Friday, November 24, 2017

The Amazon Effect

One of the ongoing puzzles of the US economy in recent decades is why inflation has stayed so low. Even outgoing Fed Chair Janet Yellen has highlighted this puzzle. The "Amazon effect" may be part of the answer: basically, the Amazon effect is that a higher level of competitive pressure from the rising level of on-line retail sales is holding back price increases that might otherwise have occurred.

Here's a figure illustrating the potential force of the Amazon effect, put together by Kevin L. Kliesen at the St. Louis Fed. As the captions above the blue line show, e-commerce was 2.8% of retail sales, but has now risen to 10.4%. The blue line itself shows the price level for those items purchased via e-commerce, using 2009 as a base year. For example, from 2000 to 2009 this price index rose from a little above 90 to 100, implying an inflation rate for these goods of about 1% per year. But since 2009, the price index for goods purchased via e-commerce has actually been declining by about 1% per year.


It's interesting to consider the possibility that the falling prices for e-commerce retail may not be a pure deflation of prices. It might also reflect cost savings delivered because buying through increasing automated warehouses is becoming more cost-efficient, compared with standard wholesale and retail product chains.

For those who want details on this price index, it's the is the price deflator for “Electronic Shopping/Mail-Order Houses” produced by the US Bureau of Economic Analysis. It's in Table 7U. Chain-Type Price Indexes for BEA Retail and Food Services Sales, available here.

Of course, a 1% annual price decline on 10% of retail sales cannot, by itself, explain why overall inflation for the entire economy has remained so low. But if you allow for the possibility that e-commerce prices can also place pressure on bricks-and-mortar retailers to limit their own price increases, the Amazon effect could be a meaningful part of an overall explanation.

Thursday, November 23, 2017

The Origins of Thanksgiving as an Official Holiday

Thanksgiving is a day for a traditional menu, and I take a holiday by reprinting this annual column on the origins of the day:

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 in 1863 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 an example of unwanted and inappropriate federal government interventionism. 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

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 then declined somewhat, but appears to have made a modest recovery in the last couple of years The figure below is from the Eatturkey.com website run by the National Turkey Federation.




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 perionds of 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 2015 from the National Turkey Federation:
Given this reasonably competitive environment, it's interesting to note that the price markups for turkey--that is, the margin between the wholesale and the retail price--tend to decline around Thanksgiving, which obviously helps to keep the price lower for consumers. Mildred Haley of the US Department of Agriculture spells this out in the "Livestock, Dairy, and Poultry Outlook" report of October 2017. The vertical lines in the figure show that the markups clearly fall around Thanksgiving.

In the past, the US turkey industry has at some times suffers from outbreaks of HPAI
(Highly Pathogenic Avian Influenza): for discussion of the 2015 outbreak, see the November 17, 2015 issue of the "Livestock, Dairy, and Poultry Outlook" from the US Department of Agriculture, Kenneth Mathews and Mildred Haley offer some details. But for Thanksgiving 2017, supply seems to have remained strong and turkey prices are down a bit.

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 actually declined by a bit in 2017, falling to $49.12 from $49.87 in 2016. 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, 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?

Wednesday, November 22, 2017

The Dominance of Peoria in the Processed Pumpkin Market

As I prepare for a season of pumpkin pie, pumpkin bread (made with cornmeal and pecans), pumpkin soup (especially nice wish a decent champagne) and perhaps a pumpkin ice cream pie (graham cracker crust, of course),  I have been mulling over why the area around Peoria, Illinois, so dominates the production of processed pumpkin.

The facts are clear enough. As the US Department of Agriculture points out (citations omitted): In 2016, farmers in the top 16 pumpkin-producing States harvested 1.1 billion pounds of pumpkins, implying about 1.4 billion pounds harvested altogether in the United States. Production increased 45 percent from 2015 largely due to a rebound in Illinois production. Illinois production, though highly variable, is six times the average of the other top eight pumpkin-producing States (Figure 2).
Production increased 45 percent from 2015 largely due to a rebound in Illinois production. Illinois production, though highly variable, is six times the average of the other top eight pumpkin-producing States.

Not only does Illinois produce more pumpkins, but a much larger share of pumpkins from this state end up being processed, rather than used fresh. The USDA reports:
Illinois harvests the largest share of processing pumpkin acres among all States—almost 80 percent. Michigan is next with a little over 10 percent. Other States harvest less than 5 percent processing pumpkins.

