Smorgasbord

Five years ago, the Institute for Fiscal Studies launched a mammoth project called "Inequality: IFS Deaton Review" (https://ifs.org.uk/inequality/). An "Evidence Volume" has now been published, with a mix of 81 (!) chapters, commentaries, articles, and reports divided into 18 (!) categories: (1) what's wrong with inequality; (2) attitudes toward inequality; (3) trends in economic inequality; (4) history of inequality; (5) political inequality; (6) gender; (7) race; (8) immigration; (9) health; (10) geography; (11) families; (12) early childhood; (13) immigration; (14) the labour market; (15) firms; (16) trade and globalization; (17) top income inequality and tax policy; and (18) benefits and public services. In the very first essay, Debra Satz and Stuart White ask: "What is wrong with inequality?"

"Because we point to a plurality of reasons to be concerned with inequality, our account is complex. This arguably makes our approach less tractable than more simple one-dimensional alternatives. For example, it is surely simpler to adopt a single focus on income inequality without looking at its effects on specific institutions or particular aspects of life such as health, social relations, and political influence. But we believe that it is possible and better to develop richer models for measuring those aspects of inequality that matter. This can lead, in some cases, to more tailored policies than income transfers, such as benefits in kind (although income transfers are often better) or different ways of accomplishing income transfers. It might suggest the need to focus on wealth as well as income. It might suggest the need to focus on policies that shape the associational context of economic and political life, such as levels and patterns of unionization. And it is worth bearing in mind that one person’s simplification for the sake of tractability is another person’s life."

As a complementary effort, the June 2024 issue of Fiscal Studies offers a ten-paper special issue on "Changing labour market and income inequalities in Europe and North America: a parallel project to the IFS Deaton Review of Inequalities in the 21st century" (https://onlinelibrary.wiley.com/toc/14755890/2024/45/2). Bradley L. Hardy, Elizabeth Krause, and James P. Ziliak contribute "Income inequality in the United States, 1975–2022."

"Overall after-tax and transfer income inequality increased more than 25 per cent since the mid-1970s, and by as much as 50 per cent when comparing the 90th and 10th percentiles. While there has been substantial upgrading in formal education credentials among both men and women—an inequality-reducing development—those with fewer credentials have increasingly been less likely to work and marry, each of which could result in higher inequality. The latter effects are exacerbated by those selecting into marriage and cohabitation being more likely to partner with those holding similar educational credentials and earning power. Moreover, the decline in work among the less skilled coincided with the transformation of the safety net to rewarding work. These demographic and policy changes have resulted in a pulling apart of the US income distribution."

The International Comparison Project at the World Bank has released the 2021 version of its "purchasing power parity" (PPP) measures for the global economy (May 2024, https://www.worldbank.org/en/programs/icp/data). From the "Highlights of Main Findings":

"PPPs convert different currencies to a common currency and, in the process of conversion, equalize their purchasing power by controlling for differences in the price levels of goods and services between economies. PPPs allow international comparisons of GDP and its components that avoid the over- or under-estimation of economic output that is inherent in market exchange rate-based comparisons, as the latter does not adjust for price levels. PPP-based estimates are also not prone to fluctuations in market exchange rates. PPPs are calculated by the ICP based on the prices of items within a common basket of goods and services and expenditure shares, used as expenditure weights, on groups of items in each of the participating economies." Using the PPP measures, "The largest economy in the world in 2021 was China, recording a PPP-based GDP of $28.8 trillion, reflecting 18.9 percent of the global GDP. The United States was the second largest, with nearly $23.6 trillion or 15.5 percent of the global GDP. India's economy was the third largest at $11. trillion, accounting for 7.2 percent."

Viral V. Acharya, Nicola Cetorelli, and Bruce Tuckman have written "Where Do Banks End and NBFIs Begin?" (from the Sverges Riksbank at https://www.riksbank.se/globalassets/media/konferenser/2023/session-5-acharya_cetorelli_ tuckman_where_do_banks_end_and_nbfis_begin_draft.pdf).

