Author: Donald

2,000 Years of Economic History in One Chart … and Another

Michael Cembalest, head of investment strategy at JP Morgan, is famous for his beautiful, insightful charts. His latest (courtesy of Paul Kedrosky) illustrates two millennia of world economic history:

According to the chart, India (orange) and China (red) together comprised more than two-thirds of the globe’s economic activity back in year 1 (well, not so much the globe, but the chosen countries). By 1950, their share had fallen to only one-eighth, thanks to the growth of the United States (green), Western Europe (shades of blue), Russia (gray), and Japan (yellow). Since then, China has been gaining share.

Not surprisingly, the chart has already attracted attention in the blogosphere. Over at the Atlantic, Derek Thompson slices and dices the data to see how much of the pattern reflects  the ebbs and flows of population vs. productivity.

At the Economist, meanwhile, K.N.C. channels Edward Tufte, expressing appropriate alarm about the compressed x-axis. The first millennium gets as much real estate as the 1990s. K.N.C. then offers another approach:

Given data limitations, this chart also compresses the x-axis, but using bars and variable-width gaps make it much clearer that there are jumps between years. The focus on a limited number of countries also makes it clear that the chart omits countries that account for 30-40% of world GDP. In Cembalest’s chart, in contrast, one wonders what happened to South America, the Nordic countries, Canada, Africa ex Egypt, etc. His listed countries appear to sum to 100% of world GDP, but large swathes of the world are unaccounted for.

What Role for Natural Gas in Transportation?

Will natural gas ever catch on as an important transportation fuel?

Yes, argues MIT Professor Christopher Knittel, in a new discussion paper for the Hamilton Project. Given the now-enormous spread between gasoline and natural gas prices, Knittel thinks that natural gas vehicles should become increasingly popular. Here, for example, are his calculations of the lifetime operating costs for various vehicles using gasoline or natural gas (click to enlarge, and be sure to read the caveat in the footnote): 

As you would expect, the biggest potential savings accrue to the most fuel-guzzling vehicles, heavy-duty trucks in particular.

Knittel does not believe, however, that the private market will exploit this potential as fast or extensively as it should. He thus proposes policies to accelerate refueling infrastructure build-out and to encourage natural gas vehicles. Here’s his abstract:

Technological advances in horizontal drilling deep underground have led to large-scale discoveries of natural gas reserves that are now economical to access. This, along with increases in oil prices, has fundamentally changed the relative price of oil and natural gas in the United States. As of December 2011, oil was trading at a 500 percent premium over natural gas. This ratio has a number of policy goals related to energy. Natural gas can replace oil in transportation through a number of channels. However, the field between natural gas as a transportation fuel and petroleum-based fuels is not level. Given this uneven playing field, left to its own devices, the market is unlikely to lead to an efficient mix of petroleum- and natural gas-based fuels. This paper presents a pair of policy proposals designed to increase the nation’s energy security, decrease the susceptibility of the U.S. economy to recessions caused by oil-price shocks, and reduce greenhouse gas emissions and other pollutants. First, I propose improving the natural gas fueling infrastructure in homes, at local distribution companies, and along long-haul trucking routes. Second, I offer steps to promote the use of natural gas vehicles and fuels.

His “steps to promote the use of natural gas vehicles and fuels” are subsidies and regulations. Regular readers will recall that I believe environmental taxes would be a better way of addressing environmental concerns and, in particular, of promoting natural gas over gasoline. Of course, that view hasn’t gained much traction among policymakers. As least not yet.

Payroll Taxes Cover About a Third of Medicare Costs

I get the impression that many Americans believe Medicare is financed like Social Security. They know that a portion of payroll taxes goes to Social Security and a portion goes to Medicare. So they conclude workers are paying for Medicare benefits the same way they are paying for Social Security benefits.

That isn’t remotely true, as new data from the Congressional Budget Office demonstrate.

In 2010, payroll taxes covered a little more than a third of Medicare’s costs. Beneficiary premiums (and some other earmarked receipts) covered about a seventh. General revenues (which include borrowing) covered the remainder, slightly more than half of total Medicare costs.

If you prefer to focus on just the government’s share of Medicare (i.e., after premiums and similar payments by or on behalf of beneficiaries), then payroll taxes covered about 40% of the program, and other revenues and borrowing covered about 60%.

