Thursday, March 23, 2017

Interview with Jonathan A. Parker

Aaron Steelman has a broad-ranging "Interview" with Jonathan A. Parker in the most recent issue of Econ Focus from the Federal Reserve Bank of Richmond (Third/Fourth Quarter 2016, pp. 22-26). Here are a few tidbits that caught my eye:

Increased volatility for high-income households
"[I]n work with Annette Vissing-Jorgensen we have looked at how the labor income of high-income households has changed significantly. What we zoomed in on is that high-income households used to live a relatively quiet life in the sense that the top 1 percent would earn a relatively stable income, more stable than the average income. When the average income dropped by 1 percent, the incomes of the top 1 percent would drop by about only six-tenths of a percent. In the early 1980s that switched, so that in a recession if aggregate income dropped by 1 percent, the incomes of the top 1 percent dropped more like 2.5 percent — quadrupling the previous cyclicality. So now they're much more exposed to aggregate fluctuations than the typical income. We also show that decade by decade, as the top income share increased, so did its exposure to the business cycle in the 1980s, 1990s, and 2000s. And as you go further and further up the income distribution, that top share — not just the top 1 percent, but the top 10th of a percent, and the top 100th of a percent — there's also been a bigger increase in inequality and a bigger increase in the exposure to the business cycle. ... 
"First, starting around the end of the 1980s, we see the adoption of incentive-based pay for CEOs and other highly placed managers. Incentive compensation over this time rises, and it happens to be that the incentive compensation is not based on relative performance, which would therefore difference out what goes on in the macroeconomy, but instead is based on absolute performance. And in the U.S. case, that could partly be due to simply what counts legally as incentive-based compensation and so is not subject to corporate profits tax. Pay in the form of stock options, for example, counts as incentive-based compensation. Pure salary does not and so is taxed as corporate profits above $1 million.
"The other possibility is that ... new information and communication technologies allow the best managers to manage more people, to run bigger companies, and therefore to earn more; the best investment managers to manage more money and to make more for themselves; the best entertainers and performers to reach more people and therefore earn a larger share of the spending on entertainment goods. High earners have become small businesses. ... We do know that increased cyclicality in income among high earners can't come simply from the financial sector. That sector just isn't quantitatively big enough, and you see the increase in earnings share and in cyclicality across industries and occupations. It's not the case that just the top hedge fund managers have become the high earners and they're very cyclical; Oprah is also."
Why don't households smooth consumption?
"I use Nielsen Consumer Panel data to design and run my own survey on households to measure the effect of what was then the second of these large randomized experiments run by the U.S. government, the economic stimulus program of 2008. The key feature of that program was that the timing of the distribution of payments was determined by the last two digits of the Social Security number of the taxpayer, numbers that are essentially randomly assigned. So the government effectively ran a $100 billion natural experiment in 2008, distributing money randomly across time to people, and this policy provides a way to measure quite cleanly how people respond to infusions of liquidity. ...
"The first thing I found out is that illiquidity is still a tremendous predictor of who spends more when a predictable payment arrives. But it's not only liquidity. People with low income have a very high propensity to spend, and not just people who have low income today, as would be associated with the standard buffer-stock model. You can imagine a situation where you've had a bad income shock, you happen to have low liquidity, and you spend a lot. But illiquidity one or even two years prior to the payment is just as strongly associated with a propensity to spend out of liquidity, as illiquidity at the time of the payment. This same set of people who have persistently high propensities to consume are also the people who characterize themselves as the type of people who spend for today rather than save for tomorrow when I asked them specifically about their type, not their situation. They are also the people who report that they have not sat down and made financial plans. ... Low liquidity, or low financial wealth, is a very persistent state across households, suggesting the propensity to spend is not purely situational. A lot of it is closer to an individual-specific permanent effect than something transient due to temporary income shocks. ... 
"So the question is how many people are influenced by constraints in practice. Is their marginal propensity to consume noticeably influenced by the fact that they might be constrained next month or in six months? I would say that's quantitatively important for roughly half of the population. ... I don't think there's a lot of transition between the people who would consistently hit these constraints or be concerned about them and the people for whom they're not that relevant."
Tradeoffs in the coming revisions in the Consumer Expenditure Survey

