social security retirement age

10 Kasım 2012 Cumartesi

How Retirement Age Tracks Social Security's Rules

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Back in 1983, as one of the steps taken to bolster the long-run finances of the Social Security System, was to phase in a rise in the "normal" or "full" retirement age. The normal retirement age for receiving full Social Security benefits had been 65, with "early retirement" with lower benefits possible at age 62. Under the new rules, the normal retirement age remained 65 for those born in 1937 or earlier--and thus turning 65 before 2002. It then phased up by 2 months per year, so that for those born six years later in 1943 or after, the normal retirement age is now 66. Written into law is a follow-up increase where a rise in the normal retirement age from 66 to 67 will be phased in, again at a rate of two months per year, for those born from 1955 to 1960.

How has this change altered actual retirement patterns? What are the reasons, either for retirees or for the finances of Social Security, to encourage still-later retirement?

Economists have long recognized that what a government designates as the "normal" retirement age has a big effect on when people actually choose to retire. Luc Behaghel and David M. Blau present some of the recent evidence in "Framing Social Security Reform: Behavioral Responses
to Changes in the Full Retirement Age," which appears in the November 2012 American Economic Journal: Economic Policy (4(4): 41–67). (The journal isn't freely available on-line, but many in academia will have access through a library subscription.)

Consider the following graphs from Behaghel and Blau. Each one is for those born in a different year, from 1937 up through 1942, as the normal retirement age phased up. These people are the ones hitting the normal retirement age of 65 in the early and mid-2000s. The solid line shows the probability of retirement at each age. The early retirement age of 62 is marked with a vertical red line; the previous normal retirement age of 65 is marked with a vertical red line; and the actual retirement age for that year as it phases up two months per year is marked with a vertical red line. The dashed line, which is the same in all the figures, shows for comparison the retirement pattern for those born over the 1931-1936 period.

The main striking pattern is that the probability of retiring at a certain age almost exactly tracks the changes in the normal retirement age: that is, the solid line spikes at the red vertical line showing the normal retirement age. There is also a spike at the early retirement age of 62. Here are the patterns.

The evidence here seems clear: People are making their retirement choices in synch with the government-set normal retirement age. This pattern isn't new, as the authors point out, a spike in retirement age at 65 became visible in the data back in the early 1940s, about five years after Social Security became law. Still, the obvious question (for an economist) is why people would make this choice. If you retire later than the normal retirement age, your monthly benefits are scaled up, so from the viewpoint of overall expected lifetime payments, you don't gain from retiring earlier. A number of possible explanations have been proposed: 1) people don't have other sources of income and need to take the retirement benefits as soon as possible for current income; 2) people are myopic, or don't recognize that their monthly benefits would be higher if they delayed retirement; 3) many people are waiting until age 65 to retire so that they can move from their employer health insurance to Medicare; 4) some company retirement plans encourage retiring at age 65.

However, none of these explanations give an obvious reason for why the retirement age would exactly track the changes in Social Security normal retirement age, so it seems as if a final "behavioral" explanation is that the "normal" retirement age announced by the government, whatever it is, is then treated by many people as a recommendation that should be taken. Choosing a retirement date in this way is probably suboptimal both for individuals and for the finances of the Social Security system.

From the standpoint of individuals, there's a widespread sense among economists that many retirees would benefit from having more of their wealth in annuities--that is, an amount that would pay out no matter how long they live. In the Fall 2011 issue of my own Journal of Economic Perspectives,
Shlomo Benartzi, Alessandro Previtero, and Richard H. Thaler have an article on "Annuitization Puzzles," which makes the point that when you delay receiving Social Security, you are in effect buying an annuity: that is, you are taking less in the present--which is similar to "paying" for the annuity-- in exchange for a larger long-term payment in the future. They write: "[T]he easiest way to increase the amount of annuity income that families have is to delay the age at which people start claiming Social Security benefits. Participants are first eligible to start claiming benefits at age 62, but by waiting to begin, the monthly payments increase in an actuarially fair manner until age 70. "

They further argue that a good starting point to encouraging such behavior would be to re-frame the way in which the Social Security Administration, and all the rest of us, talk about Social Security benefits. Imagine that, with no change at all in the current law, we all started talking about a "standard retirement age" of 70. We pointed out that you can retire earlier, but if you do, monthly benefits will be lower. If the choice of when to retire was framed in this way, my strong suspicion is that many more people would react differently than when we announce that the "normal retirement age" is 66, and if you wait then your monthly benefits will be higher. Again, people seem to react to what the government designates as the target for retirement age.

However, this labeling change might encourage people to work longer, but it would not affect the solvency of the Social Security system, because those who wait longer to retire are, in effect, paying for their own higher monthly benefits by delaying the receipt of those benefits. However, the Social Security actuaries offer a number of illustrative calculations on their website about possible steps to bolster the financing of the system. One proposal about phasing back the normal age of retirement looks like this: "After the normal retirement age (NRA) reaches 67 for those age 62 in 2022, increase the NRA 2 months per year until it reaches 69 for individuals attaining age 62 in 2034. Thereafter, increase the NRA 1 month every 2 years."