In contrast, payroll taxes and other earmarked taxes covered more than 93% of Social Security’s costs in 2010, and that was after many years of surpluses.

The difference between the two programs exists because payroll taxes finance almost all of Social Security, but only one part of Medicare, the Part A program for hospital insurance. Parts B and D (doctors and prescription drugs) don’t get payroll revenues; instead, they are covered by premiums and general revenues. But that distinction often gets lost in public discussion of Medicare financing.

As recently at 2000, general revenues covered only a quarter of Medicare’s costs. That share has increased because of the creation of the prescription drug benefit in 2003 and because population aging and rising health care costs have pushed Medicare spending up faster than worker wages. Over the next decade, CBO projects that premiums will cover a somewhat larger share of overall costs, while the general revenue share will slightly decline.

Note: For simplicity, I have focused on the annual flow of taxes and benefits. The same insight applies if you want to think of Social Security and Medicare as programs in which workers pay payroll taxes to earn future benefits. That’s approximately true for workers as a whole in Social Security (but with notable differences across individuals and age cohorts and uncertainty about what the future will bring). But it’s not true at all for Medicare.

The “Tax Expirers”

Today I had the chance to testify before the Select Revenue Measures Subcommittee of the House Ways and Means Committee about a perennial challenge, the “tax extenders,” which really ought to be known as the “tax expirers.” Here are my opening remarks. You can find my full testimony here.

As you know, the United States faces a sharp “fiscal cliff” at yearend when numerous policy changes occur. If all these changes happen, they will reduce the fiscal 2013 deficit by about $500 billion, according to the Congressional Budget Office, before taking into account any negative feedback from a weaker economy. About one-eighth of that “cliff”—$65 billion—comes from the expiring and expired tax cuts that are the focus of today’s hearing.

In deciding their fate, you should consider the larger problems facing our tax system. That system is needlessly complex, economically harmful, and widely perceived as unfair. It’s increasingly unpredictable. And it fails at its most basic task, raising enough money to pay our bills.

The “expirers” often worsen these problems. They create uncertainty, complicate compliance, and cost needed revenue. Some make the tax code less fair, some more fair. Some weaken our economy, while others strengthen it.

Fundamental tax reform would, of course, be the best way to address these concerns. But such reform isn’t likely soon.

So you must again grapple with “the expirers.” As a starting point, let me note that they come in three flavors:

  1.  Tax cuts enacted to address a temporary challenge such as recession, the housing meltdown, or regional disasters.
  2. Tax cuts that have reached a sunset review. Prolonged economic weakness and recent omnibus extensions mean there aren’t that many of these, but they do exist.
  3. Tax cuts that expire to game budget rules. These appear to be the most common. Supporters intend these provisions to be long-lived or permanent, but they haven’t found the budget resources to do so.

To determine which of these policies should be extended and which not, you should consider several factors:

  • Does the provision address a compelling need for government intervention?
  • Does it accomplish its goal effectively and at reasonable cost?
  • Does it make the tax code more or less fair?
  • Do its potential benefits justify the revenue loss or the need for higher taxes elsewhere?

In short, you should subject these provisions to the same standards applied to other policy choices. And in this case, you should keep in mind that most of the so-called “tax extenders” are effectively spending through the tax code. You should thus hold them to the same standards as equivalent spending programs.

You should also reform the way you review expiring tax provisions.

  1. Flip the burden of proof. Today’s standing presumption is that most of these provisions will ultimately be extended. That’s why they are called “the extenders,” even after they have expired. Ultimately, though, we should move to a system in which the presumption, rebuttable to be sure, is that expiring provisions will expire unless supporters can justify their continuation. In short, they should be “the expirers.”
  2. Second, divide them up. Like musk oxen, the beneficiaries of these provisions have realized that there is safety in numbers. They thus do their best to coalesce as a single herd—“the extenders”—and to migrate across the annual legislative tundra with as little individual attention as possible.You should break up the herd. Reviewing each provision in detail may not be practical in a single year, but you can identify specific groups for careful review. For example, you can separate out the stimulus provisions, the charity provisions, the energy provisions, and so on.You should also spread scheduled expirations out over time. If fewer expire each year, you will be able to give each one more attention.
  3. Third, change budget rules for temporary tax cuts. Pay-as-you-go budgeting creates crucial discipline but has an unfortunate side effect: long-term tax policies often get chopped into one-year segments. In addition, 10 years of offsets can be used to pay for a single-year extension.To combat this, you could require that any temporary tax provision be assumed to last no less than five years in the official budget baseline. Proponents would then have to round up enough budget offsets to pay for those five years.In addition, Congress could require that offsets happen over the same years as an extension. That would eliminate situations in which 10 years of offsets pay for a single-year extension.