"The BLS [Bureau of Economic Statistics] is revising the CE Survey now. It's called the Gemini Project, and I have been involved a little with advising how to revamp it. Surveys in general have been experiencing problems with participation and reporting. The CE is suffering from these problems, and so the Gemini Project is trying to address them. The CE has the huge benefit of being a nationally representative survey done by the Census Bureau; almost all of the alternative datasets that we're using from administrative sources that are not strictly survey datasets are less representative. So reducing the CE's problems with participation and reporting could potentially have a very large payoff. Of course, the cost of the change is that the CE Survey as it stands now is a very long panel dataset that has had the same format throughout the whole time. So we're going to break that and no longer be adding new time periods to an intertemporally comparable dataset. But I think that's probably a cost worth paying at this point.
"What the BLS is planning is to change dramatically the way the CE Survey is conducted. They're going to gather data in quite different ways than they have in the past, including some spending categories that will almost have so-called administrative sources. What I have been pushing for is maintaining some panel dimension in the new version of the CE Survey. If you don't have a panel dimension, then for lots of macro-type questions, you can track people only at the group level. And since groups are usually affected differently by other things going on in the world, you lose a lot of ability to identify stuff that might be interesting — tracking someone who had a specific policy exposure in one period and seeing how they're doing a month or a year later. If the BLS eliminates the panel dimension, researchers couldn't do anything like I did with my tax rebates work, nor any other work that looks at treatments that are happening at the individual level. But I'm hoping that the new, state-of-the-art version of the CE Survey will last another 35 years and be just as good."

Wednesday, March 22, 2017

India: What's Needed for Sustained Growth?

India has been experiencing episodes of rapid growth since the 1980s, but the growth always seem accompanied by a question mark. Thus, V. Anantha Nageswaran and Gulzar Natarajan write in their report Can India Grow? Challenges, Opportunities, and the Way Forward (published by Carnegie India, November 2016): 
"Indeed, in the past twenty-five years, every time India achieved a slightly higher economic growth rate, it was followed by some combination of an external financing deficit, a rise in nonperforming assets in the banking system, a high rate of inflation with consequent currency overvaluation, and other problems. This was the case at the end of the 1970s, at the end of the 1980s, and again in 2012–2013."
A main theme of the report the problems that India needs to overcome to lay a firm foundation for sustained economic growth into the future. While the report often takes a moderately optimistic glass-half-full tone, discussing what policies are being undertaken, I found that I was more struck by the glass-half-empty interpretation--that is, the depth and severity of many of these issues. Here are some examples (with footnotes omitted throughout for readability).

India's education system has gotten children into school, but is failing to teach them

"If education were only about schools, about physical infrastructure, materials, and ensuring universal enrollment, then India has succeeded spectacularly. Every large population center has a school; most schools have buildings and teachers assigned; and students have study materials. It was hoped or assumed that once the schooling inputs were in place, education and learning outcomes would somehow follow automatically. But this has proved not to be the case. Lant Pritchett, an education researcher with Harvard’s Kennedy School of Government, has evocatively described the situation as `schooling ain’t learning.' And schooling without learning leads to very poor educational outcomes, a finding supported by the 2014 Annual Status of Education Report, the largest nongovernmental household survey undertaken in rural India:
"`51.9% of Class 5 children in rural India cannot read a Class 2 text; only 25% of children in Class 5 and 46.8% in Class 8 could read simple English sentences; just 25.3% of Class 3 children could do a two-digit subtraction, 26.1% of Class 5 children and 44.1% of Class 8 students could do division. ...'
"A 2010 study by the Tata Institute of Social Sciences in Mumbai found that only 10 percent of new graduates and 25 percent of graduates of engineering and MBA programs had adequate skills to be employable. Numerous other surveys have confirmed the results."

