Friday, May 29, 2015

Does Inequality Reduce Economic Growth: A Skeptical View

Those who find the rise in income inequality over the last few decades to be concerning, like me, can find themselves facing the "so what?" question. Is my concern over rising inequality an ethical or perhaps an aesthetic judgement, and thus a personal preference where economics really doesn't have much guidance to offer? Faced with this possibility, the temptation arises to claim the following syllogism: 1) We have experienced greater inequality, which is undesirable. 2) We have experiences slower economic growth, which is undesirable. 3) Therefore, greater inequality causes slower economic growth.

A variety of studies have undertaken to prove a connection from inequality to slower growth, but a full reading of the available evidence is that the evidence on this connection is inconclusive. For example, the OECD has recently published a report called "In It Together: Why Less Inequality Benefits All," and Chapter 3, titled "The Effect of Income Inequality on Economic Growth," offers an OECD analysis seeking to connect the two. But before presenting the new study, the OECD report has the honesty and forthrightness to point out that the full body of literature on this subject is inconclusive as whether such a relationship even exists--and if so, in what direction the relationship goes.

The report first points out (pp. 60-61 that as a matter of theory, one can think up arguments why greater inequality might be associated with less growth, or might be associated with more growth. For example, inequality could result less growth if: 1) People become upset about rising inequality and react by demanding regulations and redistributions that slow down the ability of an economy to produce growth; 2) A high degree of persistent inequality will limit the ability and incentives of those in the lower part of the income distribution to obtain more education and job experience; or 3) It may be that development and widespread adoption of new technologies requires demand from a broad middle class, and greater inequality could limit the extent of the middle class.

In passing, it's worth noting that the first reason falls into the category of "frustrated people killing the goose that lays the golden eggs." In other words, finding a correlation between rising inequality and slower growth could be a sign of dysfunctional responses to the rise in inequality.

On the other side, inequality could in theory be associated with faster economic growth if: 1) Higher inequality provides greater incentives for people to get educated, work harder, and take risks, which could lead to innovations that boost growth; 2) Those with high incomes tend to save more, and so an unequal distribution of income will tend to have more high savers, which in turn spurs capital accumulation in the economy. The report doesn't mention a third hypothesis that seems relevant in a number of developing economies, which is that fast growth may first emerge in certain regions or industries, leading to greater inequality for a time, before the gains from that growth diffuse more widely across the economy.

Given the competing theoretical explanations, what does the actual evidence say? The OECD writes
(pp. 61-62):

The large empirical literature attempting to summarize the direction in which inequality affects growth is summarised in the literature review in Cingano (2014, Annex II). That survey highlights that there is no consensus on the sign and strength of the relationship; furthermore, few works seek to identify which of the possible theoretical effects is at work. This is partly tradeable to the multiple empirical challenges facing this literature.  
The report then goes on to discuss issues like: 1) variations in estimation methods, including whether the analyst looks at one country over time, multiple countries at a point in time, or multiple countries over time, along with the statistical tools used; 2) in many countries around the world, the data on income distribution is not measured well, not measured consistently over time, and not measured in ways that are easily comparable to other countries; 3) in empirical studies the already-weak data on inequality is often boiled down into a single number, like a Gini coefficient or a ratio between those in the 90th and 10th income percentiles, a simplification that might miss what is happening; 4) the connections between income inequality and growth might differ across groups of countries (like high-income and low-income countries), and looking at all countries together averages out these various effects; and 5) whether (and how) the researcher should take into account factors like the extent of progressive taxation and redistribution, the extent of financial markets, or the degree of economic and social mobility over time.

There's an old saying that "absence of evidence is not evidence of absence," in other words, the fact that the existing evidence doesn't firmly show a connection from greater inequality to slower growth is not proof that such a connection doesn't exist. But anyone who has looked at economic studies on the determinants of economic growth knows that the problem of finding out what influences growth is very difficult, and the solutions aren't always obvious. For example, the OECD study argues that inequality leads to less investment in human capital at the bottom part of the income distribution. If this result holds up in further study, an obvious answer is not to focus on inequality directly, but instead to focus on additional support for human capital accumulation for those most in need.

There are a few common patterns in economic growth. All high-income countries have near-universal K-12 public education to build up human capital, along with encouragement of higher education. All high-income countries have economies where most jobs are interrelated with private and public capital investment, thus leading to higher productivity and wages. All high-income economies are relatively open to foreign trade. In addition, high-growth economies are societies that are willing to allow and even encourage a reasonable amount of disruption to existing patterns of jobs, consumption, and ownership. After all, economic growth means change.