Psychology, Commerce, and Color Perception

Why did Homer immortalize the “wine dark” sea rather than, say, the “deep blue” sea? Was Greek wine blue?

That’s what we thought back in high school. But over at Radiolab, Jad Abumrad, Robert Krulwich, and Tim Howard offer a different hypothesis: Homer didn’t have a word for blue. Indeed, William Gladstone–yes, the British Prime Minister–poured through The Odyssey and The Iliad and found no references to blue whatsoever.

And Homer wasn’t alone. Many old texts in many languages don’t reference blue.

Radiolab offers two hypotheses to explain this.

The first is essentially commercial: blue is extremely rare in nature and hard to synthesize. Red dye easy, blue dye hard. So people didn’t often encounter blue in their daily commerce. As a result, “blue” shows up in most languages later than other, easier-to-experience colors.

The second involves perceptual psychology. At the risk of oversimplifying, you don’t see what you don’t have a name for. So, in a sort of perceptual positive feedback, cultures develop words for “blue” once they start seeing it, and vice-versa. As Robert Krulwich puts it, “weirdly, color is a loss of innocence.”

Listen to this segment here (particularly if you are thinking “wait a minute, what about the sky?”):

http://www.radiolab.org/widgets/ondemand_player/#file=%2Faudio%2Fxspf%2F211213%2F;containerClass=radiolab

P.S. Radiolab rocks. I became an avid podcast listener about three months ago–a side effect of doing physical therapy on my shoulder for an hour plus every day–and it is clearly best of breed.

Soros: The European Union is a Bubble

My Twitter feed lit up yesterday with folks recommending a speech by George Soros about Europe. [Link subsequently stopped working, but now it’s back.] They were right. Whether you love him or hate him, he provides a fascinating perspective on Europe’s past, present, and future and, in so doing, provides a particularly clear presentation of his critique of (what he views as) mainstream economics.

The whole speech is worth a read. Here are some excerpts describing his view that the European Union is a bubble:

Among other things, I developed a model of a boom-bust process or bubble which is endogenous to financial markets, not the result of external shocks. According to my theory, financial bubbles are not a purely psychological phenomenon. They have two components: a trend that prevails in reality and a misinterpretation of that trend. A bubble can develop when the feedback is initially positive in the sense that both the trend and its biased interpretation are mutually reinforced. Eventually the gap between the trend and its biased interpretation grows so wide that it becomes unsustainable. After a twilight period both the bias and the trend are reversed and reinforce each other in the opposite direction. Bubbles are usually asymmetric in shape: booms develop slowly but the bust tends to be sudden and devastating. That is due to the use of leverage: price declines precipitate the forced liquidation of leveraged positions.

…

I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position.

The process of integration was spearheaded by a small group of far sighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognized that perfection is unattainable; so they set limited objectives and firm timelines and then mobilized the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step.

Germany used to be in the forefront of the effort. When the Soviet empire started to disintegrate, Germany’s leaders realized that reunification was possible only in the context of a more united Europe and they were willing to make considerable sacrifices to achieve it. When it came to bargaining they were willing to contribute a little more and take a little less than the others, thereby facilitating agreement. At that time, German statesmen used to assert that Germany has no independent foreign policy, only a European one.

The process culminated with the Maastricht Treaty and the introduction of the euro. It was followed by a period of stagnation which, after the crash of 2008, turned into a process of disintegration. The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. It took financial markets more than a year to realize the implication of that declaration, showing that they are not perfect.

The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union.

But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. … Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications … .

Are Two Economic Clocks Better Than One?

A man with one clock always knows the time. A man with two clocks is never sure.

This week brings the two heavyweights of economic statistics. On Thursday morning we got the latest read on economic growth, and on Friday we learn how the job market fared in May.