It's not really the entire state of Illinois, either, but mainly an area right around Peoria. The University of Illinois extension service writes: "Eighty percent of all the pumpkins produced commercially in the
U.S. are produced within a 90-mile radius of Peoria, Illinois. Most of those pumpkins are grown for processing into canned pumpkins. Ninety-five percent of the pumpkins processed in the United States are grown in Illinois. Morton, Illinois just 10 miles southeast of Peoria calls itself the `Pumpkin Capital of the World.'"

Why does this area have such dominance? Weather and soil are part of the advantage, but it seems unlikely that the area around Peoria is dramatically distinctive for those reasons alone. This also seems to be a case where an area got a head-start in a certain industry, established economies of scale and expertise, and has thus continued to keep a lead. The Illinois Farm Bureau writes: "Illinois earns the top rank for several reasons. Pumpkins grow well in its climate and in certain soil types. And in the 1920s, a pumpkin processing industry was established in Illinois, Babadoost [a professor at the University of Illinois] says. Decades of experience and dedicated research help Illinois maintain its edge in pumpkin production." According to one report, Libby’s Pumpkin is "the supplier of more than 85 percent of the world’s canned pumpkin."

The farm price of pumpkins varies considerably across states, which suggests that it is costly to ship substantial quantities of pumpkin across moderate distances. For example, the price of pumpkins is lowest in Illinois, where supply is highest, and the Illinois price is consistently below the price for other nearby Midwestern states. This pattern suggests that the processing plants for pumpkins are most cost-effective when located near the actual production.

While all States see year-to-year changes in price, New York stands out because prices have declined every year since 2011. Illinois growers consistently receive the lowest price because the majority of their pumpkins are sold for processing.

Finally, although my knowledge of recipes for pumpkin is considerably more extensive than my knowledge of supply chain for processed pumpkin, it seems plausible that demand for pumpkin is neither the most lucrative of farm products, nor is it growing quickly, so it hasn't been worthwhile for potential competitors in the processed pumpkin market to try to establish an alternative pumpkin-producing hub somewhere else.

Tuesday, November 21, 2017

Will Artificial Intelligence Recharge Economic Growth?

There may be no more important question for the future of the US economy than whether the ongoing advances in information technology and artificial intelligence will eventually (and this "eventually" is central to their argument) translate into substantial productivity gains. Erik Brynjolfsson, Daniel Rock, and Chad Syverson make the case for optimism in "Artificial Intelligence and the Modern Productivity Paradox: A Clash of Expectations and Statistics" (NBER Working Paper 24001, November 2017). The paper isn't freely available online, but many readers will have access to NBER working papers through their library. The essay will eventually be part of a conference volume on The Economics of Artificial Intelligence

Brynjolfsson, Rock, and Syverson are making several intertwined arguments. One is that various aspects of machine learning and artificial intelligence are crossing important thresholds in the last few years and the next few years. Thus, even though we tend to think of the "computer age" as having already been in place for a few decades, there is a meaningful sense in which we are about to enter another chapter. The other argument is that when a technological disruption cuts across many parts of the economy--that is, when it is a "general purpose technology" as opposed to a more focused innovation--it often takes a substantial period of time before producers and consumers fully change and adjust. In turn, this means a substantial period of time before the new technology has a meaningful effect on measured economic growth. 

As one example of a new threshold in machine learning, consider image recognition. On various standardized tests for image recognition, the error rate for humans is about 5%. In just the last few years, the error rate for image-recognition algorithms is now lower than the human level--and of course the algorithms likely to keep improving. 
There are of course a wide array of similar examples. The authors cite one study in which an artificial intelligence system did as well as a panel of board-certified dermatologists in diagnosing skin cancer. Driverless vehicles are creeping into use. Anyone who uses translation software or software that relied on voice recognition can attest to how much better it has become in the last few years. 

The author also point to an article from the Journal of Economic Perspectives in 2015, in which Gill Pratt pointed out the potentially enormous advantages of artificial intelligence in sharing knowledge and skills. For example, translation software can be updated and improved based on how everyone uses it, not just on one user. They write about Pratt's essay: 
[Artificial intelligence] machines have a new capability that no biological species has: the ability to share knowledge and skills almost instantaneously with others. Specifically, the rise of cloud computing has made it significantly easier to scale up new ideas at much lower cost than before. This is an especially important development for advancing the economic impact of machine learning because it enables cloud robotics: the sharing of knowledge among robots. Once a new skill is learned by a machine in one location, it can be replicated to other machines via digital networks. Data as well as skills can be shared, increasing the amount of data that any given machine learner can use.
However, new technologies like web-based technology, accurate vision, drawing inferences, and communicating lessons don't spread immediately. The authors offer the homely example of the retail industry. The idea or invention of of online sales became practical back in the second half of the 1990s. But many of the companies founded for online-sales during the dot-com boom of the late 1990s failed, and the sector of retail that expanded most after about 2000 was warehouse stores and supercenters, not  online sales. Now, two decades later, online sales have almost reached 10% of total retail. 

