Friday, November 27, 2015

Capitalism for Growth, Goverment for Fairness

When I hear discussions of how to encourage economic growth, along with equality and fairness, I sometimes feel as if the discussants are in the grip of a category confusion, like someone who rinses their vegetables in the shower and then tries to bathe in the kitchen sink. Here's the confusion as expressed in an October 1990 opinion column by Donald Kaul, who was a prominent opinion columnist, mainly with the Des Moines Register, from the 1970s through the 1990s. Kaul wrote: 
We have come to rely upon capitalism for justice and the government for economic stimulation, precisely the opposite of what reason would suggest. Capitalism does not produce justice, any more than knife fights do. It produces winners and energy and growth. It is the job of government to channel that energy and growth into socially useful avenues, without stifling what it seeks to channel. That's the basic problem of our form of government: how to achieve a balance between economic vitality and justice. It is a problem that we increasingly ignore.
In the modern version of this category confusion, a number of politicians and my fellow citizens seem to view it as the role of companies to provide justice and fairness. Their policy prescriptions seem to be all about how companies should be held responsible for providing higher wages, a more equal distribution of wages, health insurance, pensions and retirement accounts, parental leave and sick leave, job training, healthy foods, affordable housing, a sufficient number of parking spaces cleaning up the environment, paying more taxes, and so on. 

Meanwhile, when the discussion turns to encouraging growth in the US economy, the topics that seem to come up most often are how the government can encourage growth. Sometimes the focus in on how the Federal Reserve should be boosting growth through its monetary policies. Sometimes the focus is on how government should be boosting growth through tax cuts or spending boosts, either in general terms or by subsidizing  preferred sectors of the economy like noncarbon sources of energy and building more roads and bridges.  

Striking the balance between "economic vitality and justice" (in Kaul's phrase) can be an intertwined and delicate business.  But framing the discussion in a way that government is supposed to provide growth and companies are supposed to provide fairness is topsy-turvy, and blurs the lines of responsibility in a way that does not benefit either economic growth or concerns of fairness and justice. 

Thursday, November 26, 2015

Thankgiving Tidbits: George Washington, Sarah J. Hale, Abraham Lincoln

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

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

Also, the original Thankgiving proclamation was not without some controversy and dissent in the House of Representatives, as reported by the Papers of George Washington website at the University of Virginia.

The House was not unanimous in its determination to give thanks. Aedanus Burke of South Carolina objected that he “did not like this mimicking of European customs, where they made a mere mockery of thanksgivings.” Thomas Tudor Tucker “thought the House had no business to interfere in a matter which did not concern them. Why should the President direct the people to do what, perhaps, they have no mind to do? They may not be inclined to return thanks for a Constitution until they have experienced that it promotes their safety and happiness. We do not yet know but they may have reason to be dissatisfied with the effects it has already produced; but whether this be so or not, it is a business with which Congress have nothing to do; it is a religious matter, and, as such, is proscribed to us. If a day of thanksgiving must take place, let it be done by the authority of the several States.”

Here's the transcript of George Washington's Thanksgiving proclamation from the National Archives.
Thanksgiving Proclamation
By the President of the United States of America. a Proclamation.
Whereas it is the duty of all Nations to acknowledge the providence of Almighty God, to obey his will, to be grateful for his benefits, and humbly to implore his protection and favor—and whereas both Houses of Congress have by their joint Committee requested me “to recommend to the People of the United States a day of public thanksgiving and prayer to be observed by acknowledging with grateful hearts the many signal favors of Almighty God especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness.”
Now therefore I do recommend and assign Thursday the 26th day of November next to be devoted by the People of these States to the service of that great and glorious Being, who is the beneficent Author of all the good that was, that is, or that will be—That we may then all unite in rendering unto him our sincere and humble thanks—for his kind care and protection of the People of this Country previous to their becoming a Nation—for the signal and manifold mercies, and the favorable interpositions of his Providence which we experienced in the course and conclusion of the late war—for the great degree of tranquillity, union, and plenty, which we have since enjoyed—for the peaceable and rational manner, in which we have been enabled to establish constitutions of government for our safety and happiness, and particularly the national One now lately instituted—for the civil and religious liberty with which we are blessed; and the means we have of acquiring and diffusing useful knowledge; and in general for all the great and various favors which he hath been pleased to confer upon us.
and also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech him to pardon our national and other transgressions—to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually—to render our national government a blessing to all the people, by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed—to protect and guide all Sovereigns and Nations (especially such as have shewn kindness unto us) and to bless them with good government, peace, and concord—To promote the knowledge and practice of true religion and virtue, and the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best.
Given under my hand at the City of New-York the third day of October in the year of our Lord 1789.

