Pethokoukis

How greater access to banking can reduce fertility rates in developing nations

Social insurance programs, such as Medicare and Social Security, might reduce fertility rates by lessening the need to produce children as potential protection against poverty in old age. New research from Alberto Basso, Howard Bodenhorn,  and David Cuberes — “Fertility and Financial Development: Evidence from U.S. Counties in the 19th Century”  – supplements the “old age security hypothesis” by looking at the fertility impact of financial markets. From the paper:

Under this hypothesis the spread of banks offers alternative means to provide for old age security. Financial development can affect fertility through the possibility of borrowing resources from banks, which renders current consumption less dependent on current income.

If children were sent to work to provide additional resources to the household, the development of a banking system would then reduce parents’ optimal number of children because the child’s importance in providing contemporaneous income decreases. … After controlling for several factors likely to create cross-county variation in fertility levels and for potential spatial correlation, we find that the presence of a bank and the degree of financial development in a given county are strongly associated with lower children-to-women ratios. We find compelling evidence for the old-age security hypothesis.

And this finding has a policy implication for developing countries that still have high fertility levels:

Our results suggest that policies designed to provide access to banking services (or social security systems) may reduce parents’ incentives to have a large number of children, thus facilitating increases in standard of livings via the well-known child quantity-quality trade-off.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

A conservative way to think about climate change

Image Credit: shutterstock

Image Credit: shutterstock

In his excellent book “Antifragile,” Nassim Nicholas Taleb offers two insights that may helpful to anyone grappling with the science of climate change and the follow-on policy implications. Both are based of the following NNT anecdote:

I was in Cyrpus at a conference dinner in which another speaker, a Cypriot professor of petrochemical engineering in a American university, was ranting against the climate activist Lord Nicholas Stern. Stern was part of the conference but absent from the dinner. The Cypriot was extremely animated. I had no idea what the issues were, but I saw the notion “absence of evidence” mixed with “evidence of absence” and pounced on him in defense of Stern, whom I had never met.

The petrochemical engineer was saying that we had no evidence that fossil fuels caused harm to the planet, turning his point semantically into something equivalent in decision making to the statement that we had evidence that fossil fuels did not harm. He made the mistake of saying that Stern was recommending useless insurance, causing me to jump to ask him if he had car, health, and other insurance for events that did not take plane, that sort of argument.

I started bringing up the idea that we are doing something new to the planet, that the burden of evidence is on those who disturb natural systems, that Mother Nature knows more than he will ever know, not the other way around. But it was like talking to a defense lawyer — sophistry, and absence of convergence to truth.

So two points here: first, humans have a poor record of understanding risk in complex systems, full of interdependencies, feedback loops, and nonlinear responses. Perhaps humility and caution and consideration are warranted. Doing nothing about climate change, I would argue, is a one-way, all-or-nothing bet with huge potential downside. Second, NNT argues, one should give more weight to witnesses and opinions when they present the opposite of a conflict of interest. They should have skin in the game. NNT had little use for the engineer once he found out that guy was an industry consultant. Likewise, perhaps one should have little use for the climate change activists who don’t live as if their actions are contributing to an existential, planetary crisis.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Economics, Pethokoukis, Taxes and Spending

What every Republican needs to know about the realities of 21st century tax reform

Image Credit: Shutterstock

Image Credit: Shutterstock

The great economic lesson of the 1980s supply-side revolution is that taxes matter. But what are the nuances of that lesson, and how should that lesson by applied to the modern American economy? Politicians and pundits typically offer extreme versions of how tax reform would affect growth, either that it is a magic bullet or a complete irrelevancy. A new study by William Gale and Andrew Samwick offers a good summary of consensus thinking of the matter:

Tax rate cuts may encourage individuals to work, save, and invest, but if the tax cuts are not financed by immediate spending cuts they will likely also result in an increased federal budget deficit, which in the long-term will reduce national saving and raise interest rates.

The net impact on growth is uncertain, but many estimates suggest it is either small or negative. Base-broadening measures can eliminate the effect of tax rate cuts on budget deficits, but at the same time they also reduce the impact on labor supply, saving, and investment and thus reduce the direct impact on growth.

However, they also reallocate resources across sectors toward their highest-value economic use, resulting in increased efficiency and potentially raising the overall size of the economy. The results suggest that not all tax changes will have the same impact on growth. Reforms that improve incentives, reduce existing subsidies, avoid windfall gains, and avoid deficit financing will have more auspicious effects on the long-term size of the economy, but may also create trade-offs between equity and efficiency.