Why does it take so long? The theme that Brynjolfsson, Rock, and Syverson emphasize is that a revolution in online sales needs more than an idea. It needs innovations in warehouses, distribution, and the financial security of online commerce. It needs producers to think in terms of how they will produce, package, and ship for online sales. It needs consumers to buy into the process. It takes time. 

The notion that general purpose inventions which cut across many industries will take time to manifest their productivity gains, because of the need for complementary inventions, turns out to be a pattern that has occurred before. 

For economists, the canonical comment on this process in the last few decade is due to Robert Solow (Nobel laureate '87) who wrote in an essay in 1987, "You can see the computer age everywhere but in the productivity statistics" (“We’d better watch out,” New York Times Book Review, July 12, 1987, quotation from p. 36). After all, IBM had been producing functional computers in substantial quantities since the 1950s, but the US productivity growth rate had been slow since the early 1970s. When the personal computer revolution, the internet, and surge of productivity in computer chip manufacturing all hit in force the 1990s, productivity did rise for a time. Brynjolfsson, Rock, and Syverson write: 
"For example, it wasn’t until the late 1980s, more than 25 years after the invention of the integrated circuit, that the computer capital stock reached its long-run plateau at about 5 percent (at historical cost) of total nonresidential equipment capital. It was at only half that level 10 years prior. Thus, when Solow pointed out his now eponymous paradox, the computers were finally just then getting to the point where they really could be seen everywhere."
Going back in history, my favorite example of this lag that it takes for inventions to diffuse broadly is from the invention of the dynamo for generating electricity, a story first told by economic historian Paul David back in a 1991 essay. David points out that large dynamos for generating electricity existed in the 1870s. However, it wasn't until the Paris World Fair of 1900 that electricity was used to illuminate the public spaces of a city. And it's not until the 1920s that innovations based on electricity make a large contribution to US productivity growth. 

Why did it take so long for electricity to spread? Shifting production away from being  powered by waterwheels to electricity was a long process, which involved rethinking, reorganizing, and relocating factories. Products that made use of electricity like dishwashers, radios, and home appliances could not be developed fully or marketed successfully until people had access to electricity in their homes. Large economic and social adjustments take time time.

When it comes to machine learning, artificial intelligence, and economic growth, it's plausible to believe that we are closer to the front end of our economic transition than we are to the middle or the end. Some of the more likely near-term consequences mentioned by Brynjolfsson, Rock, and Syverson include a likely upheaval in the call center industry that employs more than 200,000 US workers, or how automated driverless vehicles (interconnected, sharing information, and learning from each other) will directly alter one-tenth or more of US jobs. My suspicion is that the changes across products and industries will be deeper and more sweeping than I can readily imagine.

Of course, the transition to the artificial intelligence economy will have some bumps and some pain, as did the transitions to electrification and the automobile. But the rest of the world is moving ahead. And history teaches that countries which stay near the technology frontier, and face the needed social adjustments and tradeoffs along the way,  tend to be far happier with the choice in the long run than countries which hold back. 

Monday, November 20, 2017

Why Has Life Insurance Ownership Declined?

Back in the first half of the 19th century, life insurance was unpopular in the US because it was broadly considered to be a form of betting with God against your own life. After a few decades of insurance company marketing efforts, life insurance was transformed into a virtuous purchase for any good and devout husband. But in recent decades, life insurance has been in decline.

Daniel Hartley, Anna Paulson, and Katerina Powers look at recent patterns of life insurance and bring the puzzle of its decline into sharper definition in "What explains the decline in life insurance ownership?" in Economic Perspectives, published by the Federal Reserve Bank of Chicago (41:8,   2017). The story of shifting attitudes toward life insurance in the 19th century US is told by Viviana A. Zelizer in a wonderfully thought-provoking 1978 article, "Human Values and the Market: The Case of Life Insurance and Death in 19th-Century America," American Journal of Sociology (November 1978, 84:3, pp. 591-610).

With regard to recent patterns, Hartley, Paulson, and Powers write: "Life insurance ownership has declined markedly over the past 30 years, continuing a trend that began as early as 1960. In 1989, 77 percent of households owned life insurance (see figure 1). By 2013, that share had fallen to 60 percent." In the figure, the blue line shows any life insurance, the red line shows the decline in term life, and the gray line shows the decline in cash value life insurance.