"Non-bank financial intermediaries (NBFIs) have surpassed banks as the largest global financial intermediaries. And yet, most NBFIs continue to be lightly regulated relative to banks for safety and soundness, whether in terms of capital and liquidity requirements, supervisory oversight, or resolution planning. [T]he global financial assets of NBFIs have grown faster than those of banks since 2012, to about $239 trillion and $183 trillion in 2021, respectively. In percentage terms, the share of the NBFI sector has grown from about 44% in 2012 to about 49% as of 2021, while banks' share has shrunk from about 45% to about 38% over the same time period. As in the global data, NBFIs in the United States have accumulated substantially more assets than banks over the period shown. However, the NBFI sector in the United States accounts for a much higher share of financial assets, which was over 60% in 2021."

David McKenzie writes of "Fears and Tears: Should More People Be Moving within and from Developing Countries, and What Stops this Movement?" (World Bank Research Observer, February 2024, 39:1, 75–96, https://academic.oup.com/wbro/ article-abstract/39/1/75/6982896).

McKenzie estimates that only "one in seven of the world's population have ever migrated," either internationally or between regions within a country, and offers a "fears and tears" explanation to address the puzzle of why moving is not more widespread. "I think economists have devoted far less attention to what I call fears, which is the enormous uncertainty associated with migration that is difficult to quantify. This type of unquantifiable uncertainty, also known as Knightian uncertainty, may include fears about the safety conditions at destination . . ., the ability to make friends and fit in, about whether one will like living in the new location, and soon. With Knightian uncertainty, there is no unique probability distribution of possible outcomes of employment, wages, and amenities Bewley (2002) argues that in such cases, there can be a bias towards inertia. I think a bigger part of the reason for tears upon moving and not having these same tears upon deciding to stay is the inability to picture what you are giving up when you do not move . . . Gabaix and Laibson (2017) argue that people have only noisy information about the future and that it is harder to forecast the further into the future one looks, with these features causing individuals to behave as if they have very myopic preferences, preferring the present."

Those who would like more on industrial policy, in addition to the symposium in this issue, can turn to three articles in the 2024 Annual Review of Economics (https://www.annualreviews.org/content/journals/economics/browse).

Réka Juhász, Nathan Lane, and Dani Rodrik explore "The New Economics of Industrial Policy" (pp. 213–42): "The salience of industrial policy has risen greatly in recent years, as governments have increasingly engaged in self-conscious industrial policies as they address a variety of problems—the green transition, the resilience of supply chains, the challenge of good jobs, and geopolitical competition with China. We focus on three types of cases: episodes of infant industry promotion (e.g. in textiles, shipbuilding, and heavy industries), large-scale public R&D efforts (as in the space race between the United States and Soviet Union), and selective place-based policies targeting specific industries (as in the US manufacturing drive during World War II and contemporary regional European subsidies). Interestingly, the most recent vintage of papers, paying serious attention to identification and observability difficulties, produces results that are much more favorable to industrial policy." Chad P. Bown discusses "Modern Industrial Policy and the World Trade Organization" (pp. 243–70): "To remain relevant in the international trading system, the World Trade Organization (WTO) may need its members to engage directly over the issue of industrial policy. The staff at the major international organizations—the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), the World Bank, and the WTO—have put out an explicit plea for a renewed work program and policymaker engagement on the issue." Réka Juhász and Claudia Steinwender examine "Industrial Policy and the Great Divergence" (pp. 27–54): "We revisit the historical track record of industrial policy in the context of the nineteenth and early twentieth century—a critical juncture in economic history In particular, while much attention in economics has been paid to the developmental effects (or lack thereof) of protective import tariffs in the nineteenth century, our review of recent work suggests that tariffs were neither the only nor perhaps the most important policy lever in countries’ industrial policy tool kit. Rather, many independent countries deployed a multitude of complementary policies that foreshadow modern industrial policy, such as state-led technology acquisition, human capital development, intellectual property rights (IPR) protection, low industrial input tariffs, and subsidies for prioritized activities. We also highlight an aspect of the nineteenth century which cannot and should not be ignored, namely, that colonial powers used colonies in the service of their own industrial development goals."