On the other hand, it's also true that fast-growing countries around the world, either now or in the past, show a wide range of levels and trends of inequality, as well as considerable variation in the extent of government regulation and control, patterns of taxation and redistribution, structure of financial sector, and much more. Consider the pattern of China's fast economic growth in recent decades, with rising inequality and an evolving mixture of private initiative and government control. At least to me, China looks like a situation where growth is causing inequality, not where inequality is slowing growth. It may be that the question of "does inequality slow down economic growth" is too broad and diffuse to be useful. Instead, those of us who care about both the rise in inequality and the slowdown in economic growth should be looking for policies to address both goals, without presuming that substantial overlap will always occur between them.

Thursday, May 28, 2015

The Sharing Economy

The nickname "the sharing economy" seems like a triumph of public relations artistry. The term refers to firms based on software that allows people to rent a room in someone's house (like Airbnb) or pay for a ride in someone's car (like Uber or Lyft). At least in the kindergarten where I learned all of my sharing values, being compensated was not a form of "sharing." As an alternative title, I've proposed the "finding ways to get paid for excess capacity" economy, but it doesn't quite trip off the tongue. Better is the "matching economy," which captures the idea of using the web to match up a potential buyer and seller who would otherwise have had no way to connect.

Firms like eBay can be thought of as the first generation  of the matching economy, but people selling stuff to each other displaced relatively few existing workers and raised relatively few public policy issues. Tim Sablik offers an overview of the current issues in "The Sharing Economy: Are new online markets creating economic value of threatening consumer safety?" in the Fourth Quarter 2014 issue of EconFocus, published by the Federal Reserve Bank of Richmond. He points out that in some industries, the growth of supply as a result of the matching economy has been quite substantial:
"The Bureau of Labor Statistics reports that there were 233,000 taxi drivers and chauffeurs in the United States as of 2012, but new services are substantially adding to that number. According to a recent study by Uber's head of policy research Jonathan Hall and Princeton University economist Alan Krueger [discussed here], the company had more than 160,000 active U.S. drivers in 2014. That alone nearly doubles the supply of short-term transportation, not counting Uber's competitors like Lyft and Sidecar. Similarly for the hotel industry, Airbnb boasts over a million properties in nearly 200 countries, surpassing the capacity of major hoteliers like Hilton Worldwide, which had 215,000 rooms in 74 countries in 2014."
Sablik points to evidence that the additional competition has led to better deals for consumers, not just the consumers who use matching economy firms, but also because the traditional competitors offer better deals, too. The matching economy firms can be especially useful when there is a spike in demand--like a city hosting a Super Bowl or a political convention. Moreover, the idea of the matching economy is taking on many forms. Here's a list of some sharing economy firms from Sablik:

 
An article in the Economist magazine for January 3, 2015, discussed how the matching economy was reaching into the labor market.
"In San Francisco, ... young professionals ... can use the apps on their phones to get their apartments cleaned by Handy or Homejoy; their groceries bought and delivered by Instacart; their clothes washed by Washio and their flowers delivered by BloomThat. Fancy Hands will provide them with personal assistants who can book trips or negotiate with the cable company. TaskRabbit will send somebody out to pick up a last-minute gift and Shyp will gift-wrap and deliver it. SpoonRocket will deliver a restaurant-quality meal to the door within ten minutes."
So what are the issues or problems with the matching economy? Here is how I see them.

1) The new suppliers in the matching economy only have a cost advantage because they are breaking existing rules or otherwise underregulated. When you purchase a traditional taxi-ride or a hotel room, you are actually paying for more than the basic service. You are also paying for health and safety inspectors, for an assurance of certain kinds of required training and certification, for liability insurance, for limits on the possibilities for price-gouging, and often for brand-name reputation. From this standpoint, the problem isn't that there is more competition, but rather that the competition doesn't need to play by the same rules.

This concern has some force, but there are counterarguments. It's worth noting that new entrants are not completely unrestricted. Many of the matching economy firms do background checks on those providing services, and may require that they carry specific insurance. Users of the services can rate the providers, as well as looking at previous reviews. Sablik writes: "Portland, Ore., has partnered with Airbnb to promote the service through its tourism bureau. The city may stand to gain from the deal. According to Airbnb's own studies, its guests tend to stay longer and spend more than typical tourists. For its part, Airbnb agreed to work with the city to ensure hosts meet safety requirements. It also agreed to collect and remit lodging taxes to Portland on behalf of its hosts."