Thus, this proposal would represent no change in the rules for Social Security benefits for anyone born before 1960--and thus in their early 50s at present. Under this proposal, those born after 1960 would face the gradual phase-in--but of course, they would also benefit from having a program that is much closer to fully funded. would face the same phase-in as currently exists. The actuaries estimate that this step by itself would address about 44% of the gap over the next 75 years between what Social Security has promised and the funding that is expected during that time. Given the predicted shortfalls of the Social Security system in the future, and the gains in life expectancy both in the last few decades and expected in the next few decades, and the parlous condition of large budget deficits reaching into the future, I would be open to proposals to phase in a more rapid and more sustained rise in the normal retirement age for Social Security benefits.

9 Kasım 2012 Cuma

How Retirement Age Tracks Social Security's Rules

Should Voting be Compulsory?

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Just to put my cards face up on the table right here at the start, I'm not in favor of compulsory voting. But I think the case for doing so is stronger than commonly recognized. Let me lay out the arguments as I see them: low turnover, what the penalties look like in some other countries for not voting, the free speech/constitutional issues, and whether any resulting differences in outcomes would be desirable.

The starting point for making it compulsory to vote begins with the (arguable) notion that democracy would be better-served if participation in elections was higher. Here's a figure from a post of mine a couple of months ago on "Voter Turnout Since 1964." With some variation across age groups, voter turnout in presidential elections has been sagging over the last few decades.

Some nations have responded to concerns over low voter turnout by passing laws that make it a requirement to vote. Here's a list of countries with such laws, and the penalties that they impose for not voting, taken from a June 2006 report from Britain's Electoral Commission. The penalties are categorized from "Very Strict" to "None." But honestly, even the "Very Strict" is not especially onerous.

In talking with people on this subject, I've found that one immediate response is that that compulsory voting must be a violation of freedom or free speech in some way. I have some of this reaction myself. But while one may reasonably oppose the idea of compulsory voting, the case that it violates a specific law or constitutional right is difficult to make. Indeed, the original 1777 constitution of the state of Georgia specifically called for a potential penalty of five pounds for not voting--although it also allowed an exception for those with a good explanation. If the U.S. government can require you to pay money for taxes, or compel you to serve on jury duty, or institute a military draft, it probably has the power to require that you show up and vote. Of course, a compulsory voting law would almost certainly include provisions for conscientious objectors to voting, and you would be permitted to turn in a totally blank ballot if you wish. The penalties for not voting would be an inconvenience, but far from draconian.

For a review of the various legal and constitutional ins and outs of compulsory voting, along with some of the practical arguments, I recommend this anonymous 2007 note in the Harvard Law Review, called "The Case for Compulsory Voting."

The author points out (footnotes omitted): "Approximately twenty-four nations have some kind of compulsory voting law, representing 17% of the world’s democratic nations. The effect of compulsory voting laws on voter turnout is substantial. Multivariate statistical analyses have shown that compulsory voting laws raise voter turnout by seven to sixteen percentage points."

The anonymous author also offers what seem to me ultimately the two strongest arguments for compulsory voting. The first argument is that a larger turnout will (arguably) provide a more accurate representation of what the public wants, and in that sense will strengthen the bond between the electorate and its elected representatives. The second and more subtle argument is that compulsory voting would mean that political parties could focus much less on voter turnout. Less money and effort could go into turning out the vote, and more into persuasion. Those who now vote almost certainly have stronger partisan feelings, on average, than those who don't vote. So politicians aim their advertisements and strategies at that more partisan group. Many negative campaign ads attempt to reduce turnout for a candidate: if turnout was high, the usefulness of such negative ads could be diminished. A broader spectrum of voters would push candidates to offer a broader spectrum of messages to appeal to those voters, and groups that now have low turnout would find themselves equally courted by politicians.

The question becomes whether these potential benefits to the democracy as a whole are worth the imposition of compulsory voting. The anonymous writer in the Harvard Law Review offers what is surely meant to be an attention-grabbing and paradoxical-sounding conclusion: "Although there are several legal obstacles to compulsory voting, none of them appear to be substantial enough to bar compulsory voting laws. ... The biggest obstacle to compulsory voting is the political reality that compulsory voting seems incompatible with many Americans’ notions of individual liberty. As with many other civic duties, however, voting is too important to be left to personal choice."

How might one respond to these arguments? Perhaps the most obvious answer is that if one looks at the countries that have compulsory voting--say, Brazil, Australia, Peru, Thailand--it's not obvious that their politics are characterized by greater appeals to the nonpartisan middle, or that the bond between the population and its elected representatives is especially strong.

For a more detailed deconstruction , I recommend a 2009 essay by Annabelle Lever in Public Reason magazine, "Is Compulsory Voting Justified?" Basically, her argument comes down to a belief that the potential gains from compulsory voting are unproven and unsupported by evidence in countries that have tried it, while the lost freedom from compulsory voting would be definite and real.