Go: Washington

Sarah Josepha Hale was editor of a magazine first called Ladies' Magazine and later called Ladies' Book from 1828 to 1877. It was among the most widely-known and influential magazines for women of its time. Hale wrote to Abraham Lincoln on September 28, 1863, suggesting that he set a national date for a Thankgiving holiday. From the Library of Congress, here's a PDF file of the Hale's actual letter to Lincoln, along with a typed transcript for 21st-century eyes. Here are a few sentences from Hale's letter to Lincoln:
You may have observed that, for some years past, there has been an increasing interest felt in our land to have the Thanksgiving held on the same day, in all the States; it now needs National recognition and authoritive fixation, only, to become permanently, an American custom and institution. ...  For the last fifteen years I have set forth this idea in the "Lady's Book", and placed the papers before the Governors of all the States and Territories -- also I have sent these to our Ministers abroad, and our Missionaries to the heathen -- and commanders in the Navy. From the recipients I have received, uniformly the most kind approval. ... But I find there are obstacles not possible to be overcome without legislative aid -- that each State should, by statute, make it obligatory on the Governor to appoint the last Thursday of November, annually, as Thanksgiving Day; -- or, as this way would require years to be realized, it has ocurred to me that a proclamation from the President of the United States would be the best, surest and most fitting method of National appointment. I have written to my friend, Hon. Wm. H. Seward, and requested him to confer with President Lincoln on this subject ... 

William Seward was Lincoln's Secretary of State. In a remarkable example of rapid government decision-making, Lincoln responded to Hale's September 28 letter by issuing a proclamation on October 3. It seems likely that Seward actually wrote the proclamation, and then Lincoln signed off. Here's the text of Lincoln's Thanksgiving proclamation, which characteristically mixed themes of thankfulness, mercy, and penitence:

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

Wednesday, November 25, 2015

An Economist Chews Over Thanksgiving

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

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

On the demand side, the quantity of turkey per person consumed rose dramatically from the mid-1970s up to about 1990, but since then has declined somewhat. The figure below is from the website run by the National Turkey Federation. Apparently, the Classic Thanksgiving Dinner is becoming slightly less widespread.

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

"In 1975, there were 180 turkey hatcheries in the United States compared with 55 operations in 2007, or 31 percent of the 1975 hatcheries. Incubator capacity in 1975 was 41.9 million eggs, compared with 38.7 million eggs in 2007. Hatchery intensity increased from an average 33 thousand egg capacity per hatchery in 1975 to 704 thousand egg capacity per hatchery in 2007.
Some decades ago, turkeys were historically hatched and raised on the same operation and either slaughtered on or close to where they were raised. Historically, operations owned the parent stock of the turkeys they raised while supplying their own eggs. The increase in technology and mastery of turkey breeding has led to highly specialized operations. Each production process of the turkey industry is now mainly represented by various specialized operations.
Eggs are produced at laying facilities, some of which have had the same genetic turkey breed for more than a century. Eggs are immediately shipped to hatcheries and set in incubators. Once the poults are hatched, they are then typically shipped to a brooder barn. As poults mature, they are moved to growout facilities until they reach slaughter weight. Some operations use the same building for the entire growout process of turkeys. Once the turkeys reach slaughter weight, they are shipped to slaughter facilities and processed for meat products or sold as whole birds.
Turkeys have been carefully bred to become the efficient meat producers they are today. In 1986, a turkey weighed an average of 20.0 pounds. This average has increased to 28.2 pounds per bird in 2006. The increase in bird weight reflects an efficiency gain for growers of about 41 percent."
The 2014 report points out that the capacity of eggs per hatchery has continued to rise (again, references to charts omitted):
For several decades, the number of turkey hatcheries has declined steadily. During the last six years, however, this decrease began to slow down. As of 2013, there are 54 turkey hatcheries in the United States, down from 58 in 2008, but up from the historical low of 49 reached in 2012. The total capacity of these facilities remained steady during this period at approximately 39.4 million eggs. The average capacity per hatchery reached a record high in 2012. During 2013, average capacity per hatchery was 730 thousand (data records are available from 1965 to present).