The rise of the matching economy should also force government to take a fresh look at what regulations are needed. However, it's a well-known phenomenon in regulatory economics to have a situation in which large existing competitors welcome regulation, because the regulations help to block small and innovative new competitors--and the costs of the regulations can then be passed along to consumers. Maybe it's an obvious point, but the goal of regulation be to provide benefits to consumers in excess of the costs imposed, not to hobble new competitors. The appropriate regulations for Airbnb should differ in a number of relevant ways from the regulations for a standard commercial hotel.

2) Benefits to consumers should matter a lot.  may well be true that some of the advantage of matching economy firms is that they face a lighter regulatory hand, but that's probably not their main advantage. The main advantage is that customers like what they provide. Who benefits the most from having a greater supply of car-ride services in New York? It's clearly those with low incomes, who have an improved option to call for a ride, to know who is coming, and to know what the price will be. Some people will feel more secure riding with someone whose name and face and customer reviews they can see in advance, rather than with a stranger who drives up in a taxi. Some people like staying in other people's houses, at least some of the time, while others prefer the characteristics of a hotel or resort, at least some of the time. It

3) Too many of the jobs in the matching economy are low-paid temp work, not "good" jobs.  It's easy to conjure up a mental vision in which the matching economy comes down to rich people paying poor people to drive them places, pick up their dry-cleaning, deliver their groceries, and the like. It's also easy to imagine that the workers in those jobs may be working for low hourly pay, with unreliable fluctuations in their income and no benefits. Clearly, some of the jobs in the matching economy will fall into that category. But not every job needs to involve a career path. it's easy to think about someone who is just trying to pick up some extra income, like a college student, who is delighted with the flexibility of the job. Moreover, at least some of the matching economy companies are guaranteeing workers who want it a minimum number of hours, or offering benefits like insurance.

Overall, my own sense is that some jobs are just hours and a paycheck, and other jobs are careers. Trying to more toward an economy where career-type jobs are more available--meaning jobs where there is value to a lasting tie between worker and employee, and where the employee has  possibilities for initiative, growth, and advancement, is a policy challenge for another day. Here, I'll just note that  we are going to start passing rules and laws that only "good" jobs are allowed,  while trying to limit jobs with low pay or limited prospects, it's not clear to me that jobs in the matching economy are the problem, or that jobs in the matching economy are worse more than a lot of existing jobs in the conventional hotel or taxi industries, or in the retail and services sectors in general.

4) Current suppliers of the service don't like the new competition. Without meaning to be hard-hearted about it, my sympathy level for this complaint is low. As Sablik points out, in New York city it cost about $1 million to buy the medallion that gives the right to drive a traditional taxicab. That high price suggests that existing owners (who are often quite different from the taxicab drivers) had been quashing new competitors and earning monopoly profits. If we want an economy that is growing and offering opportunities, we need to accept that current suppliers of goods and services will face new competition and need to adapt.

Wednesday, May 27, 2015

Tradeoffs of Dollarization

Only a few countries around the world have gone so far as to "dollarize" their economy--that is, using  the US dollar as a predominant legal currency. According to an IMF characterization of exchange rate regimes, the dollarized economies include some small island nations with close historical or economic ties to the US, but also Ecuador, El Salvador, Panama, Timor Leste, and Zimbabwe. However, in a number of other countries the US dollar plays a very substantial role in bank deposits and lending. The IMF has been offering some comments and reports on the tradeoffs of dollarization, often with a strong hint that it might be beneficial to do less of it. For example, Naoyuki Shinohara
Deputy Managing Director of the IMF, made these comments in a February 2015 conference:
[M]any Frontier and Developing Asian economies are also highly dollarized. In some cases, high dollarization can facilitate trade. But there are drawbacks, such as limiting exchange rate flexibility to mitigate against external shocks, and constraining the central bank’s ability to be the lender of last resort. Under such circumstances, consideration could be given to actively promote de-dollarization. But de-dollarization is a long process and requires a commitment to strengthen policies and institutions.
An IMF staff team led by Mauro Mecagni and Rodolfo Maino has published a May 2015 report on "Dollarization in Sub-Saharan Africa: Experience and Lessons." Along with specific information about the extent of dollarization across this region--other than the official dollarization of Zimbabwe--the report does a nice job of reviewing the tradeoffs involved.