In Lever's view, the evidence that exists doesn't show that political parties start competing for the middle in a different way, nor that outcomes are different. For example, northern European social democratic countries like Sweden don't have compulsory voting, and do have declining voter turnout.
f people are disinterested or disillusions and don't want to vote for the existing candidates, it's not clear that threatening them with a criminal offense for not voting will build connections from the population to elected representatives. If political parties don't need to focus on turnout, they will immediately turn to other ways of identifying swing groups and wedge issues. The penalties for not voting may not look large in some broad sense, but be clear: when we enter the realm of compulsory voting, we are talking about criminal behavior. will need to decide how large the fines or other penalties will be, and what happens to those (and there will be some!) who refuse to pay. If not voting is a crime, we will be making a lot of people into criminals--maybe guilty of only a minor crime, but still recorded in our information-technology society as breaking the law. It is by no means clear that having a right to vote should be reinterpreted as having a legal duty to vote: there are many rights that one may choose to exercise, or not, as one prefers. In a free society, the right to be left alone has some value, too. Lever concludes:

"I have argued that the case for compulsory voting is unproven. It is unproven because the claim that compulsion will have beneficial results rests on speculation about the way that nonvoters will vote if they are forced to vote, and there is considerable, and justified, controversy on this matter. Nor is it clear that compulsory voting is well-suited to combating those forms of low and unequal turnout that are, genuinely, troubling. On the contrary, it may make them worse by distracting politicians and voters from the task of combating persistent, damaging, and pervasive forms of unfreedom and inequality in our societies.

"Moreover, I have argued, the idea that compulsory voting violates no significant rights or liberties is mistaken and is at odds with democratic ideas about the proper distribution of power and responsibility in a society. It is also at odds with concern for the politically inexperienced and alienated, which itself motivates the case for compulsion. Rights to abstain, to withhold assent, to refrain from making a statement, or from participating, may not be very glamorous, but can be nonetheless important for that. They are necessary to protect people from paternalist and authoritarian government, and from efforts to enlist them in the service of ideals that they do not share. Rights of non-participation, no less than rights of anonymous participation, enable the weak, timid and unpopular to protest in ways that feel safe and that are consistent with their sense of duty, as well as self-interest. ... People must, therefore, have rights to limit their participation in politics and, at the limit, to abstain, not simply because such rights can be crucial to prevent coercion by neighbours, family, employers or the state, but because they are necessary for people to decide what they are entitled to do, what they have a duty to do, and how best to act on their respective duties and rights."

I don't know of any recent polls on how Americans feel about compulsory voting, but a 2004 poll by ABC News found 72% opposed--a slightly higher percentage than a poll taken 40 years earlier on the same subject. These kinds of results from nationally representative polls pose an additional level of irony. If Americans as a group are strongly opposed to laws that would require compulsory voting, it seems problematic to glide around this opposition into an argument that, really, although they don't know it yet, they would feel better off with compulsory voting.

In a 2004 essay on compulsory voting (in this volume), Maria Gratschew points out that a number of countries in western Europe that used to have compulsory voting have have moved away from it in recent decades: Austria, Italy, Greece, and Netherlands. In discussing the decision by Netherlands to drop its compulsory voting laws in 1967, Gratschew writes: "A number of theoretical as well as practical arguments were put forward by the committee: for example, the right to vote is each citizen's individual right which he or she should be free to exercise or not; it is difficult to enforce sanctions against non-voters effectively; and party politics might be livelier if the parties had to attract the voters' attention, so that voter turnout would therefore reflect actual participation and interest in politics."

Compulsory voting is one of those intriguing roads that looks better when not actually traveled.

Fall 2012 Journal of Economic Perspectives

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The Fall 2012 issue of my own Journal of Economic Perspectives is now freely available on-line. Actually, all issues of JEP back to the first issue in 1987 are freely available on-line, compliments of the American Economic Association.

The issue starts with a three-paper symposium on the issue of "contingent valuation," which is whether it makes sense to use survey techniques to estimate the costs of events like the Exxon Valdez oil spill in 1989 or the BP oil spill in 2010. The symposium has an overview paper laying out the issues, followed by pro and con viewpoints. Next comes a five-paper symposium on various aspects of China's economy: labor markets, macroeconomic imbalances, and perspectives on patterns of long-term growth. The final three papers are about the Clark medal awarded to Amy Finkelstein, about Irving Fisher's famous 1896 paper, and a "Recommendations for Further Reading" that I contribute to each issue.