U.S. agriculture is full of examples of remarkable increases in yields over a few decades, but they always drop my jaw. I tend to think of a "turkey" as a product that doesn't have a lot of opportunity for technological development, but clearly I'm wrong. Here's a graph showing the rise in size of turkeys over time from the 2007 report.

The production of turkey remains an industry that is not very concentrated, with three relatively large producers and then more than a dozen mid-sized producers. Here's a list of top turkey producers in 2014 from the National Turkey Federation:

In the last couple of years, the US turkey industry has been affected by an outbreak of HPAI
 (Highly Pathogenic Avian Influenza). In the November 17, 2015 issue of the "Livestock, Dairy, andPoultry Outlook" from the US Department of Agriculture, Kenneth Mathews and Mildred Haley offer some details.
U.S. turkey meat production in third-quarter 2015 was 1.35 billion pounds, down 9 percent from a year earlier. This continued the downward path for turkey production in 2015 ... The third-quarter decline was due to both a lower number of turkeys slaughtered and a drop in their average live weight at slaughter. The slaughter number fell to 57.5 million, 6 percent lower than a year earlier, while the average live weight at slaughter declined to 29.3 pounds, a drop of 3 percent from the previous year. Since April the average live weight at slaughter has been lower than the previous year, for a period of 6 consecutive months—reflecting the impact of the HPAI outbreak, which caused processors to slaughter birds somewhat earlier than they normally would in order to maintain supply levels. ... Lower turkey meat production during third-quarter 2015 helped to lower overall turkey stocks, which, in turn, put upward pressure on whole bird prices. ... Turkey meat production in 2016 is forecast at 6 billion pounds, which would be an increase of 8 percent from the HPAI-reduced production of the previous year; much of the increase will come in the second half of the year. ... Prices for whole frozen hen turkeys at the wholesale level averaged $1.36 per pound in October, up from $1.16 per pound the previous year (17 percent). ... The quarterly price for frozen whole hens in 2016 is forecast higher through the first half of the year, but then to average below year-earlier levels in the second half, as higher production mitigates traditional seasonal price increases.

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

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

The cost of buying the Classic Thanksgiving Dinner rose by a  bit less than 1% in 2015, compared with 2014. The top line of the graph that follows shows the nominal price of purchasing the basket of goods for the Classic Thanksgiving Dinner. The lower line on the graph shows the price of the Classic Thanksgiving Dinner adjusted for the overall inflation rate in the economy. The line is relatively flat, especially since 1990 or so, which means that inflation in the Classic Thanksgiving Dinner has actually been a pretty good measure of the overall inflation rate.

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

Will Convergence Occur?

Economic theory suggests that low-income countries have the possibilities for growing rapidly in a way that would allow them to converge toward the per capita income levels of high-income countries. After all, the low wages and lack of capital of low-income countries should make them an attractive place for international firms and investors. Moreover, today's low-income countries don't have to invent all the technologies developed in the last century all over again; instead, they can draw on knowledge and technology already available. A prominent essay by an economist named Alexander Gerschenkron back in 1962 (available at various places on the web like here ) referred in the spirit of these arguments to "the advantages of backwardness."

So how is that process of convergence actually coming along Maria A. Arias and Yi Wen offer some fact and analysis in "Trapped: Few Developing Countries Can Climb the Economic Ladder or Stay There," which appears in the October 2015 issue of the Regional Economist, published by the Federal Reserve Bank of St. Louis (pp. 4-9). Consider a couple of figures showing where some convergence has happened in the last 60 years--and where it has not.