What economic factors that often lead to dollarization? The IMF team lists four main causes:

  • Large macroeconomic imbalances and high inflation. Several countries around the world (for example, Chile, Colombia, and Peru) became dollarized following periods of macroeconomic turbulence and high inflation that encouraged the substitution of domestic currency with the U.S. dollar. Dollarization may thus result from a legacy of severe economic disruption.
  • Financial repression and capital controls. Many Latin American economies in the 1970s and 1980s as well as many SSA [sub-Saharan Africa] countries (for example, Democratic Republic of the Congo, Liberia, and Nigeria) have become dollarized following periods of financial repression and the imposition of capital controls.
  • Use of the dollar as anchor for macrostability. Some countries (for example, Ecuador, El Salvador) adopted the dollar as legal tender in order to escape from a long history of monetary and financial disorder by “importing” the credibility of the U.S. monetary institutions.
  • Underdeveloped financial markets. In several countries, domestic borrowers contract debt in foreign currencies in response to the lack of domestic currency alternatives in incomplete financial markets.

Although dollarization arises as a response to economic problems, it brings tradeoffs of its own. A dollarized economy by definition has no control over its own monetary policy--and there is no particular reason to think that decisions made by the US Federal Reserve will suit the economic needs of  other countries. A dollarized economy is also vulnerable to rises and falls in the exchange rate of the US dollar. A particular problem can arise in a partially dollarized economy when the government, or large banks and firms, have borrowed in US dollars, planning to receive funds in the local currency of the country, convert to US dollars in the foreign exchange markets, and repay the US dollar loans. If the exchange rate moves sharply, it can become impossible to repay those US dollar loans (a dynamic that was one of the roots of the East Asian financial crisis in 1998).

The IMF study chooses a threshold in which if the ration of a foreign currency deposits to total deposits is more than 30%, an economy is said to be "dollarized." Here's the picture for sub-Saharan Africa as of 2012, with the extent of dollarization shown as a share of bank deposits and a share of bank loans. Moving clockwise from east to west, an arc of countries including Angola, Congo, Uganda, Tanzania, and Mozambique are relatively heavily dollarized.



The IMF researchers look for past examples of de-dollarization in recent decades, including Israel, Poland, Bolivia, Peru, and Angola. Overall, they sum up the de-dollarization efforts in this way:
Experience also shows that dollarization is often difficult to reverse. While the use of a foreign currency as a store of value or for domestic transactions has increased sharply in several countries over time, there are fewer cases in which this trend has been significantly reversed. Memories of macroeconomic instability and hyperinflation—the key factors that encourage dollarization—do not wither away easily, encouraging economic agents to maintain foreign currency denominated assets even when macroeconomic conditions have stabilized and policy credibility has been established.
As one might expect, the main steps to reduce dollarization focus on controlling inflation and achieving macroeconomic stability, so the main incentives behind dollarization are reduced. Passing laws and regulations to outlaw dollarization doesn't tend to work well; it only emphasizes the desperate problems of the local currency, thus making dollarization look more attractive. But the IMF team points out that when a country has its macroeconomic fundamentals under control, it can also nudge its economy along the de-dollarization trajectory in other ways. For example, it can set financial regulations for local banks that require them to take the foreign exchange risks of lending in US dollars into account--which pushes the bank toward holding more reserves and doing more lending in the local currency.

In a globalized economy, banks and firms in all countries are going to be involved in foreign currency exchanges. There can be a reasonable economic case for similar nearby countries to link their currencies together. But when dollarization becomes highly prominent, it's typically a signal that the government's economic policies are mistrusted or incompetent or both.

Monday, May 25, 2015

The Earned Income Tax Credit

The single largest federal program for providing cash assistance to those with low incomes is the Earned Income Tax Credit, which in 2014 reduced taxes owed by the working poor by about $3.6 billion while transferring to those households an additional $60.8 billion (according to Table 14-1 in the Analytical Perspectives volume of the proposed US budget. This isn't as much as programs with non-cash benefits, like Food Stamps and Medicaid. But it's more than what is spent on welfare, or on the Supplemental Security Income program for the low-income disabled and elderly. In "Earned Income Tax Credit in the United States," which appears in the Journal of Social Security Law (2015, 22:1, pp. 20-30), Elaine Maag provides a useful overview of the program.

For economists, the big selling point of the EITC is that it rewards work. The classic problem that arises when government provides assistance to those with low income levels is that as a person works to earn an extra $100, they often find that the government benefits are then reduced by nearly that same amount or sometimes even more. As a result, many low-income people who work are saving the government some money, but not much increasing their actual after-benefits, after-taxes standard of living. In contrast, the EITC is set up so that the work disincentives are greatly reduced. Maag offers a graph familiar to those who know the program that shows how it operates.