Symposium on Contingent Valuation

"From Exxon to BP: Has Some Number Become Better Than NoNumber?" by Catherine L. Kling, Daniel J. Phaneuf and Jinhua Zhao

On March 23, 1989, the Exxon Valdez ran aground in Alaska'sPrince William Sound and released over 250,000 barrels of crude oil, resultingin 1300 miles of oiled shoreline. The Exxon spill ignited a debate about theappropriate compensation for damages suffered, and among economists, a debateconcerning the adequacy of methods to value public goods, particularly when thegood in question has limited direct use, such as the pristine naturalenvironment of the spill region. The efficacy of stated preference methodsgenerally, and contingent valuation in particular, is no mere academic debate.Billions of dollars are at stake. An influential symposium appearing in thisjournal in 1994 provided arguments for and against the credibility of thesemethods, and an extensive research program published in academic journals hascontinued to this day. This paper assesses what occurred in this academicliterature between the Exxon spill and the BP disaster. We will rely ontheoretical developments, neoclassical and behavioral paradigms, empirical andexperimental evidence, and a clearer elucidation of validity criteria toprovide a framework for readers to ponder the question of the validity ofcontingent valuation and, more generally, stated preference methods.
Full-Text Access | Supplementary Materials
"Contingent Valuation: A Practical Alternative WhenPrices Aren't Available," by Richard T. CarsonA person may be willing to make an economic tradeoff toassure that a wilderness area or scenic resource is protected even if neitherthat person nor (perhaps) anyone else will actually visit this area. Thistradeoff is commonly labeled "passive use value." Contingentvaluation studies ask questions that help to reveal the monetary tradeoff eachperson would make concerning the value of goods or services. Such surveys are apractical alternative approach for eliciting the value of public goods,including those with passive use considerations. First I discuss the ExxonValdez oil spill of March 1989, focusing on why it is important to measuremonetary tradeoffs for goods where passive use considerations loom large.Although discussions of contingent valuation often focus on whether the methodis sufficiently reliable for use in assessing natural resource damages inlawsuits, it is important to remember that most estimates from contingentvaluation studies are used in benefit–cost assessments, not natural resourcedamage assessments. Those working on benefit–cost analysis have long recognizedthat goods and impacts that cannot be quantified are valued, implicitly, bygiving them a limitless value when government regulations preclude certainactivities, or giving them a value of zero by leaving certain consequences outof the analysis. Contingent valuation offers a practical alternative forreducing the use of either of these extreme choices. I put forward anaffirmative case for contingent valuation and address a number of the concernsthat have arisen.Full-Text Access | Supplementary Materials
"Contingent Valuation: From Dubious to Hopeless," by Jerry HausmanApproximately 20 years ago, Peter Diamond and I wrote anarticle for this journal analyzing contingent valuation methods. At that timePeter's view was that contingent valuation was hopeless, while I was dubiousbut somewhat more optimistic. But 20 years later, after millions of dollars oflargely government-funded research, I have concluded that Peter's earlierposition was correct and that contingent valuation is hopeless. In this paper,I selectively review the contingent valuation literature, focusing on empiricalresults. I find that three long-standing problems continue to exist: 1)hypothetical response bias that leads contingent valuation to overstatements ofvalue; 2) large differences between willingness to pay and willingness toaccept; and 3) the embedding problem which encompasses scope problems. The problemsof embedding and scope are likely to be the most intractable. Indeed, I believethat respondents to contingent valuation surveys are often not responding outof stable or well-defined preferences, but are essentially inventing theiranswers on the fly, in a way which makes the resulting data useless for seriousanalysis. Finally, I offer a case study of a prominent contingent valuationstudy done by recognized experts in this approach, a study that should be onlyminimally affected by these concerns but in which the answers of respondents tothe survey are implausible and inconsistent.Full-Text Access | Supplementary Materials
Symposium on China's Economy