Female labor force participation in India is strikingly low
"A ... major labor market deficiency is the country’s shockingly low female workforce participation rate. At 24 percent in 2014, it was comparable to levels in the Middle East and North Africa, and just half that in Indonesia. A 2015 report from the McKinsey Global Institute showed that the female contribution to India’s GDP, at 17 percent, is the lowest in the world among a sample constituted of countries and regions, and less than half the global female share of GDP at 37 percent. The report estimates that if India did as well as the best-performing country in South Asia on this metric, by 2025 its incremental output would be higher by 16 percent, or $700 billion. But this would require, even more than enabling public policies, a social transformation on a scale equivalent to that which led to the weakening of caste barriers in Indian society in the latter part of nineteenth century and the early twentieth century."
India has a small number of large firms, a huge number of tiny firms, and little in the middle

"The number and proportion of small and microenterprises are staggeringly high. Their contribution to output and employment is infinitesimally small. Yet romanticism in policy circles with micro and small has endured far longer than is justified by their economic value added. Small has not been beautiful, as the capital and labor locked up in these unproductive enterprises represent lost economic opportunity. Furthermore, most such enterprises are informal and operate beneath the radar of tax
authorities and other regulators. ... India’s industrial base has a gaping hole in the middle. Specifically, India has a preponderance of microenterprises and a tiny set of large enterprises. It has neither small nor medium-sized enterprises."



The size of of farms is small and declining, making investment and economies of scale 




A striking high share of India's workers are in the informal economy
"A statistical update on employment in the informal economy published by the International Labor Organization in 2012 showed that India has one of the world’s largest informal sectors. At 83.6 percent, the share of informal employment in  the country’s overall nonagricultural employment total is the highest in the world. Furthermore, India’s labor force participation rate is one of the lowest in the world. Only Egypt and Honduras fare worse."
Domestic savings and capital accumulation in India have been low
"The economic historian Robert Allen has documented India’s capital accumulation shortfall. He writes, “Between 1860 and 1990, it [India] accumulated little capital and achieved little growth. Its capital-labor ratio in 1990 ($1,946) and labor productivity ($3,235) were like Britain’s in 1820 ($1,841 and $4,408, respectively).” Comparing the development trajectories of seventeen countries in the 1820–1990 period, he argues that developing countries such as India “need to accumulate capital in the massive way that  East Asian economies have done since 1960 in order to close the gap with the West.” That gap is a huge one to close. Unfortunately, India is constrained by its low savings rate and narrow capital base, both of which constrain it from generating the capital required to sustain a high economic growth rate for a sufficiently long period."
India's government depends on a narrow slice of the population for its tax base
"The narrow industrial base and limited pool of middle-class taxpayers is nowhere reflected more starkly than in the country’s very low tax-to-GDP ratio. India has one of the lowest ratios among the G20 countries—far lower than Brazil’s, for example. Despite India’s large population, the country’s income tax base is comparable to that of a small European country. In 2012–2013 there were just 31.19 million assessees, or less than 3 percent of the 1.2 billion population, in contrast to 147 million assessees in 2013 among 316 million people in the United States."
India's public spending on infrastucture has been falling as a share of GDP