First, consider countries that were "middle income" by global standards in 1950--that is, their per capita incomes at that time were between roughly 10% and 40% of the US level. On the figure, the US level of per capita GDP is used as the baseline, represented by 1, and the per capita GDP of other countries is expressed relative to that baseline. The rising lines show some examples of convergence: Hong Kong, Ireland, Spain, and Taiwan. Other examples would include some countries of east Asia like South Korea. But the other four countries, all from Latin America--Mexico, Brazil, Ecuador, and Guatamala--have seen at best a very modest force of convergence over the last 60 years.

The low-income countries of the world back in 1950, those starting at well below 10% of the US level of per capita income, show a mixed pattern as well. In the figure below, the recent rise of China and India are put in perspective. In terms of per capita GDP, they have now reached the lower part of "middle-income" by global terms. But a number of other low-income countries around the world haven't shown much convergence. The examples given here, which can be thought of as representing other low-income swaths of south Asia, sub-Saharan Africa, and Latin America, are Bangladesh, El Salvador, Mozambique, and Nepal. 

More systematic evidence shows that countries often remain in the low-income and middle-income positions for a long time. By their calculation based on all the countries for which estimates are available  (references to tables omitted): 
The probability of remaining trapped in the low-income range is 94 percent after 10 years 90 percent after 20 years and 80 percent in the entire observational period, 30 to 61 years.  ... [T]he probability of escaping the middle-income trap is 11 percent after a 10-year period, 21 percent after a 20-year period and 36 percent after 30 to 61 years. Also interesting to note is that countries almost never degrade to low- or middle-income status once they have reached the high-income status: The probability of remaining at a high-income status is at least 97 percent.
One of the central questions of development economics is: "What is holding back convergence?" It's easy to come up with theories. For example, low-income countries might have economic or political institutions that aren't conducive to growth. For example, perhaps they don't offer support for the rule of law or private property in a way that helps economic growth. Or perhaps political elites in a low-income country would rather control and sometimes close off interactions with the rest of the world, rather than open up to the world and risk that alternative centers of power and wealth might form. But as the authors point out, many of these explanations are at best partial, and it's not hard to think of exceptions to whatever rule you have formulated. 

All of which leaves me with a few thoughts: 

1) It doesn't seem quite right to argue that countries are "trapped" in their current level of income. Aart Kraay and David McKenzie make a persuasive case for skepticism about this view in their essay "Do Poverty Traps Exist? Assessing the Evidence," in the Summer 2014 issue of the Journal of Economic Perspectives. They point out that while there has been a lack of convergence, the world's poorest economies circa 1960 actually have growth at about the same rate as the world's higher-income economies since then. Moreover, whatever kind of "trap" exists apparently applies not just to the poorest countries, but also to middle-income countries and high-income countries--which rarely switch their positions, either.  

2) The take-off of China and India from low-income toward middle-income status is a phenomenal change. These countries each have populations over 1.2 billion, and together they represent something like one-third of the world population. Their growth in recent decades suggest that we need to rethink our beliefs from a few decades ago about countries being stuck. I find myself wonder if something about the huge size of these countries has perhaps helped their growth. Maybe once a large-population country gets its economy rolling, it has more sustained momentum than would a small-population country that took similar steps. 

3) As a way of thinking concretely if anecdotally abou this issue, Arias and Wen compare two middle income countries: Ireland, which has experienced convergence in recent decades, and Mexico, which has not. Both countries are near high-income countries. They give Ireland credit for its willingness to be open to foriegn direct investment, which helped link it to the global economy, as well as for its investments in education and its ability (most of the time) to avoid high government budget deficits or inflation. In contrast, Mexico for many decades focused mainly on exporting oil, while its government did not invest heavily in education and instead ran up large debts and periods of high inflation. These kinds of differences surely aren't a full description of why one country converges and another doesn't, but it's a start. 