"The End of Cheap Chinese Labor," by Hongbin Li, Lei Li, Binzhen Wu and Yanyan XiongIn recent decades, cheap labor has played a central role inthe Chinese model, which has relied on expanded participation in world trade asa main driver of growth. At the beginning of China's economic reforms in 1978,the annual wage of a Chinese urban worker was only $1,004 in U.S. dollars. TheChinese wage was only 3 percent of the average U.S. wage at that time, and itwas also significantly lower than the wages in neighboring Asian countries suchas the Philippines and Thailand. The Chinese wage was also low relative to productivity.However, wages are now rising in China. In 2010, the annual wage of a Chineseurban worker reached $5,487 in U.S. dollars, which is similar to wages earnedby workers in the Philippines and Thailand and significantly higher than thoseearned by workers in India and Indonesia. China's wages also increased fasterthan productivity since the late 1990s, suggesting that Chinese labor isbecoming more expensive in this sense as well. The increase in China's wages isnot confined to any sector, as wages have increased for both skilled andunskilled workers, for both coastal and inland areas, and for both exportingand nonexporting firms. We benchmark wage growth to productivity growth usingboth national- and industry-level data, showing that Chinese labor was keptcheap until the late 1990s but the relative cost of labor has increased sincethen. Finally, we discuss the main forces that are pushing wages up.Full-Text Access | Supplementary Materials
"Labor Market Outcomes and Reforms in China," by Xin MengOver the past few decades of economic reform, China's labormarkets have been transformed to an increasingly market-driven system. Chinahas two segregated economies: the rural and urban. Understanding the shiftingnature of this divide is probably the key to understanding the most importantlabor market reform issues of the last decades and the decades ahead. From1949, the Chinese economy allowed virtually no labor mobility between the ruraland urban sectors. Rural-urban segregation was enforced by a householdregistration system called "hukou." Individuals born in rural areasreceive "agriculture hukou" while those born in cities are designatedas "nonagricultural hukou." In the countryside, employment and incomewere linked to the commune-based production system. Collectively owned communesprovided very basic coverage for health, education, and pensions. In cities,state-assigned life-time employment, centrally determined wages, and acradle-to-grave social welfare system were implemented. In the late 1970s,China's economic reforms began, but the timing and pattern of the changes werequite different across rural and urban labor markets. This paper focuses onemployment and wages in the urban labor markets, the interaction between theurban and rural labor markets through migration, and future labor marketchallenges. Despite the remarkable changes that have occurred, inheritedinstitutional impediments still play an important role in the allocation oflabor; the hukou system remains in place, and 72 percent of China's populationis still identified as rural hukou holders. China must continue to ease itsrestrictions on rural–urban migration, and must adopt policies to close thewidening rural-urban gap in education, or it risks suffering both a shortage ofworkers in the growing urban areas and a deepening urban-rural economic divide.Full-Text Access | Supplementary Materials
"Understanding China's Growth: Past, Present, and Future," by Xiaodong ZhuThe pace and scale of China's economic transformation haveno historical precedent. In 1978, China was one of the poorest countries in theworld. The real per capita GDP in China was only one-fortieth of the U.S. leveland one-tenth the Brazilian level. Since then, China's real per capita GDP hasgrown at an average rate exceeding 8 percent per year. As a result, China'sreal per capita GDP is now almost one-fifth the U.S. level and at the samelevel as Brazil. This rapid and sustained improvement in average livingstandard has occurred in a country with more than 20 percent of the world’spopulation so that China is now the second-largest economy in the world. I willbegin by discussing briefly China's historical growth performance from 1800 to1950. I then present growth accounting results for the period from 1952 to 1978and the period since 1978, decomposing the sources of growth into capitaldeepening, labor deepening, and productivity growth. But the main focus of thispaper will be to examine the sources of growth since 1978, the year when Chinastarted economic reform. Perhaps surprisingly, given China's well-documentedsky-high rates of saving and investment, I will argue that China’s rapid growthover the last three decades has been driven by productivity growth rather thanby capital investment. I also examine the contributions of sector-levelproductivity growth, and of resource reallocation across sectors and acrossfirms within a sector, to aggregate productivity growth. Overall, gradual andpersistent institutional change and policy reforms that have reduceddistortions and improved economic incentives are the main reasons for theproductivity growth.Full-Text Access | Supplementary Materials
"Aggregate Savings and External Imbalances in China," by Dennis Tao Yang
Over the last decade, the internal and externalmacroeconomic imbalances in China have risen to unprecedented levels. In 2008,China's national savings rate soared to over 53 percent of its GDP, whereas itscurrent account surplus exceeded 9 percent of GDP. This paper presents aunified framework for understanding the structural causes of these imbalances.I argue that the imbalances are attributable to a set of policies andinstitutions embedded in the economy. I propose a unified framework forunderstanding the joint causes of the high savings rate and external imbalancesin China. My explanations first focus on an array of factors that encouragedsaving across the corporate, government, and household sectors, such aspolicies that affected sectoral income distribution, along with factors likeincomplete social welfare reforms, and population control policies. I then turnto policies that limited investment in China, thus preventing the high savingsfrom being used domestically. Finally, I will examine how trade policies, suchas export tax rebates, special economic zones, and exchange rate policies,strongly promote exports. Moreover, the accession of China to the World TradeOrganization has dramatically amplified the effects of these structuraldistortions. In conclusion, I recommend some policy reforms for rebalancing theChinese economy.Full-Text Access | Supplementary Materials
"How Did China Take Off?" by Yasheng Huang
There are two prevailing perspectives on how China took off.One emphasizes the role of globalization—foreign trade and investments andspecial economic zones; the other emphasizes the role of internal reforms,especially rural reforms. Detailed documentary and quantitative evidenceprovides strong support for the second hypothesis. To understand how China'seconomy took off requires an accurate and detailed understanding of its ruraldevelopment, especially rural industry spearheaded by the rise of township andvillage enterprises. Many China scholars believe that township and villageenterprises have a distinct ownership structure—that they are owned andoperated by local governments rather than by private entrepreneurs. I will showthat township and village enterprises from the inception have been private andthat China undertook significant and meaningful financial liberalization at thevery start of reforms. Rural private entrepreneurship and financial reformscorrelate strongly with some of China's best-known achievements—povertyreduction, fast GDP growth driven by personal consumption (rather than bycorporate investments and government spending), and an initial decline ofincome inequality. The conventional view of China scholars is right about onepoint—that today's Chinese financial sector is completely state-controlled. Thisis because China reversed almost all of its financial liberalization sometimearound the early to mid 1990s. This financial reversal, despite its monumentaleffect on the welfare of hundreds of millions of rural Chinese, is almostcompletely unknown in the West.Full-Text Access | Supplementary Materials