The different lines in the graph represent single-earner families with different numbers of children. Maag explains the situation for a family with one child:
"In 2014, a family with one child was eligible for a subsidy of 34 cents for each dollar earned up to $9,720—a maximum credit of $3,305. A family qualified for the $3,305 credit until its income reached $17,830. At that point, the EITC declined by almost 16 cents for each additional dollar of earnings; the credit phased out completely once earnings reach $38,511 (figure 1). Larger credits are shown for families with more than one child, as well as the small credit available to a family with no custodial children."
Thus, a low-income person with one child who starts working gets a bonus of 34 cents on the dollar up to a certain level of earnings--which helps to offset their declining eligibility for other government benefits. For this family, the credit does phase out above $17,830 in income, so each $1 earned above this amount means that the amount of the credit falls by about 16 cents. This represents a lower incentive to work--but losing only 16 cents in benefits for every $1 earned is a lot better than losing, say $1 in benefits for every dollar earned. And any means-tested program has to be phased out in some way as income levels rise. Along with the federal EITC, 23 states have also added their own versions of the EITC to their state-level income tax codes.

Maag reviews the empirical evidence that the EITC does seem to encourage greater levels of work participation in the phase-in range, although it doesn't seem to have much effect on average hours worked and doesn't do much to discourage work hours in the phase-out range. She writes (footnotes omitted): "The official measure of poverty in the US does not include changes in resources due to taxes. If it did, scholars have determined that the EITC wouldhave been credited with lifting 6.5 million people out of poverty in 2012, including about 3.3 million children. Changes in income as a result of the EITC are associated with better health, more schooling and higher earnings in adulthood."

Overall, I think one can make a plausible case for a dramatic increase in the amount spent on the EITC. But honesty compels me to point out that the EITC has two well-known shortcomings and problems that need to be mentioned.

  • The program is heavily focused on families with children. Thus, it doesn't help the situation of a childless person who is below the poverty line and working for near minimum-wage. EITC benefits are also lower for married couples. Any government program where the benefits are  higher for those who are unmarried with children deserves a closer look to see if the incentives can be structured differently. 
  • The EITC adds a lot of complexity to the tax forms of the working poor, who are often not well-positioned to cope with that complexity, nor to hire someone else to cope with it. About 20% of EITC payments go to those who don't actually qualify, which seems to happen because low-income people hand over their tax forms to paid tax preparers who try to get them signed up. Of course, there's another group, not well-measured as far as I know, of working-poor households who would be eligible for the EITC but don't know how to sign up for it. 

These issues don't have neat and tidy answers, but they do have messy and practical answers.

Friday, May 22, 2015

Quandaries of Global Trade in Secondhand Clothing

Even good intentions can have unexpectedly mixed results. Used clothing that is donated to charity in high-income countries often ends up being passed along to low-income countries. In turn, the textile and clothing industries in those countries often can't compete with these imports, and end up contracting. Andrew Brooks tells the story in his new book Clothing Poverty: The Hidden World of Fast Fashion and Second-hand Clothes. For those who would like a shorter version, Brooks has authors a couple of short and readable overview articles on March 20, 2015, in Geographical, and on February 13, 2015, in the Guardian.

Basic statistics on exports of used clothing are available from US and UN sources. The US Department of Commerce website reports that in 2014, US exports of "Worn clothing and other worn articles," item 6309.00, totaled 774 million kilograms in 2014, with a value of $710 million. The United Nations Comtrade data on "Worn clothing and other worn textile articles; rags 269" shows that worldwide exports in this area rose from $1.5 billion 2000 to $5.1 billion by 2013. As one would expect, a certain amount of this used clothing is moving between nearby high-income countries: say between the US and Canada, or between European Union countries. But a sizeable share also makes its way from high-income to low-income countries. Here are the UN numbers of main importers and exporters in the "worn clothing" category.