4) My own sense, for what it's worth, is that convergence is in some substantial way a broad national commitment to welcome extensive and continual change. Sustained economic growth will shake up the lives of people in low-income and middle-income countries: not just what they can buy, but what jobs they do, what their living spaces look like, how their children will be educated, ties with family, what firms prosper or go under, and an ongoing transformation of villages, towns and cities. CNo nation can have a genuine commitment to sustained and powerful economic growth if it doesn't also have a broad-based willingness to to experience extensive change. But change is disruption, and disruption involves losses as well as gains. 

Tuesday, November 24, 2015

The Economics of the Retail Sector

Lots of economic analysis focuses on production, or on consumption. But there is less focus on the economic characteristics of what happens in between production and consumption--which is called the retail sector. In the Fall 2015 issue of the Journal of Economic Perspectives, Ali Hortaçsu and Chad Syverson look at "The Ongoing Evolution of US Retail: A Format Tug-of-War," while Bart J. Bronnenberg and Paul B. Ellickson take an international view in "Adolescence and the Path to Maturity in Global Retail." (Full disclosure: I've been Managing Editor of JEP since the first issue in 1987.)

Broadly understood,  the retail sector includes all of the activities between the producer and the consumer, which can include purchases by a wholesaler, transportation costs of shipping to warehouses, and the costs of holding that inventory for a time along with transportation costs of shipping to the retailer and the costs of retailing itself, including physical facilities and inventory costs. The evolution of retailing means that these costs are reshuffled among different players. For example, if I order a giant bulk-pack of paper towels from an e-retailer, and then store it in the basement and use it for several, I am bearing some of the storage and inventory costs that would otherwise be carried by a brick-and-mortar retailer.  However, the transportation costs of delivering that bulk-pack of paper towels from the e-retailer involves a relatively small shipment in a delivery van from a warehouse to my house, while the transportation costs of delivering to a warehouse store involves both a large truck shipment to the store, my own time and energy to pick up the bulk-pack and take it through check-out, followed by use of my own car to complete the delivery to my home. In various ways, the economic of retail involves issues of coordination, inventory-holding, economies of scale, as well as questions of how much variety is provided.

Hortaçsu and Syverson point out that the US retail sector accounts for about 11% of all jobs, and about 6% of the economy, as measured by the economic value-added by the sector. If one measures productivity by value-added per employee, then productivity is relatively low in the retail sector, which helps to explain why the average job in retail relatively low-paid. 

The story in US retail over the last few decades is the appearance of two new sets of players, each with a powerful gravitational pull that has greatly disrupted traditional retailes. One new set of players are the big box retailers, sometimes known as "warehouse clubs" and "supercenters," led by Walmart but also including Costco, Target, and others. The other new set of players are the e-commerce retailers, led by Amazon, eBay, and including many others.  In different ways, these new players in retail are both driven by changes in information technology. For the big-box retailers, information technology is how they manage their huge set of suppliers and  their inventories, allowing them to take advantage of economies of scale and scope. For the e-commerce retailers, information technology creates their virtual stores, ties them to their customers, and coordinates their shipping and billing. Hortaçsu and Syverson summarize the situation in US retail in this way:

"One can imagine the future of the retail sector as being pulled in one direction by the growth of e-commerce, which involves smaller employment firms, less market concentration, more geographical dispersion, and higher productivity. At the same time, the sector is being pulled in another direction by the warehouse clubs and supercenters, with higher employment firms, very high market concentration, location near population centers, and lower productivity relative to online channels. While warehouse clubs/supercenters have had more influence on the sector to this point, e-commerce has had its own effects and may be growing in relative importance. Perhaps this concurrent expansion and strength of e-commerce and a physical format portends a retail future not dominated by either, but rather with a substantial role for a “bricks-and-clicks” hybrid. The formats may end up being as much complements as substitutes, with online technologies specializing in product search and discovery, and physical locations facilitating consumers’ testing, purchase, and returns of products ...."
The international view of retail in the article by Bronnenberg and Ellickson shows a related transformation of retail happening at different speeds and in different ways around the word. They emphasize a broad view of retailing that includes potential roles for customers and government, as well as for retail firms themselves. For example, if customers have cars for transporting goods, spacious living accommodations for storage, and sufficient income, they will be more likely to buy bulk-packs of goods from warehouse retailers. The time consumers need to spend affects retail: for example, by encouraging e-commerce purchases that will be delivered.