Other Articles

"Amy Finkelstein: 2012 John Bates Clark Medalist," by Jonathan Levin and James Poterba
Amy Finkelstein is the 2012 recipient of the John BatesClark Medal from the American Economic Association. The core concerns of Amy'sresearch program have been insurance markets and health care. She has addressedwhether asymmetric information leads to inefficiencies in insurance markets,how large social insurance programs affect healthcare markets, and thedeterminants of innovation incentives in health care. We describe a number ofAmy's key research contributions, with particular emphasis on those identifiedby the Honors and Awards Committee of the American Economic Association in herClark Medal citation, as well as her broader contributions to the field ofeconomics.Full-Text Access | Supplementary Materials
"Retrospectives: Irving Fisher's Appreciation andInterest (1896) and the Fisher Relation," by Robert W. Dimand and Rebeca Gomez BetancourtIrving Fisher's monograph Appreciation and Interest (1896)proposed his famous equation showing expected inflation as the differencebetween nominal interest and real interest rates. In addition, he drew attentionto insightful remarks and numerical examples scattered through the earlierliterature, and he derived results ranging from the uncovered interestarbitrage parity condition between currencies to the expectations theory of theterm structure of interest rates. As J. Bradford DeLong wrote in this journal(Winter 2000), "The story of 20th century macroeconomics begins withIrving Fisher" and specifically with Appreciation and Interest because"the transformation of the quantity theory of money into a tool for makingquantitative analyses and predictions of the price level, inflation, andinterest rates was the creation of Irving Fisher." I discuss the messageof Appreciation and Interest, and assess how original he was.Full-Text Access | Supplementary Materials
"Recommendations for Further Reading," by Timothy TaylorFull-Text Access | Supplementary Materials

Fetal Origins and Epigenetics: Interview with Janet Currie

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Douglas Clement has an insightful interview with Janet Currie in the September 2012 issue of The Region magazine published by the Federal Reserve Bank of Minneapolis. As Currie says near the start of the interview: “Labor economists think a lot about human capital and investments in it. Traditionally, that’s something to do with education, ... [b]ut I’m interested in health as human capital as well, and understanding how health and education intersect. ... “It is a broad concept, human capital ... Not all these different boxes, but an integrated whole." The interview makes a number of interesting points about an array of subjects, including how financial incentives affect the practice of medicine ( no matter what doctors say!), early childhood education, and women in the economics profession.

Here, I'll focus on one topic: the fetal origins of inequality. Here's the question from Clement, and part of Currie's answer:

Region: Could you briefly review the fetal origins hypothesis and how economists have expanded its reach—to test scores, education and income as well as health?

Currie: I think the phrase itself was coined by David Barker, a physician who was interested in whether there was a biological mechanism such that if the fetus was starved in utero it would be more likely to be obese or more likely to have heart disease or diabetes, things related to that in later life.
... An infant programmed in this way would then be more likely to gain a lot of weight later on and to have diseases related to obesity.... I believe Thalidomide was the first thing that really shocked people and showed that if you give drugs to the woman, that it could have an effect on the fetus. People were also working on the Dutch “Hunger Winter” prior to Barker, looking into whether being literally starved in utero had long-term effects.

So economists have taken that idea and run with it. Economic studies are examining a wide range of things that might affect fetal health and asking whether they have long-term consequences. I think there’s pretty broad acceptance now of the idea that all kinds of things that happen when people are in utero seem to have a long-term effect.

One of the things I talked about in my Ely lecture was what mechanism might underlie the long term effects, and I raised the idea of “epigenetic” changes as one possibility. The way I like to think about that is you have the gene, which only changes very slowly when you have mutations. But then kind of on top of the gene you have the epigenome, which determines which parts of the gene are expressed. And that can change within one generation. There are animal experiments that do things like change the diet of guinea pigs and all the baby guinea pigs come out a different color. It can be pretty dramatic. ... The idea is that the fetal period might be particularly important because these epigenetic switches are being set one way or another. And then once they’re set, it’s more difficult to change them later on.

I think we haven’t really been able to look at all of the implications of that given the limitations of the data. We don’t have very much data where we can follow people from, say, in utero to some later period. But, that’s where the frontier is, trying to do that kind of research and make those linkages....

I think a really interesting thing about the fetal origins hypothesis for public policy is that if it’s really important what happens to the fetus, and some people think that maybe the first trimester is the most important or the most vulnerable period, then you’re talking about women who might not even know that they’re pregnant. It really means you should be targeting a whole different population than, say, 15 years ago, when we thought, oh, we need to be targeting preschool kids instead of kids once they reach school age. Now we’re kind of pushing it back. Then it was, “We need to be playing Mozart to infants.” Now the implication is that we’ve got to reach these mothers before they even get pregnant if we really want to improve conditions.

Epigenetics implies that it does not make sense to talk about nature versus nurture. If nature is the gene and nurture is the thing that sets the switches, then the outcome depends on both of those things. So you can’t really talk about nature or nurture in most situations. It has to be some combination of both. ...

One thing that is interesting—and I’m starting to do a little bit of work like this myself—is thinking about children in developing countries. Things we’re looking at here in the United States, like the effects of in utero exposure to pollution on child health and economic outcomes, involve problems that are much worse in developing countries. So if we can find an effect here … for instance, my E-ZPass paper suggested that the incidence of low birth weight was 8 percent higher for pregnant women who are subjected to large amounts of auto exhaust because they live near highway toll plazas. If that is true here, then what must be the effect in Beijing? It must be even bigger than that.