Economic History

Maristella Botticini delivered the 2023 Presidential Address to the European Economic Association, drawing on a research paper written with Pietro Buri and Massimo Marinacci, titled "The Beauty of Uncertainty: The Rise of Insurance Contracts and Markets in Medieval Europe" (Journal of the European Economic Association, 21:6, December 2023, 2287–326, https://academic.oup.com/jeea/article/21/6/2287/7319353; video at https://www.youtube.com/watch?v=IZzTHeIrGGw).

From the abstract: "Maritime insurance developed in medieval Europe is the ancestor of all forms of insurance that appeared subsequently [W]e show that medieval merchants had to bear more frequently natural risks (they traveled longer distances) and new human risks with unknown probabilities (they faced unpredictable attacks by corsairs due to increased political fragmentation and commercial competition in Europe). The increased demand for protection in medieval seaborne trade met the supply of protection by a small group of wealthy merchants with a broad information network who could pool risks and profit from selling protection through a novel business device: the insurance contract. A new market—the market for insurance—was then born. Next, analyzing more than 7,000 insurance contracts redacted by notaries and about 100 court proceedings housed in the archives of Barcelona, Florence, Genoa, Palermo, Prato, and Venice, we study the main features of medieval trade, the type of risks faced by merchants, and the characteristics of insurance contracts and markets from 1340 to 1500."

James Feigenbaum and Daniel P. Gross have been studying a classic example of US jobs lost to automation: telephone switchboard operators. In "Answering the Call of Automation: How the Labor Market Adjusted to Mechanizing Telephone Operation" (Quarterly Journal of Economics, August 2024, 139:3, pp. 1879–939, https://academic.oup.com/qje/article/139/3/1879/7614605), they explore the period from 1920 and 1940:

"[W]e show that after a city was cut over to mechanical [switchboard] operation, the number of 16- to 25-year-old women in subsequent cohorts employed as telephone operators immediately fell by 50% to 80%. These jobs made up around 2% of employment for this group, and even more for those under age 20—and given turnover rates, this shock may have foreclosed entry-level job opportunities for as much as 10% to 15% of peak cohorts. The effect of this shock on incumbent operators was to dispossess many of their jobs and careers . . . In contrast, however, automation did not reduce employment rates in subsequent cohorts of young women, who found work in other sectors—including jobs with similar demographics and wages (such as typists and secretaries), and some with lower wages (such as food service workers).

Feigenbaum and Gross also consider the perspective of AT&T in "Organizational and Economic Obstacles to Automation: A Cautionary Tale from AT&T in the Twentieth Century" (Management Science, published online, February 27, 2024, https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2022.01760).

"Although manual switching served early telephone networks well, expansion revealed its limits, as its complexity rose quickly in large markets with billions of possible connections, and switchboards became system bottlenecks. As AT&T grew, its service quality thus fell, and operator requirements exploded: by the 1920s AT&T was the largest U.S. employer, with operators over half its workforce. Company records show the limits of manual switching were known as early as the 1900s, when automatic technology was already being tested—yet it took AT&T several more decades to adopt it widely. We show in this paper that automation was hindered by interdependencies between call switching and the rest of AT&T’s business: the mechanization of call switching required complementary innovation and adaptation across the firm, which were only resolved over time."

William Deringer provides an early practical example of present discounted value calculations in "Mr. Aecroid's Tables: Economic Calculations and Social Customs in the Early Modern Countryside," Journal of Modern History, March 2024, 96:1, https://www.journals.uchicago.edu/doi/10.1086/728594).