India's government and government-run programs are often dysfunctional

"The inability to implement government programs is pervasive and dominates the public’s perception of weak governance. India’s government-run schools are noteworthy for neglect and apathy. Teacher absenteeism is rampant; learning levels are abysmal; toilets, where available, are mostly nonfunctional; and so on. In healthcare, doctor and nurse absenteeism is very high, and the quality of primary care services is unacceptable. Even when resources and personnel are made available, most large government-run hospitals remain badly managed. In both sectors, well-designed national programs with adequate implementation flexibility have fallen far short of expectations when subjected to the field test of implementation.
"Inordinate delays in fixing a leaking pipeline or repairing potholes, let alone building new roads or drilling wells, and slow garbage collection are frustrations familiar to most Indians. The execution of small panchayat (the unit of administration at the village level) works, even when contracted and the money made available, takes months to years. And despite the existence of progressive and comprehensive legislation on social protection, atrocities against lower castes, children, and women continue unabated.
"Supervisory systems, even when not compromised, struggle to enforce regulations. The commanding sectors of modern India, infrastructure and urban facilities, are marred by the same malaise. The capacity to design and document projects, manage procurements, mobilize financial resources, finalize contracts, and manage the execution effectively is sorely lacking even at the highest levels of state and national government. It is no surprise that contracting corruption, execution delays, and renegotiations have become quotidian in these sectors."
The pathway to export-led growth through low-wage manufacturing seems to be less available
"One of the defining features of successful economic growth over long periods in the recent past has been the central role of exports. The most prominent example is that of East Asia, where long periods of economic growth were sustained by strong export growth, in particular driven by the manufacturing sector. India clearly exports a far smaller share of its output than did any of the East Asian economies during their high-growth periods. The prospects for the manufacturing sector becoming the engine of India’s growth do not appear promising, owing to the structural shifts taking place in the global economy and the concomitant trend of premature deindustrialization. More worryingly, the prospect of exports becoming a main driver of economic growth also looks bleak."
These issues mostly suggest their own solutions, but implementation isn't easy or straightforward. The bottom line of the report is that India's economy has enough strong areas that 4-5% annual GDP growth remains quite possible. But it's worth remembering that when it comes to per capita GDP, India ranks 150th among the countries of the world, at a level similar to Nigeria and Congo. Annual growth rates of 4-5% would mean that India barely keeps pace with other emerging market economies like China, or gradually falls behind.

For another recent post on India's economy, see my overview of the most recent Economic Survey from India's Ministry of Finance in "The Economic Vision for Precocious, Cleavaged India" (February 16, 2017).

Tuesday, March 21, 2017

Available: My Principles Text, Fourth Edition

Here at the Conversable Economist blog, we (that would be me) interrupt the usual parade of economics articles, report, graphs, and figures to bring you a commercial message.

The fourth edition of my Principles of Economics textbook is now available. It is mainstream in content, well-written, and fairly priced. It offered me a chance for me to unpack my personal toolkit of how to explain this material: that is, my preferred order for the material, step-by-step conceptual explanations, metaphors,  historical and modern examples, evocative graphs and tables, quotations, parables, and more. If you're actively looking at possible textbooks for next fall, or perhaps just keeping track of what's out there, I commend it to your attention. Here's are shots of the front and back covers, which includes a few nice comments from current users.


Monday, March 20, 2017

What's the Value of US Household Production?

The value of household production has never been included in GDP. But although this is sometimes interpreted as a knock against those who do most of household production, it's really just a matter of accounting. To be included in GDP, there needs to be a market transaction. Even back in 1934, when Simon Kuznets was reporting the first estimates of "national income" to the US Congress, he was careful to note: "A student of social affairs who is interested in the total productivity  of the nation, including those efforts which, like housewives' services,  do not appear on the market, can therefore use our measures only  with some qualifications."

However, the US Bureau of Economic Analysis and statistical agencies in other countries now often use  "satellite accounts" to calculate the value of household production, which is currently equal to about 23% of US GDP--and has been declining over time. Here's a bit of broader context for the comment from Kuznets in  his 1934 report, National Income, 1929-1932 : Letter from the Acting Secretary of Commerce Transmitting in Response to Senate Resolution No. 220 (72nd Cong.) a Report on National Income, 1929-32, and then some information on the current estimates of the size of household production in the US and elsewhere.