Currie, along with Douglas Almond wrote on this topic in the Summer 2011 issue of my own Journal of Economic Perspectives in "Killing Me Softly: The Fetal Origins Hypothesis" (25(3): 153-72). That article, like all articles in JEP back to the first issue in 1987, is freely available to all courtesy of the American Economic Association. Another useful starting point to this literature is Currie's Ely lecture on this topic (mentioned in passing in her answer above): "Inequality at Birth: Some Causes and Consequences." American Economic Review,101(3): 1-22. The AER is not freely available on-line, but many in academia will have on-line access through AEA memberships or library subscriptions.

For yet another recent angle, there's an article in a recent Economist magazine on "Epigenetics and Health: Grandma's curse." The big question is whether an acquired characteristic--like, say, asthma that is caused by heavy smoking--can be inherited. A plain-vanilla theory of inheritance says this isn't possible, because smoking is bad for you, but it doesn't alter your genes. However, studies on pregnant rats apparently show that if a first generation of rats is dosed with nicotine, which leads to asthma, then the first generation of offspring also has a propensity to asthma. That result is unsurprising, because it's just the fetal origins hypothesis in action. But apparently, the next generation of rats after that also has a greater propensity to asthma, although that generation was never expose to nicotine directly. The epigenetic explanation is that nicotine doesn't change genes, but it can alter the "switches" that determine what characteristics are expressed by those genes, and those different "switches" can be to some extent inherited. As the article writes: [T]hose epigenetic changes that are inherited seem to be subsequently reversible. But the idea that acquired characteristics can be inherited at all is still an important and novel one ..."

Options for the Deficit from CBO

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The Congressional Budget Office has just published a report called "Choices for Deficit Reduction." To me, the bottom line is that coming to grips with the U.S. fiscal situation in the medium run is going to require going outside everyone's current comfort zone.

To set the stage, here are the CBO projections for the debt/GDP ratio in the next couple of decades. As I've discussed before on this blog (for example, here), the CBO is required by law to calculate a "baseline scenario" which projects the debt under current law. The difficulty with this approach is that current law can incorporate all kinds of future spending cuts or tax increases that aren't actually going to happen when the time comes. Thus, the CBO also calculates an "alternative fiscal scenario," which is based on four assumptions:

"That all expiring tax provisions (other than the recent reduction in the payroll tax for Social Security), including tax provisions that expired at the end of December 2011, are extended;
That the parameters of the alternative minimum tax (AMT) are indexed to increase with inflation after 2011 (starting from the 2011 exemption amount);
That Medicare’s payment rates for physicians’ services are held constant at their current level; and
That provisions of the Budget Control Act of 2011that established automatic enforcement procedures designed to reduce discretionary and mandatory spending beginning in January 2013 do not go into effect, although the law’s original caps on discretionary appropriations remain in place."

The "alternative fiscal scenario" provides a useful starting point, because you can then look at how changing each of these four assumptions, along with many other policy changes, would affect the debt/GDP over time.Under the alternative scenario, the debt/GDP is headed for the danger zone of about 90-100% debt/GDP by the early 2020s, and then is headed for unimaginably high levels after that. (For discussions of why that 90-100% ratio is likely to be important, see earlier posts here, here, and here.)

As one way of getting a handle on what needs to be done, the CBO looks at a variety of possible spending and tax policies, and how they would affect the budget deficit that in the alternative fiscal scenario would be about $1 trillion in 2020. Thus, steps that reduce the projected 2020 deficit by $1 trillion would balance the budget, and get the debt/GDP ratio on a declining path. Steps that reduce the projected 2020 deficit by $500 billion would keep the debt/GDP ratio in 2020 about the same as it is now--but the debt/GDP ratio would start rising after that point. An intermediate set of policies that reduce the 2020 deficit by $750 billion would put the long-term trend of the debt/GDP ratio on a slightly declining path--more-or-less what the baseline scenario looks like.

So what do the possible policy options look like? They come in three tables: possibilities for reducing mandatory spending, possibilities for reducing discretionary spending, and possibilities for increasing taxes. You'll notice that many of the recommendations come with various footnotes and caveats, which in turn require heading for the actual report. Some of the recommendations overlap in various ways (like different methods of altering Social Security or Medicare), and so you can't just add up all the choices. But for a quick sense of the issue, just glance at the right-hand numbers showing the total projected change in the deficit. If you take the intermediate goal of cutting the projected 2020 deficit by $750 billion, most people will very quickly run out of easily palatable options.