A number of government policies affect retailing, including the road infrastructure, but also "the ease of obtaining building permits, the regulation of corruption, the availability of autos (through policies allowing the imports of used cars), and the minimum wage structure. ... In many emerging markets, another way in which government affects the retail sector lies in its ability to set policies regarding foreign direct investment."

Of course, large firms also play a role in what they call "modern retailing." They write:
"Firms are clearly the foremost strategic players driving the adoption of modern retailing technology. A modern chain of vertically integrated, large-format stores relies on an upstream distribution system of local producers, third-party logistics firms, and either third-party or integrated wholesalers who must all modernize together. Transactions that were often historically informal must be formalized through contracts with local suppliers and intermediaries. In a case study of Chile, Berdegué (2001) found that small farming cooperatives had to incur significant costs to deliver products of homogeneous quality, to coordinate harvest cycles, and to grade, sort, and package in a manner that met the downstream chain’s requirements. Also, adopting formal accounting processes makes previously informal transactions subject to taxes. ... Among the toughest coordination problems is the joint adoption of commonly used technology."
"In developed markets, the transition to modern retailing is nearly complete. In contrast, many low-income and emerging markets continue to rely on traditional retail formats, that is, a collection of independent stores and open air markets supplied by small-scale wholesalers, although modern retail has begun to spread to these markets as well. ... E-commerce is a notable exception: the penetration of e-commerce in China and several developing nations in Asia has already surpassed that of high-income countries for some types of consumer goods."
 This graph shows the takeoff in e-commerce in China, as measured by retail in the two sectors of "Apparel/Footware" and "Electronics/Appliances."

Bronnenberg and Ellickson agree that while e-commerce is going to be a big player in the future, it's not going to take over retail in general. Warehouses and supercenters will still play a large role, quite likely the dominant role, for some time to come. Other kinds of niche retailers--for example, those who specialize in a certain product, or those located in urban areas where huge store-spaces and parking places aren't available--will also play a role. In thinking about the tradeoffs of the various kinds of retail, they write: 
"Online purchases have benefits and costs that vary by product category. For example, online purchase of physical goods introduces a delay between purchase and delivery, but also gives consumers a greater opportunity to comparison-shop by lowering search costs and travel time and provides a seamless method of gathering information on the experience of previous customers (through online reviews). On the other hand, online retail offers less ability to inspect goods before purchase (and adds the risk of not having a product delivered at all), which renders the reputation of the firm all the more important. Whether a purchase is made online or in-store clearly depends on the frequency of purchase, the homogeneity of the product, and the number of products typically purchased in a given occasion, amongst other factors. Books fall at one end of this spectrum, and thus, in modern retailing systems, are primarily bought online, while groceries fall at the other end, and are typically bought in-store."

Monday, November 23, 2015

The Size of Automatic Stabilizers in the US Budget

The notion that bigger budget deficits (or smaller surpluses) can help to stimulate an economy in recession, and that smaller budget deficits (or bigger surpluses) can help to prevent an economy from being overstimulated into inflation, are the core ideas of countercyclical fiscal policy. As every intro econ textbook points out, this countercyclical fiscal policy can be "automatic" or "discretionary."

Discretionary fiscal policy is perhaps easier to understand: for example, it's when government passes new laws to raise spending or cut taxes in a recession. But automatic countercylical fiscal policy--also called "automatic stabilizers"--happens without any new legislation being passed. When the economy heads south so that incomes and profits fall, less in taxes is collected automatically, with no need for new legislation. When the economy booms so that incomes rise, there is automatically less need for government programs like Medicaid or welfare payment, again with no need for new legislation.