The main source of contention arises when clothing from high-income countries like the US and the UK ends up in low-income countries. A substantial amount of this used clothing ends up in the hands of companies like the Trans-Americas Trading Co., which buys clothing from charities and reports on its website: "Approximately eight out of ten pounds of clothing collected by large charitable institutions are sold to recyclers in order to generate revenue for their charitable programs." Here are a couple of images from the Brooks posting on Geographical.  The first shows what happens to some of the used clothes when given away in the US and the UK.
Africa2

Brooks reports that about one-third of all globally donated clothes end up in Africa, where most of them are not donated, but instead are re-sold. The next image shows some of the effects of this used clothing in various nations of sub-Saharan Africa.
Africa1

In a number of African countries, the presence of used clothing has become so prominent in the markets that it has a local slang name. Here are a few examples, as reported by Brooks:
  • Nigeria: "okirika" (bend down boutique)...
  • "Ghana: "obroni wawu" (clothes of the dead white man)" 
  • Zambia: "salaula" (selecting from a bale by rummaging)
  • Congo: "sola" (to choose)
  • Zimbabwe: "mupedzanhamo" (where all problems end)
  • Kenya & Tanzania: "mitumba" (bundles) or "kafa ulaya" (clothes of the dead whites)

There are some legitimate quandaries here. On one side, many of the charities in high-income countries that ask for donated clothing, and then end up selling that clothing to dealers like Trans-Americas Trading Co., are doing good things with the money they raise. Clothing that is passed along to others doesn't end up in a landfill someplace. It's quite plausible that those who wear end up wearing the donated clothing didn't have more cost-effective options. On the other side, there is some severe irony in this global trade in secondhand clothing.

One irony is that there was a history of high-income countries using trade barriers to limit imported clothing from low-income countries under the Multi-Fiber Agreement, which lasted from 1974-1994 and then was phased out over the following decade. The agreement was especially controversial among economists because textiles had been one of the early steps into manufacturing for high-income countries in the 19th century, and for a number of Asian economies in the mid-20th century. Having argued that it was important for high-income countries to protect their own textile markets, it is ironic to now face the reality that second-hand clothes from high-income countries are injuring textile production in low-income countries. Thus, one can have some sympathy with countries that essentially ban imports of worn clothing, including Argentina, the Dominican Republic, Namibia, and South Africa.

On the other side, the textile industry like so many others is dramatically shifting toward greater mechanization and use of industrial robots, even in low-income countries. Thus, it's not altogether clear that textiles offer the same path to a substantial number of jobs or a growing manufacturing sector that it once did. And it seems unlikely that textiles are going to be one of the hot new growth industries of the future. For low-income countries, looking for opportunities in other industries may well be the wiser long-term choice.

Thursday, May 21, 2015

E-cigs: The Bootlegger/Baptist Opposition

It might seem that the debate over e-cigarettes and "vaping" should be a fundamentally empirical question. Does vaping primarily reduce cigarette smoking? If so, then it should be viewed as an overall benefit to public health and, at a minimum, not discouraged. Or does vaping serve as a gateway that leads to increased cigarette smoking? If so, then it should be discouraged in many of the same ways as cigarette smoking: public health advisories, taxes, no-vaping in public spaces, and the like.

But interpreting the evidence isn't simple. For example, the Centers for Disease Prevention and Control (CDC) put out a report on April 17, 2015, titled "Tobacco Use Among Middle and High School Students — United States, 2011–2014." The first paragraph offers this statement: "In 2014, e-cigarettes were the most commonly used tobacco product among middle (3.9%) and high (13.4%) school students. Between 2011 and 2014, statistically significant increases were observed among these students for current use of both e-cigarettes and hookahs (p<0.05), while decreases were observed for current use of more traditional products, such as cigarettes and cigars, resulting in no change in overall tobacco use." Some people see this shift from regular cigarettes to e-cigarettes as good news, because the health effects of e-cigarettes are lower (that is, they have nicotine, but none of the other by-products of smoking that are typically linked to cancer). Some see the rise in e-cigarettes as a threat to be stopped.

As the government regulators figure out what to do, it's important to remember that there is an industry lobbying powerhouse with a large incentive to restrict e-cigarettes: the big tobacco companies.  Jonathan H. Adler, Roger E. Meiners, Andrew P. Morriss, and Bruce Yandle make this argument in "Bootleggers, Baptists, and E-cigs," which appears in the Spring 2015 issue of Regulation magazine.

A bootleggers-and-Baptists coalition refers to legal restrictions that arise from a combination of those who don't want the activity to occur and those who want to use the regulations to cripple potential competition. In the canonical example, both bootleggers and Baptists favored laws prohibiting legal alcohol sales--but for different reasons. Other common examples include when industry partners with environmentalists to support tough environmental regulations, which industry favors because it will cripple any new competition.  In another example, existing examples of legal gambling--like state lotteries--often partnered with anti-gambling forces to oppose expanded gambling opportunities from Native American casinoes. Bruce Yandle and Adam Smith have a recent book out on the subject: Bootleggers and Baptists: How Economic Forces and Moral Persuasion Interact to Shape Regulatory PoliticsHere's an interview with Yandle from a few years back.