From the abstract: "In the 1610s and 1620s, a new computational technology took hold in England: printed mathematical tables for compound interest and discounting (‘present value’) problems. Historians of finance and accounting have long recognized these paper tools as predecessors of essential modern techniques like 'discounted cash flow.' Yet the history of these tables remains hazy [A]mong the leading ‘early adopters’ were institutions of the Church of England. Amidst the inflation of the early modern 'price revolution,' bishops, cathedrals, and colleges confronted a complex of economic, political, and social pressures. Mathematical tables like Acroyd’s emerged out of long-running conflicts between church landlords and tenants over how to determine just and reasonable fines on church lands."

Construction Costs

Zachary Liscow, Will Nober, and Cailin Slattery discuss "Procurement and Infrastructure Costs," in a paper presented at the 13th annual Municipal Finance Conference at the Brookings Institution (July 11, 2024, https://www.brookings.edu/events/13th-annual-municipal-finance-conference/).

"The United States spends a large amount on infrastructure costs: state and local governments spent $266 billion on highways alone in 2022. The spending, on a per-project basis, is very high by international standards—over three times as high as other upper- and middle-income countries." The authors conduct a survey of state-level Departments of Transportation (DOTs) as well as the companies that bid to build roads. "States that flag concerns about consultant costs have higher costs—a one standard deviation increase in reported consultant costs is associated with an almost 20% increase ($70,000) in cost per lane-mile. States where contractors and procurement officials expect more change orders have significantly higher costs: one additional change order correlates with $25,000 in additional cost per lane-mile at the mean. More directly, we find that states with (perceived) higher quality DOT employees have lower costs. A state with 'neither low nor high quality' employees has almost 30% higher costs per mile than one that rates the DOT employees as ‘moderately high quality’, all else equal. A one standard deviation increase in DOT employment per capita is correlated with 16% lower costs. [W]e find that an additional bidder on a project is associated with 8.3% lower costs, or a savings of approximately $30,000 per lane-mile ($460,000 for the average project)."

Stephen Smith reports on costs of installing "Elevators" (Center for Building in North America, May 2024, https://static1.squarespace.com/static/634dfe3176afcc36f569d83d/t/6689cb0e8ac6370940a122ff/1720306458871/ Elevators.pdf).

"Single-family houses aside, the United States has over 32 million apartments, while Spain has fewer than 13 million apartments but about the same number of elevators. The U.S. has 40 percent fewer elevators per capita than the Netherlands, despite 30 percent of the American housing stock being in multi-family dwellings (and 19 percent in buildings with at least 10 units), compared to a total multifamily housing share of just 21 percent in the Netherlands. New York City has roughly the same population as Switzerland and even more New Yorkers live in apartment buildings than Swiss residents do, but New York only has half the number of passenger elevators. No matter how you slice the numbers, America has fallen behind on elevators." The report investigates how labor costs and building codes across countries drive these differences.

Interviews

Tyler Cowen interviews Joseph Stiglitz on his "Conversations with Tyler" podcast: "Joseph Stiglitz on Pioneering Economic Theories, Policy Challenges, and His Intellectual Legacy" (June 26, 2024, https://conversationswithtyler.com/episodes/joseph-stiglitz/). As Cowen mentions, Joe's CV now runs to 153 pages, which "is neither complete nor really has any chaff." For a sample, here's Stiglitz on a 1980 paper written with Sandy Grossman:

"The title of that paper was 'On the Impossibility of Informationally Efficient Markets.' It was an argument against the view that was held by people like Eugene Fama that markets were informationally efficient, that they transmitted efficiently all the information from the informed to the uninformed. We made the obvious observation that if that were the case, there would be no incentive for anybody to gather information. So the market might be transmitting information, but it would be all free information. It would be information that nobody had done any work to collect. That idea, actually, in another context worries me very much today, that with Google and AI scraping so much information off of our newspapers, off of our podcasts, off of everything they can get a hold of, they’re trying to appropriate the value of the knowledge that’s been created by other people without paying for it. If they succeed in doing that, of course, that will decrease the incentives for others to produce information of high quality and of value. It’s that kind of interaction that was at the heart of our 1980 paper, and the themes that we talked about there are still the critical themes that we’re talking about today."