Early the 19th century, the costs of death and funerals were largely a family and neighborhood affair. As Zelizer points out, attitudes at the time, life insurance was commercially unsuccessful because it was viewed as betting on death. It was widely believed that such a bet might even hasten death, with with blood money being received by the life insurance beneficiary. For example, Zelizer wrote:

"Much of the opposition to life insurance resulted from the apparently speculative nature of the enterprise; the insured were seen as `betting' with their lives against the company. The instant wealth reaped by a widow who cashed her policy seemed suspiciously similar to the proceeds of a winning lottery ticket. Traditionalists upheld savings banks as a more honorable economic institution than life insurance because money was accumulated gradually and soberly. ...  A New York Life Insurance Co. newsletter (1869, p. 3) referred to the "secret fear" many customers were reluctant to confess: `the mysterious connection between insuring life and losing life.' The lists compiled by insurance companies in an effort to respond to criticism quoted their customers' apprehensions about insuring their lives: "I have a dread of it, a superstition that I may die the sooner" (United States Insurance Gazette [November 1859], p. 19). ... However, as late as the 1870s, "the old feeling that by taking out an insurance policy we do somehow challenge an interview with the 'king of terrors' still reigns in full force in many circles" (Duty and Prejudice 1870, p. 3). Insurance publications were forced to reply to these superstitious fears. They reassured their customers that "life insurance cannot affect the fact of one's death at an appointed time" (Duty and Prejudice 1870, p. 3). Sometimes they answered one magical fear with another, suggesting that not to insure was "inviting the vengeance of Providence" (Pompilly 1869). ... An Equitable Life Assurance booklet quoted wives' most prevalent objections: "Every cent of it would seem to me to be the price of your life .... it would make me miserable to think that I were to receive money by your death .... It seems to me that if [you] were to take a policy [you] would be brought home dead the next day" (June 1867, p. 3)."
However, over the course of several decades, insurance companies marketed life insurance with a message that it was actually a loving duty to one's family for a devout husband. As Zelizer argues, the rituals and institutions of what society viewed as a "good death" altered. She wrote:
"From the 1830s to the 1870s life insurance companies explicitly justified their enterprise and based their sales appeal on the quasi-religious nature of their product. Far more than an investment, life insurance was a `protective shield' over the dying, and a consolation `next to that of religion itself' (Holwig 1886, p. 22). The noneconomic functions of a policy were extensive: `It can alleviate the pangs of the bereaved, cheer the heart of the widow and dry the orphans' tears. Yes, it will shed the halo of glory around the memory of him who has been gathered to the bosom of his Father and God' (Franklin 1860, p. 34). ... life insurance gradually came to be counted among the duties of a good and responsible father. As one mid-century advocate of life insurance put it, the man who dies insured and `with soul sanctified by the deed, wings his way up to the realms of the just, and is gone where the good husbands and the good fathers go' (Knapp 1851, p. 226). Economic standards were endorsed by religious leaders such as Rev. Henry Ward Beecher, who pointed out, `Once the question was: can a Christian man rightfully seek Life Assurance? That day is passed. Now the question is: can a Christian man justify himself in neglecting such a duty?' (1870)."
Zelizer's work is a useful reminder that many products, including life insurance, are not just about prices and quantities in the narrow economic sense, but are also tied to broader social and institutional patterns.  

The main focus of Hartley, Paulson, and Powers is to explore the extent to which shifts in socioeconomic and demographic factors can explain the fall in life insurance: that is, have socioeconomic or demographic groups that were less likely to buy life insurance become larger over time? However, after doing a breakdown of life insurance ownership by race/ethnicity, education level, and income level, they find that the decline in life insurance is widespread across pretty much all groups. In other words, the decline in life insurance doesn't seem to be (primarily) about socioeconomic or demographic change, but rather about other factors. They write: 
"Instead, [life insurance] ownership has decreased substantially across a wide swath of the population. Explanations for the decline in life insurance must lie in factors that influence many households rather than just a few. This means we need to look beyond the socioeconomic and demographic factors that are the focus of our analysis. A decrease in the need for life insurance due to increased life expectancy is likely to be an especially important part of the explanation. In addition, other potential factors include changes in the tax code that make the ability to lower taxes through life insurance less attractive, lower interest rates that also reduce incentives to shelter investment gains from taxes, and increases in the availability and decreases in the cost of substitutes for the investment component of cash value life insurance." 
It's intriguing to speculate about what the decline in life insurance purchases tells us about our modern attitudes and arrangements toward death, in a time of longer life expectancies, more households with two working adults, the backstops provided by Social Security and Medicare, and perhaps also shifts in how many people feel that their souls are sanctified (in either a religious or a secular sense) by the purchase of life insurance. 