Kuznets wrote in 1934:
"The volume of services rendered by housewives and other members of the  household toward the satisfaction of wants must be imposing indeed,  when totaled for the 30 million families comprising the population of  this country; and the item is thus large enough to affect materially any estimate of national income. But the organization of these services  render them an integral part of family life at large, rather than of the specifically business life of the nation. Such services are, therefore, quite removed from those which gainfully occupied groups undertake to perform in return for wages, salaries, or profits. It was considered  best to omit this large group of services from national income, especially  since no reliable basis is available for estimating their value. This  omission, unavoidable though it is, lowers the value of national income  measurements as indexes of the nation's productivity in conditions  of recent years when the contraction of the market economy was accompanied by an expansion of activity within the family. ... Thus, the estimates submitted in the present study define income in such a way as to cover primarily only  efforts whose results appear on the market place of our economy.  A student of social affairs who is interested in the total productivity  of the nation, including those efforts which, like housewives' services,  do not appear on the market, can therefore use our measures only with some qualifications." 
Back in the Depression, as Kuznets noted, there was a shift from the market-paid work that was part of GDP to household services that were not counted in GDP. But in more recent decades, the shift has tended to go the other direction, as people have tended to shift away from household production and instead to purchase a larger share of these services in the market. Benjamin Bridgman at the US Bureau of Economic Analysis offers an overview of how these calculations are done and the trends over time in "Accounting for Household Production in the National Accounts: An Update, 1965–2014," in the February 2016 issue of Survey of Current Business.

The starting point is to use surveys of time use, like the American Time Use Survey (ATUS) and the Multinational Time Use Survey (MTUS). The categories and reporting in these surveys have varied over time, and thus the results should be interpreted with a degree of caution, but broadly, there are seven categories of household production "housework, cooking, odd jobs, gardening, shopping, child care, and domestic travel." Then the hours spent on these tasks are multiplied by the wage commonly paid in the market for those doing these domestic tasks.

The value of household services was equal to about 37% of GDP in 1965, but is currently equal to about 23% of GDP. As Bridgeman writes:
"Household production has declined in importance over time as more women engage in market work. ... Including household production in 2014 would increase national output by 23 percent, less than the 26 percent in 2008. Since much of the decline in market work was driven by men, who spend relatively little time in home production, the shift is not enough to counteract the general decline of the household sector. The gap between working and nonworking men is also relatively small, so moving a man from the market to the home does not increase his hours much. Working men spent an average of 16.2 hours per week in household production, only slightly less than the 21.2 for nonemployed men. In contrast, the movement of women into market work had a big impact since there is a significant difference in hours that employed and nonemployed women devote to home production. Working women devoted 23.2 hours of household production compared with 33.2 hours for nonworking women in 2014." 

Saturday, March 18, 2017

American Leisure: TV and a Bit of Socializing

The most fundamental tradeoff that individuals face is time: no matter your income, education level, gender, ethnicity, we all get precisely 1,440 minutes each day, and 168 hours each week. The American Time Use Survey, conducted by the Census Bureau, surveys a nationally representative group Americans on their use of time. Here are some patterns of American leisure.

Americans average about five hours of leisure time each day, and they spend 55% of that time watching television. 
Leisure time on an average day

In the April/May issue of 1843 magazine (published by The Economist), James Tozer digs down into the American Time Use Survey data a little further, in a short "What the numbers say"  article on "Leisure time." For example, here's a breakdown of total leisure per day, in minutes, by demographic categories. Men, the less educated, and the elderly tend to have more leisure time.


Tozer also looks at how leisure time changes between 2006 and 2015. In this figure, the size of the circles is proportional to how much time was spent on leisure time just on weekends and holidays. The different colors show age groups. The axis on the right-hand side shows how time spent in these categories shifted from 2006-2015. Thus, older folks are watching more TV and spending less time on reading and thinking. Younger folks are spending a little less time watching TV, a lot less time socializing, and a lot more time on their computers and phones.

As I wrote about five years ago on this website:
Economists sometimes quote the old proverb: "De gustibus non est disputandum." There's no arguing over taste. We tend to accept consumer tastes and preferences as given, and proceed from there. I suppose that those of us who blog, and then hope for readers, can't really complain about those who spend time looking at a screen. I certainly have my own personal time-wasters, like reading an inordinate number of mysteries. I assume that for many people the television is on in the background of other activities. But at some deep level, I just don't understand averaging 8 hours of television per day [per household]. I always remember the long-ago jibe from the old radio comedian Fred Allen:"Television is a medium because anything well done is rare."