How big are the automatic stabilizers? Frank Russek and Kim Kowalewski offer some estimates, along with lots of detail about how these calculations are made, in "How CBO Estimates Automatic Stabilizers," published in November 2015 as Congressional Budget Office Working Paper 2015-07. They write:
Most types of revenues—mainly personal, corporate, and social insurance taxes—are sensitive to the business cycle and account for most of the value of the automatic stabilizers. A relatively small part of total outlays—those for the programs that are intended to support people’s income and have a cyclical component—contribute to the value of the automatic stabilizers; those benefits include ones from unemployment insurance, Medicaid, and SNAP (the Supplemental Nutrition Assistance Program). The automatic stabilizers do not include discretionary spending because that spending (which requires legislation) is not automatic or interest payments because those outlays are not designed to provide income support.CBO’s estimates of the automatic stabilizers are based on the estimated cyclical elements of those revenues and outlays. The magnitude of the automatic stabilizers is zero when the economy is operating at its potential and grows as the economy operates further away from its potential. 
To get a sense of the size of automatic stabilizers in the US economy, here's are a few figures. The first shows how automatic stabilizers on the revenue side affect federal budget deficits. The second shows how automatic stabilizers on the spending side affect budget deficits.

A few patterns emerge from these figures. The timing of the automatic stabilizers is about right. For example, if one looks at the size of the most recent recessions in 2001 and in 2007-2009, you can see the automatic drop in tax revenues and the automatic rise in spending. The automatic changes in tax revenues are typically larger than the spending changes. And taken together, the effects of automatic stabilizers are substantial, combining in the 2007-2009 recession to equal about 3% of GDP.

If you combine the automatic stabilizers on the revenue and spending sides, and put it on a graph with actual deficits, here's what it looks like.. The light blue line shows how the budget deficit actually changed, including both automatic stabilizers and discretionary changes. The dark blue line shows how the deficit would have changed with the automatic stabilizers subtracted out. Clearly, discretionary policies have a bigger effect on overall deficits than do automatic stabilizers. But in helping to counterbalance economic swings, the automatic stabilizers remain useful.

The existence of automatic stabilizers is one reason why it would be foolish to require that the federal budget be balanced in every year. Think about it: a recession arrives, and so tax revenues automatically fall and spending in recession-related categories automatically rises. A true believer that the budget should be balanced each year would have to argue that in the fact of that recession, taxes should be hiked and spending cut to offset the changes of the automatic stabilizers.

Friday, November 20, 2015

Refugees, Displaced, Resettled: Some Global Snapshots

Each year the United Nations High Commissioner for Refugees publishes a "Global Trends" report. The report for 2014, published in June 2015, was titled: "World at War: Forced Displacement in 2014." The report doesn't have much do say about policy details: it's focused mainly on describing the scope of the problem. It's perhaps useful to lay out some terms that are used in specific ways in the report, although they are often used more-or-less interchangeably in media reports and conversation.

Displaced persons is an overall category for those who have been forced to move "as a result of persecution, conflict, generalized violence, or human rights violations. The UNHCR report notes:
"The year 2014 has seen continuing dramatic growth in mass displacement from wars and conflict, once again reaching levels unprecedented in recent history. One year ago, UNHCR announced that worldwide forced displacement numbers had reached 51.2 million, a level not previously seen in the post-World War II era. Twelve months later, this figure has grown to a staggering 59.5 million,  roughly equalling the population of Italy or the United Kingdom. Persecution, conflict, generalized violence, and human rights violations have formed a ‘nation of the displaced’ that, if they were a country, would make up the 24th largest in the world."