For instance, most economists are skeptical that the 1986 Tax Reform Act, the model for many current efforts at tax reform, had much more than a modest positive effect on the long-term economic growth. Maybe the economy ended up 1% bigger than otherwise. I asked AEI economist Alan Viard for his take on the Gale-Samwick study:

I might have written the study with a different tone and might have covered some additional policies (the ones more likely to promote growth), but I think its conclusion are generally right, as far as they go. Revenue-neutral individual income tax reform has little impact on work and saving incentives, but can benefit the economy by reducing distortions between different sectors. Deficit-financed individual income tax cuts typically reduce economic growth. Individual income tax cuts financed by reducing government consumption typically increase growth.

The study expressly does not discuss corporate income tax cuts and movements toward consumption taxation. In my view, those are the policies most likely to promote growth. The study appears to overlook individual income tax cuts financed by cutting entitlements, which would also tend to promote growth.

As it happens, Viard has developed a comprehensive tax reform plan that would replace the income tax with a progressive consumption tax, or “X tax,” that would potentially create some fairly impressive pro-growth effects.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

A look at the debt of families in the bottom quartile

Leverage ratio of the poorest families

The triennial Survey of Consumer Finances was recently release by the Fed. Over at Bloomberg, Mark Whitehouse gathers together some of the data from the report on US families’ debts. Despite the “overall improvement in the state of U.S. household finances,” it turns out that by some measures the least wealthy families “are in worse shape than ever.”

Whitehouse writes:

As of 2013, the debts of the quarter of families with the lowest net worth stood at about 156 percent of pretax income, according to the Fed data. That’s more than in 2007, before the financial crisis hit…. The poorest quartile of families is the only group that owes more than it owns.

Yikes.

There also has been a pretty steady increase in installment debt, “a category that includes both student and auto loans — areas that have recently seen a lot of questionable lending to lower-income borrowers.”

Debts of the poorest families by type

Whitehouse concludes:

Whatever the drivers, the data suggest that the 2008 crisis and subsequent economic malaise have left a troubling legacy: A group of the poorest families, numbering roughly 14 million, whose precarious finances make them vulnerable to shocks and limit their ability to contribute to future growth. That’s hardly a strong foundation for a healthy recovery.

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.

Pethokoukis, Economics, U.S. Economy

Where the US economy stands at this very moment

Great summary from MKM economist Mike Darda:

Retail sales were in line with expectations in August, but upward revisions pushed the six-month annual rate of increase above 7%. We believe the pickup in sales is sustainable due to three bullish forces colliding: improving labor market conditions, rising confidence levels and a sharp fall in gasoline prices (positive supply side shock).

As the business cycle picks up steam and the recovery matures, the demand for risk free liquid assets / money should ease. This should allow the Fed to tighten policy / slow liquid asset growth without tipping over the business cycle, at least in the early innings of this process. Markets are already discounting such an eventuality with two-year note yields (which are the most sensitive to changes in short rate expectations) rising to three year highs. The flattening yield curve also is a sign that the growth rate of liquid assets will begin to slow as the Fed begins to tighten policy next year.

Moreover, stable inflation expectations near the Fed’s target are a sign that the expected path of Fed policy is about right, despite widespread perceptions to the contrary from the financial punditry. Looking further ahead, there should be at least several years left before this business cycle heads for the graveyard. Expansions don’t die of old age, they are terminated by the Fed. And it will likely still be several years before labor markets are tight enough to generate the kind of wage pressures that would be associated with recession-inducing Fed tightening, in our view.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Economics, Pethokoukis, Taxes and Spending

Reaganomics 2.0: Yes, the supply-side agenda really does need an update

Official_Portrait_of_President_Reagan_1981

Just catching up now to a Forbes piece by Brian Domitrovic, another broadside against the expansion of the child tax credit outlined in the conservative reform policy book “Room to Grow.” This bit is unfortunately representative of the piece:

The “Room to Grow: suggestion is Keynesianism by another name: non-marginal rate cuts so that people closer to the bottom can have more to spend. It is odd to hear that supply-side economics should be updated because it succeeded in the 1980s. The proposed update suggests a return to demand-side economics, whose record includes having failed spectacularly in the stagflation of the 1970s.