Friday, November 17, 2017

Brexit: Still a Process, Not Yet a Destination

I happened to be in the United Kingdom on a long-planned family vacation on June 23, 2016, when the Brexit vote took place. At the time, I offered a stream-of-consciousness "Seven Reflections on Brexit" (June 26, 2016). But more than year has now passed, and Thomas Sampson sums up the research on what is known and what might come next in "Brexit: The Economics of International Disintegration," which appears in the Fall 2017 issue of the Journal of Economic Perspectives.

(As regular readers know, my paying job--as opposed to my blogging hobby--the Managing Editor of the JEP. The American Economic Association has made all articles in JEP freely available, from the most recent issue back to the first. For example, you can check out the Fall 2017 issue here.)

Here's Sampson's basic description of the UK and its position in the international economy before Brexit. For me, it's one of those descriptions that doesn't use any weighted rhetoric, but nonetheless packs a punch.
"The United Kingdom is a small open economy with a comparative advantage in services that relies heavily on trade with the European Union. In 2015, the UK’s trade openness, measured by the sum of its exports and imports relative to GDP, was 0.57, compared to 0.28 for the United States and 0.86 for Germany (World Bank 2017). The EU accounted for 44 percent of UK exports and 53 percent of its imports. Total UK–EU trade was 3.2 times larger than the UK’s trade with the United States, its second-largest trade partner. UK–EU trade is substantially more important to the United Kingdom than to the EU. Exports to the EU account for 12 percent of UK GDP, whereas imports from the EU account for only 3 percent of EU GDP. Services make up 40 percent of the UK’s exports to the EU, with “Financial services” and “Other business services,” which includes management consulting and legal services, together comprising half the total. Brexit will lead to a reduction in economic integration between the United Kingdom and its main trading partner."
A substantial reduction in trade will cause problems for the UK economy. Of course, the estimates will vary according to just what model is used, and Sampson runs through the main possibilities. He summarizes in this way: 
"The main conclusion of this literature is that Brexit will make the United Kingdom poorer than it would otherwise have been because it will lead to new barriers to trade and migration between the UK and the European Union. There is considerable uncertainty over how large the costs of Brexit will be, with plausible estimates ranging between 1 and 10 percent of UK per capita income. The costs will be lower if Britain stays in the European Single Market following Brexit. Empirical estimates that incorporate the effects of trade barriers on foreign direct investment and productivity find costs 2–3 times larger than estimates obtained from quantitative trade models that hold technologies fixed."
What will come next after Brexit isn't yet clear, and may well take years to negotiate. In the meantime, the main shift seems to be that the foreign exchange rate for the pound has fallen, while inflation has risen, which means that real inflation-adjusted wages have declined. This national wage cut has helped keep Britain's industries competitive on world markets, but it's obviously not a desirable long-run solution.

But in the longer run, as the UK struggles to decide what actually comes next after Brexit, Sampson makes a distinction worth considering: Is the opposition to Brexit about national identity and taking back control, even if it makes the country poorer, or is it about renegotiating trade agreements and other legislation to do more to address the economic stresses created by globalization and technology? He writes:

"Support for Brexit came from a coalition of less-educated, older, less economically successful and more socially conservative voters who oppose immigration and feel left behind by modern life. Leaving the EU is not in the economic interest of most of these left-behind voters. However, there is currently insufficient evidence to determine whether the leave vote was primarily driven by national identity and the desire to “take back control” from the EU, or by voters scapegoating the EU for their
economic and social struggles. The former implies a fundamental opposition to deep economic and political integration, even if such opposition brings economic costs, while the later suggests Brexit and other protectionist movements could be addressed by tackling the underlying reasons for voters’ discontent."
For me, one of the political economy lessons of Brexit is that relatively easy to get a majority against a specific unpopular element of the status quo, while leaving open the question of what happens next. It's a lot harder to get a majority in favor of a specific change. That problem gets even harder when it comes to international agreements, because while it's easy for UK politicians to make pronouncements on what agreements the UK would prefer, trade negotiators in the EU, the US, and the rest of the world have a say, too. Sampson discusses the main post-Brexit options, and I've blogged about them in "Brexit: Getting Concrete About Next Steps" (August 2, 2016). While the process staggers along, this "small open economy with a comparative advantage in services that relies heavily on trade with the European Union" is adrift in uncertainty.