation and the Kennedy School of Government found that 57 percent of people believed that high-income families paid less than their fair share. A December 2011 Pew poll found the same percentage saying so. By contrast, it found that only 11 percent of people found that the amount of federal taxes they themselves paid was what bothered them the most, with 28 percent naming the complexity of the tax system.

Possibly the greatest dissatisfaction with the tax system is not with taxes per se, but the widespread feeling that the money is simply wasted. The American Enterprise Institute compendium shows that the percentage of people who believe that the government wastes a lot of their money has risen over time. Recent polls put the percentage in the 70 percent to 80 percent range, almost twice what it was in the late 1950s and early 1960s.

When asked what percentage of all federal spending is wasted, a variety of polls routinely put the figure around half. People also believe that wasteful spending has risen over time and that they themselves get little if any value from the taxes they pay. Overwhelmingly, people say that how their taxes are spent bothers them more than the amount they pay.

Not surprisingly, people prefer the idea of paying less in taxes and getting less from government over the idea of paying more in taxes and getting more services from government. It’s hard to see how this could be otherwise given the distribution of federal spending. As the chart below from the Center on Budget and Policy Priorities shows, the vast bulk of it goes to national military programs that no one actually sees, programs for the elderly and poor, or interest on the debt. Programs that average people might see in their own lives, such as education or transportation, are a tiny fraction of spending. Even over a lifetime, most people expect to get back less from government than they pay in taxes.

2012 Figures from the Office of Management and Budget, Fiscal Year 2014 Historical Tables, Center on Budget and Policy Priorities

In terms of tax reform, people remain sympathetic to the idea of a flat tax despite their general sympathy for progressivity and the idea that government should actively narrow the distribution of income.

Almost everyone thinks the federal tax system is too complicated and in need of major overhaul. In principle, people are willing to give up deductions in return for lower rates, but when questioned about specific deductions they usually support the big ones. An April 2011 Gallup poll found 60 percent to 70 percent of people opposing elimination of the home mortgage deduction, the deduction for state and local taxes or the deduction for charitable contributions, either to reduce the deficit or in return for lower tax rates.

Politically, Republicans and those with high incomes tend to hate taxes and doing their taxes more than Democrats and those with low incomes. According to a new Pew poll, 60 percent of Republicans say they hate doing their taxes compared with 46 percent of Democrats; 63 percent of those with incomes over $75,000 hate doing their taxes compared with 50 percent of those with incomes below $30,000.

It’s undoubtedly the case that one’s decision to identify with the Republicans or Democrats in the first place has a lot to do with taxes.

Article source: http://economix.blogs.nytimes.com/2013/04/16/what-people-think-about-taxes/?partner=rss&emc=rss

Economix Blog: Casey B. Mulligan: Varieties of Not Working


Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

Today’s Economist

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Employment can be a better indicator of labor market activity than unemployment, because unemployment is not the only way that a person can be without work.

The blue series in the chart below shows the reduction in unemployment since March 2012, expressed as a percentage of the population (e.g., in a population of 100 million, 0.1 percentage points means 100,000 people and 0.5 percentage points means 500,000.) In order to correct for the movement of baby boomers into retirement, I used Bureau of Labor Statistics data only for people 25 to 54 years old (this group is about 124 million and has been falling a little). Over the subsequent year, and especially since mid-2012, unemployment was reduced significantly.

Bureau of Labor Statistics

But reduced unemployment is not the same as more employment, because the third labor force classification is “out of the labor force.” Neither the unemployed nor those out of the labor force have a job, but only the unemployed are actively looking for one.

The red series in the chart shows that the “out of the labor force” ranks have increased roughly as much as unemployment has been reduced, and the difference between the blue and the red series indicates the change in the fraction of the population that is employed. For the months when the blue series is above the red series, employment per capita has increased since March 2012.

Because the blue series hardly exceeds the red series, if at all, the large majority of the reduction in unemployment has been associated with offsetting increases in people out of the labor force.

While the reduction in unemployment and the growth in the out of the labor force more or less cancel each other out, jobs are at least being created fast enough to absorb the growth in the working-age population. That additional population increases demand, which contributes to the jobs being created.

Retirements and going to school could increase the number of people out of the labor force, but the data I’ve shown are for an age group in which retirement and schooling are rare. For the 25-to-54 age group, “out of the labor force” typically represents people who are finding ways to get by without working.

Some people moving out of the labor force devote their time to caring for their young children while their spouses obtain cash income for the family. That some of the growth in those out of the labor force has occurred among married people suggests that such specialization in the family could be part of the story. But the fact that this group is growing especially among unmarried people suggests that family specialization explains at best a minority of the aggregate changes.

Unemployment insurance benefits are paid only to people who report that they are actively looking for work. Some unemployed have long been skeptical that they can find a good job and are just going through the motions of job search to satisfy the unemployment program’s requirements (see this testimony to a House subcommittee by Stacey G. Reece, co-owner of a recruitment firm in Gainesville, Fla., who said he witnessed people “applying for jobs only to protect their status for unemployment insurance”).