To be honest, I feel like this ground has been pretty well covered for now. (Such as here and here.) But Domitrovic mentions this blog, so I offer the briefest of responses: this severe, visceral revulsion at the idea of letting middle-class families keep more of what they earn during a time of economic stagnation is befuddling, really. (Perhaps it demands sociological rather than economic analysis.) That, especially when conservative reformers also back sweeping corporate tax reform is especially odd.

All in all, these critiques suggest a rather narrow, cramped, and retrograde vision of what a pro-growth supply-side economic agenda might look like in the 21st century. Is the top personal income tax rate really everywhere and always the biggest problem with the US economy? These attacks also ignore a variety of modern economic phenomenon — including job polarization, wage stagnation, and automation — that could mean boosting GDP growth is a necessary but insufficient condition for a broadly shared prosperity in 21st century America.

A pro-work, pro-innovation agenda will require tax reform, yes, but also healthcare, education, and regulatory reform along with modernization of the safety net. Summarily and reflexively dismissing all updates and expansions to the now 33-year-old Reagan agenda (note that distance between now and then is the same as the distance between Reagan and the Dewey GOP of the late 1940s) as “Keynesianism” — now a catch-all slander devoid of much meaning — is unhelpful.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

What we’re reading today: September 12, 2014

Check out the top pieces we’re reading today on the economy, technology, education, and more.

1.) Martin R. West, in his post for Education Next, discusses the first hard evidence on virtual education.

2.) At WSJ, Mark Sklar writes on doctoring in the age of Obamacare.

3.) The Boston Fed looks at Bitcoin as money here.

4.) From The Upshot comes a piece on making top colleges less aristocratic and more meritocratic.

5.) Public pensions are still marching to their death, comments Jeffrey Dorfman at Forbes.

6.) The jobless rate may be a flawed indicator for Fed policy, notes this NYTimes article.

7.) From MIT Technology Review: Intel says laptops and tablets with 3-D vision are coming soon.

8.) At e21, Jared Meyer measures regulation, asking: “How many regulations are there? Which industries have to jump through the most regulatory hoops? Which government agencies are most likely to pass new rules?”

9.) This Brookings piece makes the case for combining teacher evaluation and the Common Core.

10.) The internet is getting too big for just one kind of Wi-Fi, says Quartz.

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.

Pethokoukis

‘The Scottish referendum is not occurring at a good time for Europe’

Wise and worrisome words from Desmond Lachman:

The fallout from a Scottish yes vote is unlikely to be confined to the British Isles. Separatist movements across Europe would gain encouragement from Scotland’s bold move, which could inject further uncertainty into Europe’s already fragmenting political landscape. The most serious and immediate threat in this respect is that of Catalonia where the Spanish government is already in a tense standoff with Barcelona over its intention to hold a non-binding referendum in November 2014 on the question of Catalonia’s independence.

The Scottish referendum is not occurring at a good time for Europe. The European economic recovery has again run out of steam, geopolitical risks from the Russian-Ukraine crisis are continuing to impact European investor confidence, and Europe’s politics continues its process of gradually fragmenting. The last thing that a fragile Europe needs right now is new shock waves from a Scottish economic crisis. For that reason alone, one has to hope that the Scottish electorate does the right thing and votes no to dissolving its 300-year old union with the rest of the United Kingdom.

The betting public and latest polls suggest a “no” vote on independence.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

What really happened when Google’s driverless car took a self-driving test

Image Credit: Steve Jurvetson (Flickr) (CC-by-2.0)

Image Credit: Steve Jurvetson (Flickr) (CC-by-2.0)

A couple weeks ago, I wrote on the many obstacles still facing driverless cars. Here, courtesy of IEEE Spectrum, is a look at how Google’s autonomous car passed the first US state self-driving test. While “regulations governing Google’s experimental self-driving cars will come into effect on California’s roads starting September 16th,” and the cars have driven over 1 million kilometers since the company started developing them in 2009, “they have been tested only once by a government body on open roads”—Nevada DMV officials in May 2012.