Friday, March 17, 2017

Africa's Cities: The Low Development Trap

A few weeks ago, I offered some thoughts on "Agriculture in Sub-Saharan Africa" (February 22, 2017). For a complementary useful look at the urban side of Africa's development issues, a team of World Bank researchers led by Somik Vinay Lall, J. Vernon Henderson, and Anthony J. Venables have published Africa's Cities: Opening Doors to the World. This report isn't a bloodless overview of the trends and patterns of urbanization; instead, it's an argument with a thesis that urbanization in Africa is not serving as an engine for growth.  They write:
In principle, cities should benefit businesses and people through increased economic density. Firms clustered in cities should be able to access a wider market of inputs and buyers, with reduced production costs thanks to scale economies. Workers should consume more diverse products and services, pay less for what they consume, and enjoy easier commutes because of proximity to their jobs. Africa’s cities feel crowded precisely because they are not dense with economic activity, infrastructure, or housing and commercial structures. ... 
Typical African cities share three features that constrain urban development and create daily challenges for residents:
  • Crowded, not economically dense — investments in infrastructure, industrial and commercial structures have not kept pace with the concentration of people, nor have investments in affordable formal housing; congestion and its costs overwhelm the benefits of urban concentration.
  • Disconnected — cities have developed as collections of small and fragmented neighborhoods, lacking reliable transportation and limiting workers’ job opportunities while preventing firms from reaping scale and agglomeration benefits.
  • Costly for households and for firms — high nominal wages and transaction costs deter investors and trading partners, especially in regionally and internationally tradable sectors; workers’ high food, housing, and transport costs increase labor costs to firms and thus reduce expected returns on investment. ..
In sum, the ideal city can be viewed economically as an efficient labor market that matches employers and job seekers through connections (Bertaud 2014). The typical African city fails in this matchmaker role.  A central reason for this failure — one that has not yet been sufficiently recognized — is that the city’s  land use is fragmented. Its transport infrastructure is insufficient, and too much of its development occurs through expansion rather than infill. While the underlying causes of these problems are regulatory and institutional, the effects of spatial fragmentation are material: It limits urban economies. ... And without the economic density that gives rise to efficiency, Africa’s cities do not seem to increase worker productivity.  ...
Cities in Africa are costly for households, workers, and businesses. Because food and building costs are high,  families can hardly remain healthy or afford decent housing. Because commuting by vehicle is not only  slow but expensive, workers find it hard to take and keep jobs that match their skills. And the need for higher wages to pay higher living costs makes firms less productive and competitive, keeping them out of tradable sectors. As a result, African cities are avoided by potential regional and global investors and trading partners. ...
When urban costs drive nominal wages too high, firms will not be able to compete in the tradable sector and will produce only nontradables. The nontradable sector includes certain goods (beer and cement are examples), the construction trade, the retail trade, and many service sector activities, including informal sector employment. Demand for these goods and services comes from income generated within the city and its hinterland — but also from income transferred from outside, such as resource rents, tax revenues, and foreign aid.
The reason why a firm in the nontradable sector can afford to pay higher wages — while a firm in the tradable sector cannot — is that the nontradable producer can raise its prices citywide. By doing so, it passes its own cost increases on to consumers in the urban market. But such price hikes make the cost of living in a city even higher, contributing to the workers’ urban costs. This sequence can become a vicious cycle that keeps African cities out of the tradable sector and limits their economic growth.
The report is full of facts, patterns, and insights documenting these claims across urban areas in countries of sub-Saharan Africa. Some bits that caught my eye:
"In eight representative African cities, roads occupy far lower shares of urban land than in other cities around the world."