Government statisticians and outside commenters usually emphasize a particular headline number in these reports. For the economy as a whole, it’s the annual growth rate of gross domestic product (GDP), which logged in at a mediocre 1.9 percent in the first quarter. For jobs, it’s the number of nonfarm payroll jobs created in the past month (115,000 in April, but that will be revised on Friday morning).

In each case, the government also reports a second measure of essentially the same thing. Jobs day aficionados are familiar with this. The payroll figure comes from a survey of employers, but the Bureau of Labor Statistics also reports results from a survey of people. That provides the other famous job metric, the unemployment rate, and a second count of how many people have a job. The concept isn’t exactly the same as the payroll measure–it includes a broader array of jobs, for example, but doesn’t reflect people holding multiple jobs–but it’s sufficiently similar that it can be an interesting check on the more-quoted payroll figure.

The downside of this extra information, however, is that it can foster confusion. In April, for example, payrolls increased by 115,000, but the household measure of employment fell by 169,000. Did jobs grow or decline in April?

Another, less well-known example happens with the GDP data. The Bureau of Economic Analysis calculates this figure two different ways: by adding up production to get GDP and by adding up incomes to get gross domestic income (GDI). In principle, these should be identical. In practice, they differ because of measurement challenges. As Brad Plummer notes in a piece channeling Wharton economist Justin Wolfers, the two measures tell somewhat different stories about recent economic growth. In Q1, for example, GDI expanded at a respectable 2.7 percent, much faster than the 1.9 percent recorded for GDP. Is the economy doing ok or barely plodding along?

Such confusion is the curse of having two clocks. We can’t be sure which measure to believe. Experts offer good reasons to prefer the payroll figure (e.g., it’s based on a much larger survey) and GDP (e.g., income measurement is difficult for various technical reasons, including capital gains). But there are counterviews as well; for example, at least one paper finds that GDI does a better job of capturing swings in the business cycle.

Despite this confusion, two clocks are better than one. They remind us of the fundamental uncertainty in economic measurement. That uncertainty is often overlooked in the rush to analyze the latest economic data, but it is real. There are limits to what we know about the state of the economy.

In addition, a weighted average of two readings may well provide a better reading than either one alone. If one clock says 11:40 and another says 11:50, for example, you’d probably do well to guess that it’s 11:45. Unless, of course, you have reason to believe that one clock is better than the other.

The same may well be true for GDP and GDI – the truth is likely in the middle. (This is less true with the jobs data; because of the larger sample, I weight the payroll measure much more heavily than the household measure, at least for monthly changes.)

P.S. For more on GDP vs. GDI, see Dean Baker and Binyamin Appelbaum.

The World’s Most Traveled Bird?

B95, aka Moonbird, has again touched down in New Jersey. After refueling, he will head north to the Canadian arctic for at least his 20th breeding season. Remarkable for a four-ounce red knot whose normal lifespan is just four or five years and whose annual migration begins and ends way down in Tierra del Fuego.

B95 has logged at least 320,000 miles over the years, probably more. That’s enough to go to the moon and halfway back, hence his nickname.

He’s even got a biography coming out this summer.

Is the United States the Best Place for Women?

Women in the United States have the best quality of life of any developed nation, according to the Better Life Index recently released by the Organization for Economic Cooperation and Development.

The index combines eleven different measures of wellbeing, including health, education, income, and life satisfaction. Australia gets top honors for overall wellbeing, but U.S. women top the rankings (women in red, men in black; you’ll probably have to click to read this chart):

Any such index rests on many assumptions and value judgements, of course. So kudos to the OECD for providing a completely interactive version of the index. If you don’t like the way they combine the eleven factors, you can roll your own index and see what happens.

Among other things, that allows you to drill down on each of the individual factors the OECD considers. The “life satisfaction” element reveals that the United States is an outlier in another way: the disparity between women’s life satisfaction and men’s:

Korea has the largest gap, with women reporting much higher satisfaction than men. The United States has the second largest gap, with women noticeably more satisfied than men. (But do note that by this metric alone, the United States is not the best place for women–several countries are higher.)

If you like data, interactive graphics, and international comparisons, you’ll probably enjoy putting the OECD’s Better Life Index through its paces.