Here’s what happened:

  • Google’s autonomous Toyota Prius passed the test almost immediately
  • However, Google chose the test route and set limits on the road and weather conditions that the vehicle could encounter
  • Engineers had to take control of the car twice during the drive
  • In smooth, everyday traffic, the Prius worked perfectly: the car detected and stopped for pedestrians and merged smoothly onto a freeway up to the local speed limit
  • The car was not tested on roundabouts
  • Also, Google’s policy was to prohibit autonomous operation at railroad crossings that lack signals and for human drivers to take over
  • Construction proved a little tricky: when faced with a partially blocked-off road, the car switched between autonomous and manual modes and then braked to a halt, requiring the safety driver to take control
  • It was recorded that the car needed driver assistance with some turns

This is a portion of the notes on the car’s performance by Bruce Breslow, then head of the DMV–”the measured pace of Google’s autonomous Prius may have started to annoy” him:

Bruce Breslow's notes on Google Prius

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.

Economics, Health Care, Pethokoukis

The $700 billion savings myth: New economic study undercuts a key Obamacare selling point

New research suggests that one of the key economic claims used to sell Obamacare to Congress might not be true. Here is Obama White House budget boss and healthcare guru Peter Orszag in 2009:

As I have written and talked about before, one of the biggest signals of inefficiency in American health care is the massive regional variation in cost and health outcomes. As the Dartmouth Health Atlas has made clear, medicine is practiced differently in different regions across the country, different cities, and even among different hospitals in the same city. And yet the higher cost areas and hospitals don’t generate better outcomes than the lower-cost ones. The result is an estimated $700 billion a year spent on health care that does nothing to improve patient health, but subjects you and me to tests and procedures that aren’t necessary and are potentially harmful – not to mention wasteful.

And a summary of the new Brookings paper, “Why the Geographic Variation in Health Care Spending Can’t Tell Us Much About the Efficiency or Quality of Our Health Care System,” by Louise Sheiner:

Underlying socioeconomic and demographic characteristics have important implications for the geographic patterns in Medicare spending. The findings contradict prior research claiming that most of the variation in Medicare spending can be attributed to geographic differences in medical ‘practice styles’ (the extent and intensity of medical interventions in a given area), thus calling into question the claim that the U.S. could save up to $700 billion in health care waste and inefficiency if all providers were to emulate the practices of low-costs states.

In “Why Geographic Variation in Health Care Spending Can’t Tell Us Much about the Efficiency or Quality of our Health Care System,” Brookings Senior Fellow and Hutchins Center on Fiscal and Monetary Policy Director Louise Sheiner contends that the geographic variation in health care spending does not provide a useful measure of inefficiency and waste in the system, in contrast to the widely accepted views from theDartmouth Atlas of Health Care. Her paper finds that the ‘practice style’ that Dartmouth researchers point to is in fact reflective of underlying systemic differences across states. By employing a state-level approach, as opposed to Dartmouth’s individual-level approach, Sheiner shows that “states with similar demographic characteristics have similar levels of real beneficiary Medicare spending. Thus, what the Dartmouth researchers have deemed as differences in ‘practice styles’ are not randomly distributed, but are instead closely linked to population characteristics.”

In fact, states that appear to be high-cost, like Florida and Connecticut, are no longer big health care spenders once demographic and health variables are controlled for, just as states that appear to be low health care spender like Utah and Vermont are actually relatively high spenders once those adjustments are made. These results suggest that the cross-state variation in Medicare spending is tightly associated with the characteristics of state populations, and that once these characteristic are controlled for, the variation in spending is fairly small.

 

For example, it is no surprise that states like Mississippi and Louisiana spend far more on Medicare given their population’s characteristics. These states perform poorly on a wide range of indicators, including diabetes rates, obesity rates and lack of physical activity, suggesting that the higher Medicare expenditures may simply reflect the fact that the population is unhealthy. Furthermore, physicians practicing in states with sicker populations may practice a more intensive form of medicine for all their patients, making comparisons across states based on individual patients potentially misleading. Finally, states with higher Medicare expenditures tend to have more uninsured and lower reimbursements from private insurance and Medicaid. Because all of these factors are so hard to disentangle, Sheiner concludes that looking at variation in Medicare spending across geographic areas particularly informative. “A comparison of health spending in Mississippi with health spending in Minnesota is not likely to provide a useful metric of the ‘inefficiencies’ of the health system, nor is it likely to provide a useful guide to improve the quality of care in places where it is lacking,” she writes.

The author also finds a negative correlation between each state’s level and growth of Medicare spending – low-spending states tend to have higher growth rates than high-spending states. Thus, examining the practice patterns in low-cost states isn’t likely to provide the key to “bending the cost curve” in health spending, she concludes.

Recall that back in 2010, the geographic savings claim also came under fire from the New York Times.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.