When such a person’s unemployment benefits run out, he may look less actively for work, which changes his classification from unemployed to out of the labor force.

The termination of unemployment benefits can, and sometimes does, have the opposite effect, because the loss of income can make out-of-work people more seriously consider accepting a low-paying job. But unemployment insurance is by no means the only safety-net program. The Supplemental Nutrition Assistance Program (formerly known as food stamps) is a major and newly expanded safety-net program and does not require its beneficiaries to work or be looking for work. Curiously, SNAP has been expanding while the unemployment rate falls.

People without jobs increasingly take part in the disability insurance program, which does not require people to look for work because “disability” means that the person is unable to work. Medicaid is another major safety program that does not require its participants to work.

A significant part of the recent reductions in the unemployment rate may reflect movements of people between safety net programs rather than any significant change in their job-finding prospects.

Article source: http://economix.blogs.nytimes.com/2013/04/10/varieties-of-not-working/?partner=rss&emc=rss

Today’s Economist: Nancy Folbre: The Unregulated Work of Mechanical Turk

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.

Ever wonder what our labor market would look like without minimum wages or labor law protections? Take a look at the brave new world of online piecework platforms, like Amazon’s Mechanical Turk, which allows employers, politely termed “requesters,” to post jobs for a “global, on-demand, 24 x 7 work force.”

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Workers are offered pay for completion of a series of Human Intelligence Tasks (HITs), easily fragmented activities (like transcription, categorization or tagging) in which computers actually need assistance from carbon-based life forms like ourselves.

Spamming and fake reviewing can be easily commissioned. For instance, I could probably pay less than 10 cents apiece for unique posted comments of at least 50 words including at least two positive superlatives on this blog. (Should I discuss this with my editors?)

Estimates of what workers can earn on these crowdsourced tasks range from about $1.20 to $5 an hour without any benefits. Employers treat them as independent contractors not covered by federal minimum-wage legislation. A standard terms-of-use agreement gives employers the freedom to reject an employee’s work on any grounds; workers (oops, I mean contractors) have no easy recourse.

Mechanical Turk takes its name from an 18th-century hoax featuring a man-size Turkish puppet that could vanquish most opponents at chess with serene equanimity. Years later it was revealed that his chess table concealed a human prodigy who could manipulate the pieces from underneath with magnets. Other successful companies have adopted equally poetic names, like CrowdFlower and CrowdCloud.

What started as a niche experiment has become a major global industry. Like some other activities, like work at call centers, digital piecework represents a form of virtual labor migration that denationalizes employment. Research by Panos Ipeirotis, a computer expert at the Stern School of Business at New York University, estimates that Mechanical Turk alone engages 500,000 active workers in more than 100 countries, with workers heavily concentrated in two countries: the United States (with 50 percent of the total) and India (with 40 percent).

About 70 percent of its employees are women, many of whom probably can’t find other opportunities to work from home with flexible hours and are therefore willing to accept low wages.

The Mechanical Turk Web site promotes itself with a quotation from a proud chief executive: “Over all, we estimate saving 50 percent over other outsourcing methods.” Yet as both Zakia Uddin on Alternet and Julian Dobson on The Huffington Post point out, these labor practices haven’t gotten as much attention as sweatshop practices in other countries.

A recent Utne Reader article by the California journalist Ellen Cushing briefly profiles some of the industry’s fans as well as its critics. In general, computer scientists, including Professor Ipeirotis, seem quite cheerful about its prospects for improving both efficiency and opportunities for people in developing countries who can gain access to computers.

Low-quality wages may elicit low-quality work. But as Professor Ipeirotis points out, companies can compensate in two different ways, through redundancy (hiring several workers to do the same job and comparing their results) or through use of “gold data” — questions to which employers already know the answer, randomly inserted as a test of worker competence.

One recent academic paper on the future of crowd work, acknowledging sweatshop anxieties, asks, “Can we foresee a future crowd workplace in which we would want our children to participate?” It does not provide a clear answer.

Such a future can clearly be imagined. But can it be achieved?

Workers relying on such low wages and unstable employment are not likely to be able to educate their children enough to escape increasingly high rates of unemployment. A sustainable form of crowdsourcing will require forms of collective governance that mitigate the effects of market competition on those treated as mere links in a chain of algorithmic logic.

In other words, it will require some assurance of human rights, including access to decent employment, living wages and high-quality public education.

Computers don’t care whether they have meaningful opportunities for the development of their potential capabilities. Most humans do. If they had such opportunities, they would not be willing to crawl under a table and create the illusion of an eternally smiling, amazingly intelligent global machine. They would not be willing to get turked.

Article source: http://economix.blogs.nytimes.com/2013/03/18/the-unregulated-work-of-mechanical-turk/?partner=rss&emc=rss