According to the report, the total of 59.5 million displaced people can then be divided up into three groups: 19.5 million refugees, 38.2 million internally displaced persons, and 1.8 million asylum-seekers. This total does not include as many as 10 million "stateless" persons, who are living in a country but not recognized as citizens of that country--or of any other country. According to a 2014 UNHCR report, some examples of the stateless include
 More than two decades after the disintegration of the Soviet Union, over 600,000 people remain stateless. Some 300,000 Urdu-speaking Biharis were denied citizenship by the government of Bangladesh when the country gained its independence in 1971. A 2013 Constitutional Court ruling in the Dominican Republic led to tens of thousands of Dominicans, the vast majority of Haitian descent, being deprived of their nationality, and of the rights that flowed from it. More than 800,000 Rohingya in Myanmar have been refused nationality under the 1982 citizenship law and their freedom of movement, religion and education severely curtailed.
Refugees are defined in this way: "According to the 1951 Refugee Convention, a refugee is a person who is outside the country of his or her nationality and is unable or unwilling to avail him- or herself of the protection of that country because of a well-founded fear of being persecuted for reasons of “race”, religion, nationality, political opinion or membership of a particular social group in case of return. People fleeing conflicts or generalized violence are also generally considered as refugees, although sometimes under legal mechanisms other than the 1951 Convention."

Of the 19.5 million refugees, 5.1 million are Palestinians. Of the remaining 14.4 million, here are their countries of origin. While the large recent increase in refugees from Syria as moved that country to the top of this list in 2014, the top place on the list for the previous 30 years had been held by Afghanistan. Indeed, there are still 2.6 million refugees from Afghanistan living outside their country, some of whom have now been refugees for more than three decades since the late 1970s and early 1980s.

Other than the countries on this list: "Other main source countries of refugees were Colombia, Pakistan, and Ukraine. The number of Colombian refugees (360,300) decreased by 36,300 persons compared to the start of the year, mainly as a result of a revision in the number in the Bolivarian Republic of Venezuela. In contrast, figures for both Pakistan and Ukraine increased dramatically. In Pakistan, some 283,500 individuals fled to Afghanistan as armed conflict in their country unfolded during the year; likewise, fighting in eastern Ukraine not only displaced more than 800,000 people within the country but also led to 271,200 persons applying for refugee status or temporary asylum in the Russian Federation."

The goal of the UNHCR is to find a "durable solution" for refugees: return to their original country; local integration into the country where they have ended up, which would eventually involve full legal recognition and citizenship; or resettlement in a different country. Return to the original country has traditionally been the way in which most refugee issues were ultimately resolved. However, in the last few years, return to the original country has diminished.

There doesn't seem to be good data on what numbers of refugees end up being locally integrated in a given year. Such integration is often a slow and evolving process. The category of "resettlement" is what the current US disputes are about. The US has in recent years been the destination for about two-thirds of resettled refugees.
The cumulative number of resettled refugees (900,000) for the past decade is almost at par with the previous decade, 1995-2004 (923,000). Among the 105,200 refugees admitted during the year, Iraqi refugees constituted the largest group (25,800). This was followed by those from Myanmar (17,900), Somalia (11,900), Bhutan (8,200), the Democratic Republic of the Congo (7,100), and the Syrian Arab Republic (6,400). Under its resettlement programme, the United States of America continued to admit the largest number of refugees worldwide. It admitted 73,000 refugees during 2014, more than two-thirds (70%) of total resettlement admissions. Other countries that admitted large numbers of refugees included Canada (12,300), Australia (11,600), Sweden (2,000), Norway (1,300), and Finland (1,100).
This overview of displaced persons, refugees, and resettlement suggests that in a global perspective, US discussions of whether resettle perhaps 10,000 refugees from Syria is heavier on symbolism and emotion than on addressing the actual underlying humanitarian situation. It won't make much of a dent in the total number of the 3.8 million refugees from Syria, or the the 2.6 million Afghan refugees, or the millions of other refugees. It doesn't start to address the question of whether the US or the international community should seek to address the humanitarian needs of the 38.2 million internally displaced persons, who aren't counted in the total number of refugees.

Along with the immediate issues of how to support refugees and other displaced persons wherever they are, the ultimate question is about what the UNHCR calls the "durable solution." Is the vision here that most of the refugees will ultimately return to their home countries, or not?  The historical presumption has been that most refugees will return to their home countries, and resettlement elsewhere is for a few extreme situations. If there is a shift to a presumption that a high proportion of those refugees will be resettled in high-income countries, then the issue of refugees quickly becomes entangled in broader questions about freedom of international immigration.