Janet Bush of the McKinsey Global Institute interviews Chad Syverson in "Unpacking the Mysteries of the Global Economy" (July 2, 2024, audio and text at https://www.mckinsey.com/mgi/forward-thinking/unpacking-the-mysteries-of-productivity).

Bush: "There's a perception that productivity means efficiency and lost jobs. I remember somebody said to me, 'Oh, productivity—you’re fired.' Unpack that for us." Syverson: "That is an example of the fallacy of reasoning causality from an accounting identity. There are many specific ways to measure productivity, but they're all basically ratios of output to input, how much comes out of a production process divided by how many inputs go into it. And the notion that you're describing with that person's comment comes from looking at that definition and thinking, 'Oh, that's how you causally affect productivity. So OK, I want productivity to be higher. It's outputs over inputs, so if I make inputs smaller, productivity will go up.' Well, the problem with that is—and this is true whenever you reason from an accounting identity—it's not just inputs that are changing when you decide to cut inputs. You know, those inputs are doing something, presumably, and you're going to affect what they're doing if you try to cut those inputs, like, say, workers or worker hours. And that might be useful stuff that makes output. You know, I totally understand sort of the sentiment behind what that person said. I hear it a lot, but it’s usually in that direction, the messing up the identity for causality. Because if someone said, 'Oh, I need productivity to go up, I know what I'll do, I'll just make more output'—if you said that to someone, they'd say, 'OK, what magic wand do you have that lets you wave and get more output for nothing?'"

Discussion Starters

Alexander Budzier and Bent Flyvbjerg present "The Oxford Olympics Study 2024: Are Cost and Cost Overrun at the Games Coming Down?" (May 2024, University of Oxford Said Business School, Working paper | 2023–24, https://www.politico.eu/wp-content/uploads/2024/07/15/The_Oxford_Olympics_Study_2024_Are_Cost_and_Cost_O_240715_145740_cleaned.pdf).

"Given that the last three Summer Games cost USD 51 billion (in 2022 prices) and overran budgets by 185% in real terms—not including road, rail, airport, hotel, and other infrastructure, which often cost more than the Games themselves—the financial size and risks of the Games warrant study The Paris 2024 games, for instance, have seen costs surge from EUR 3.6 billion to 8.8 billion. Similarly, Los Angeles 2028 has revised its forecast from USD 5.3 billion to 6.8 billion. For instance, cost overrun and associated debt from the Athens 2004 Games weakened the Greek economy and contributed to the country’s deep financial and economic crises, beginning in 2007 and still playing out almost a decade later. For Rio 2016, the Brazilian economy was doing well when the city bid for the Olympics. Fast forward a decade to two months before the opening ceremony and this was no longer the case. Rio was now in such dire straits that the governor declared a state of emergency to secure additional funding for the Games from money reserved for dealing with natural and other disasters."

Stephanie M. Blalock, Kevin McMullen, Stefan Schöberlein, and Jason Stacy tell the story of "'One of the Grand Works of the World': Walt Whitman's Advocacy for the Brooklyn Waterworks, 1856–59" (Technology and Culture, January 2024, 65:1, 237–63, https://muse.jhu.edu/pub/1/article/920522).

From the abstract: "When the Brooklyn Waterworks opened in 1859, it was one of America's most advanced water and sewer systems. Yet after Brooklyn was annexed by New York City, the waterworks' history slipped into obscurity, despite having a now-famous champion: the 'poet of America,' Walt Whitman, whose brother worked on the project. This article shows the Brooklyn poet's fierce, multiyear lobbying effort for the waterworks in various newspapers and introduces a wealth of newly recovered Whitman writings on the issue. As a journalist, Whitman exemplifies the nineteenth-century press as an intermediary between expert engineers and popular readers. The poet brought precise expertise, translated engineers' technical arguments into everyday language for his readers, and fought the resulting day-to-day political battles over construction in print. Whitman, then, is an underappreciated case study of the confluence of technology, public health, and local journalism."