In the case of e-cigarettes, the Adler, Meiners, Morriss, and Yandle  essay points out that  few years back, the four big tobacco companies (Philip Morris Inc., R. J. Reynolds, Brown & Williamson and Lorillard) signed an agreement in which they would pay $206 billion over time to 46 states, and in exchange, the states would not sue them for how smoking increased the health care spending costs of those states. Many anti-smoking groups broadly favored the settlement, because worked like a tax on cigarettes to push tobacco companies to raise their prices to consumers and thus discourage smoking.

But the big tobacco companies were concerned that new entrants to the industry might be able to undercut them on price, because new entrants would not have to make these payments to the states. As the Adler et al. group explains: "Therefore the MSA [Master Settlement Agreement] provided that for every percent of market share over 2 percent lost by a participating cigarette manufacturer, the manufacturer would be allowed to reduce its payments to the states by 3 percent, unless each participating state enacted a statute to prevent price competition from non-participating manufacturers (which each state did). The statutes require nonparticipating cigarette producers to make payments equal to or greater than what they would owe had they been participants in the agreement, to eliminate any cost advantage."

In short, the political process over how e-cigarettes should be regulated is not a pure public health argument. E-cigs represent a competitive threat to the tobacco industry, which will lobby to have have them regulated at least as harshly as conventional cigarettes, although the health issue posed by e-cigs (which, by the way, can contain little or no nicotine if the vaper desires) is clearly much lower. States will be worried that this new competition from vaping might in some way affect their revenues they are expecting from the tobacco companies. A certain group of anti-smoking neo-prohibitionists has pretty much already decided to view vaping as an insidious precursor to conventional cigarettes.

As I have pointed out, the anti-smoking efforts that began with the US Surgeon General's report back in 1964 have saved millions of lives, but even though smoking rates have diminished, tobacco use is still linked to 400,000 premature deaths and another $300 billion in economic costs due to health care costs and lost productivity each year. Perhaps e-cigs can help to reduce these costs. The evidence on how e-cigarettes interact with use of conventional cigarettes is still accumulating, but before we run with the assumption that e-cigs are part of the same problem, it's worth some critical scrutiny on the bootlegger-and-Baptist coalition that is pushing for this result.

Wednesday, May 20, 2015

John Stuart Mill's Birthday: Thoughts on Conformity and Individualism

John Stuart Mill was born 209 years ago on May 20, 1806, and has a claim to being the greatest economist of his time. His Principles of Political Economy, first published in 1848, served as the leading overview of the subject of economics four four decades, until Alfred Marshall published his Principles of Economics in 1890. Mill's 1848 book is wonderfully systematic and detailed, and has its share of original insights for its time. Some of my own favorites include the idea that it is possible to separate for analytical purposes the issues of production and distribution;  the systematic treatment of supply and demand in setting prices; the discussion of the function of money; and the arguments about the economy evolving toward a stationary state.  However, I think Mill may rank higher as a political philosopher than as an economist.  