"Related to the predominance of informal housing near African city centers is their relative lack of built-up area. For example, in both Harare, Zimbabwe and Maputo, Mozambique, more than 30 percent of land within five kilometers of the central business district remains unbuilt. This land near the core is not left unbuilt by design in African cities, as it can be in well-developed downtowns such as Paris (which reserves 14 percent of downtown land for green space, making densely populated districts more livable). Instead, outdated and poorly enforced city plans, along with dysfunctional property markets, create inefficient land use patterns that no one intended. The downtown lacks structures — despite being crowded." 
"Without adequate formal housing in reach of jobs, and without transport systems to connect people living farther away, Africans forgo services and amenities to live in cramped quarters near their work. ... Across Africa, 60 percent of the urban population is packed into slums— much higher than the 34 percent seen elsewhere."
"African households face higher costs relative to their per capita GDP than households in other regions. ... Housing and transport are especially costly in urban Africa. Relative to their income levels, urban residents pay 55 percent more for housing in Africa than they do in other regions. Urban transport, which includes prices of vehicles and transport services, is about 42 percent more expensive in African cities than in cities elsewhere. ...  For the poorest urban residents especially, the cost of vehicle transport in some cities is prohibitive. The need to walk to work limits these residents’ access to jobs. The price premium for food is also large (about 35 percent)."
"African cities also are disconnected in that they are spatially dispersed. Structures are scattered in small neighborhoods. Without adequate roads or transport systems, commuting is slow and costly, denying workers access to jobs throughout the larger urban area. People and firms are separated from each other and from economic opportunity. And because urban form is determined by long-lived structures that shape the city for decades — if not centuries — cities that assume a disconnected form can easily become locked into it. ... African cities are 20 percent more fragmented than are Asian and Latin American ones."

What public policy emphases are implied by these insights? Lall, Henderson, and Venables write:
Africa’s urban areas are quickly gaining in population: Home to 472 million people now, they will be twice as large in 25 years. The most populous cities are growing as fast as 4 percent annually. Productive jobs, affordable housing, and effective infrastructure will be urgently needed for residents and newcomers alike. In urgency lies opportunity. Leaders can still set their cities onto more efficient development paths if they act swiftly — and if they can resist flashy projects, steadfastly pursuing two main goals in order of priority:
  • First, formalize land markets, clarify property rights, and institute effective urban planning.
  • Second, make early and coordinated infrastructure investments that allow for interdependence among sites, structures, and basic services.
A third goal is to improve urban transport and additional services. But this must not come ahead of the two goals listed above — nor can it be achieved unless those are met first.

Thursday, March 16, 2017

The Rise and Fall of Personal Interest Income

Yesterday, the Federal Reserve tweaked interest rates upward one more time, "to raise the target range for the federal funds rate to 3/4 to 1 percent." Most of the commentary has focused focuses on the macroeconomics of whether or when rates should rise, which seems appropriate. But spare a thought for those, including retirees, insurance companies, and pension funds, who depend on investments that make interest payments as part of their portfolio. One obvious consequence of the low interest rates in recent is that personal income received in the form of interest payments has also declined.

Here's a figure showing personal interest income received since the 1950s. The drop in interest payments received as personal income after the Federal Reserve cut interest rates to fight recession in 2001, and again in 2007-2008, are clearly visible.


To put this nominal data in a more revealing perspective, I've divided personal interest income by the size of the economy, as measured by GDP, which is a rough-and-ready way of adjusting for both economic growth and inflation over time. The result was striking:



The hump-shaped curve is striking to me. Back in the late 1940s, the main task of the Federal Reserve in the aftermath of World War II was to keep interest rates low so that government interest payments on the wartime debt would stay affordable. But the Fed broke lose from this arrangement and regained its independence with what is sometimes called the Treasury-Fed Accord of 1951. Interest rates rose, and so did the quantity of financial instruments paying interest, so the personal income received in the form of income rose, too.

The 1980s were a peculiar time for interest income. The blue line in the figure below shows the annual inflation rate. The red line shows an interest rate commonly used as a benchmark for the overall level of interest rates, the interest rate on 10-year Treasury bonds. High inflation during the 1970s had pushed nominal interest rates way up. The drop in inflation around 1983 came more suddenly than many had expected, and so there is a period when the real rate of return on many interest-bearing investment (that is, the gap between the red and the blue line) was unexpectedly high.


During that period in the mid-1980s, personal income from interest payments was historically high relative to GDP. But since then, interest rates have gradually drifted lower, and during a number of time periods, the returns available from alternative investments in the stock market looked quite attractive. Personal income received in the form of interest payments has drifted lower, although not yet back to the level of the 1950s.