For example, repealing the expansion of health insurance coverage and the "individual mandate" to buy health insurance from the Affordable Care Act would reduce the 2020 deficit by about $190 billion, which is real money, but not nearly enough (and would leave tens of millions of Americans again without health insurance). Or letting the the tax cuts enacted in 2001, 2003, and 2009 expire only for couples filing joint tax returns with income over $250,000 per year and for single taxpayers with income over $200,000, along with indexing the alternative minimum tax (AMT) for inflation, reduced the 2020 deficit by $110 billion, which is real money, but not nearly enough to do what is needed. So even if Republicans and Democrats would compromise on eliminating Obama's health care plan in exchange for eliminating the Bush tax cuts for those above $200,000 or $250,000 per year, they would have less than half of the $750 billion deficit reduction. To put it another way, Americans and U.S. economy are more drunk on deficit spending, and withdrawal is going to be more painful than most people realize.

Here are the three tables of options:

5 Kasım 2012 Pazartesi

When Rent Control Ended in Cambridge, Mass.

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Every intro class teaches about price ceilings, and I suspect that 99% of them use rent control laws as an example. Of course, the standard lesson from a supply-and-demand diagram is that price ceilings lead to a situation where the quantity demanded exceeds the quantity supplied, and so while the price of rent-controlled apartments is lower, good luck in finding a vacancy!

The slightly more sophisticated insight is what I call in my own intro textbook the problem of "many margins for action." (Of course, if you are teaching an intro econ class, I encourage you to take a look at my Principles of Economics textbook, a high quality and lower-cost alternative to the big publishers, available here.) Landlords who face rent control legislation can skimp on maintenance, or hunt for ways to force the renter to bear additional fees or costs. If a large number of landlords act in this way, the feeling of the neighborhood and property values for homes that are not rentals may be affected, too.

Cambridge, Massachusetts, has a rent control law in place from 1970 to 1994. It was ended by a statewide vote that barely squeaked out a 51%-49% majority--and ended despite the fact that Cambridge residents favored the continuation of the law by a 60%-40% majority. The law placed limits on rents for all rental properties in Cambridge built in 1969 or earlier. In "Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge, Massachusetts," David H. Autor, Christopher J. Palmer, and Parag A. Pathak look at what happened. (The paper is published as NBER Working Paper 18125. These working papers are not freely available on-line, but many in academia will have access through institutional memberships. Full disclosure: David Autor is editor of my own Journal of Economic Perspectives, and thus my boss.) Autor, Palmer, and Pathak have data on rents and prices in both controlled rental buildings, uncontrolled rental buildings, and owner-occupied housing. They can also make comparisons to neighboring suburbs that did not have rent controls in place. Here are a few of their more striking findings:

-- The rent-controlled buildings in Cambridge, Mass., typically had rents 25%-40% below the level of uncontrolled rental buildings nearby. However, the maintenance of rent-controlled building was often subpar, with a higher incidence of issues like holes in walls or floors, chipped or peeling paint, loose railings, and the like. More broadly, owners of rent-controlled properties had no incentive to do any major fix-ups or renovations, because they would be unable to recoup the costs.

-- Rent control laws are still easy to find, if not exactly widespread, in the United States. For example, "New York City’s system of rent regulation affects at least one million apartments, while cities such as San Francisco, Los Angeles, Washington DC, and many towns in California and New Jersey have various forms of rent regulation."

-- Not surprisingly, the end of rent control in 1995 meant that prices of the buildings that had formerly been rent-controlled rose. "Our statistical analysis also indicates that rent controlled properties were valued at a discount of about 50 percent relative to never-controlled properties with comparable characteristics in the same neighborhoods during the rent control era, and that the assessed values of these properties increased by approximately 18 to 25 percent after rent control ended."

-- More surprising, it turns out that the end of rent control raised the value of all the non-controlled properties in Cambridge, too. Properties that were in a neighborhood with a higher percentage of rent-controlled properties increased in value by more than those in neighborhoods with a lower percentage of rent-controlled properties. Indeed, when rent control ended, the gains to owners of uncontrolled properties were greater in total than the gains to the owners of rent-controlled properties. "The economic magnitude of the effect of rent control removal on the value of Cambridge’s housing stock is $1.8 billion. We calculate that positive spillovers from decontrol added $1.0 billion to the value of the never-controlled housing stock in Cambridge, equal to 10 percent of its total value and one-sixth of its appreciation between 1994 and 2004. Notably, direct effects on decontrolled properties are smaller than the spillovers. We estimate that rent control removal raised the value of decontrolled properties by $770 million, which is 25 percent less than the spillover effect."

Taking all of this together, it seems to me like the way to think about rent control--at least in the form that it was enacted in Cambridge, Mass.-- is that it creates a situation of low-quality and poorly-maintained housing stock, which then rents for less than uncontrolled properties. If the goal of public policy is to create lower-quality and more affordable housing, there are other ways to accomplish that goal. For example, zoning laws could require that rental complexes include a mixture of regular and small-sized rental apartments, so that the small-sized (and thus "lower quality") apartments would rent for less. Or those with lower incomes could just receive housing vouchers.

But when rent control is enacted in a way that leads to degradation of a substantial portion of the housing stock, the costs are not just carried by landlords of those rent-controlled apartments. In fact, a majority of the costs may be as a result of spillover effects to real estate that isn't rent-controlled. When a substantial proportion of the houses in a neighborhood are not well-maintained, everyone's housing prices will suffer.