As a birthday present, here's a passage from Mill's 1859 classic On Liberty. In "Chapter III: Of Individuality, as One of the Elements of Well-Being," Mill argues that while there was once a time when society needed to control the individuality of people, we have now entered a time when people instead have an urge for conformity. Mill wrote about the practices of most people:
"I do not mean that they choose what is customary, in preference to what suits their own inclination. It does not occur to them to have any inclination, except for what is customary. Thus the mind itself is bowed to the yoke: even in what people do for pleasure, conformity is the first thing thought of; they like in crowds; they exercise choice only among things commonly done: peculiarity of taste, eccentricity of conduct, are shunned equally with crimes: until by dint of not following their own nature, they have no nature to follow: their human capacities are withered and starved: they become incapable of any strong wishes or native pleasures, and are generally without either opinions or feelings of home growth, or properly their own. ..."
Even worse than bowing to such conformity, Mill argues, people then demand that others conform as well. We first conform to the crowd, and then pressure others to conform as well, instead of leaving each person to steer their own way. In one of my favorite lines in the Mill corpus, he writes:
"If a person possesses any tolerable amount of common sense and experience, his own mode of laying out his existence is the best, not because it is the best in itself, but because it is his own mode."
My own sense is that most people, definitely including myself, find it easy to think about what would be "best" for other people, and to undervalue what other people choose for themselves. Or to put it another way, all the choices I agree with are (of course) distinctively individual, while all the choices I disagree with are (of course) people who could do better if they didn't keep giving in to the forces of conformity and custom within their group. Here's the longer version of the paragraphs containing these passages:
"There has been a time when the element of spontaneity and individuality was in excess, and the social principle had a hard struggle with it. The difficulty then was, to induce men of strong bodies or minds to pay obedience to any rules which required them to control their impulses. To overcome this difficulty, law and discipline, like the Popes struggling against the Emperors, asserted a power over the whole man, claiming to control all his life in order to control his character—which society had not found any other sufficient means of binding. But society has now fairly got the better of individuality; and the danger which threatens human nature is not the excess, but the deficiency, of personal impulses and preferences. Things are vastly changed, since the passions of those who were strong by station or by personal endowment were in a state of habitual rebellion against laws and ordinances, and required to be rigorously chained up to enable the persons within their reach to enjoy any particle of security. In our times, from the highest class of society down to the lowest, every one lives as under the eye of a hostile and dreaded censorship. Not only in what concerns others, but in what concerns only themselves, the individual or the family do not ask themselves—what do I prefer? or, what would suit my character and disposition? or, what would allow the best and highest in me to have fair play, and enable it to grow and thrive? They ask themselves, what is suitable to my position? what is usually done by persons of my station and pecuniary circumstances? or (worse still) what is usually done by persons of a station and circumstances superior to mine? I do not mean that they choose what is customary, in preference to what suits their own inclination. It does not occur to them to have any inclination, except for what is customary. Thus the mind itself is bowed to the yoke: even in what people do for pleasure, conformity is the first thing thought of; they like in crowds; they exercise choice only among things commonly done: peculiarity of taste, eccentricity of conduct, are shunned equally with crimes: until by dint of not following their own nature, they have no nature to follow: their human capacities are withered and starved: they become incapable of any strong wishes or native pleasures, and are generally without either opinions or feelings of home growth, or properly their own. ...

There is no reason that all human existence should be constructed on some one or some small number of patterns. If a person possesses any tolerable amount of common sense and experience, his own mode of laying out his existence is the best, not because it is the best in itself, but because it is his own mode. Human beings are not like sheep; and even sheep are not undistinguishably alike. A man cannot get a coat or a pair of boots to fit him, unless they are either made to his measure, or he has a whole warehouseful to choose from: and is it easier to fit him with a life than with a coat, or are human beings more like one another in their whole physical and spiritual conformation than in the shape of their feet? If it were only that people have diversities of taste, that is reason enough for not attempting to shape them all after one model. But different persons also require different conditions for their spiritual development; and can no more exist healthily in the same moral, than all the variety of plants can in the same physical, atmosphere and climate. The same things which are helps to one person towards the cultivation of his higher nature, are hindrances to another. The same mode of life is a healthy excitement to one, keeping all his faculties of action and enjoyment in their best order, while to another it is a distracting burthen, which suspends or crushes all internal life. Such are the differences among human beings in their sources of pleasure, their susceptibilities of pain, and the operation on them of different physical and moral agencies, that unless there is a corresponding diversity in their modes of life, they neither obtain their fair share of happiness, nor grow up to the mental, moral, and aesthetic stature of which their nature is capable. Why then should tolerance, as far as the public sentiment is concerned, extend only to tastes and modes of life which extort acquiescence by the multitude of their adherents? Nowhere (except in some monastic institutions) is diversity of taste entirely unrecognised; a person may, without blame, either like or dislike rowing, or smoking, or music, or athletic exercises, or chess, or cards, or study, because both those who like each of these things, and those who dislike them, are too numerous to be put down. But the man, and still more the woman, who can be accused either of doing "what nobody does," or of not doing "what everybody does," is the subject of as much depreciatory remark as if he or she had committed some grave moral delinquency. ...
If the claims of Individuality are ever to be asserted, the time is now, while much is still wanting to complete the enforced assimilation. It is only in the earlier stages that any stand can be successfully made against the encroachment. The demand that all other people shall resemble ourselves, grows by what it feeds on.
Perhaps the good news here is that Mill's comments still read as timely today, which suggests that perhaps this balance between conformity and individualism is not decided once and for all, but is an ongoing challenge for each of us to accept, both in having the willingness and energy to make our own choices, and in the level of tolerance and acceptance we offer as a society to those who (peacefully) choose not to conform with our own decisions.