Brookings: Topics - Economics

Russia's Development of Siberia: What is to be Done?

Clifford G. Gaddy — Tue, 18 Jun 2013 10:30:00 -0400

Russians are famous for their “eternal questions.” “Who is to blame?” and “What is to be done?” are the best-known. Another of the timeless quandaries seems to be, “What is the future of Siberia?” In 2003 Fiona Hill and I wrote a book about the legacy of Soviet-era development of Siberia for today’s Russia, The Siberian Curse: How Communist Planners Left Russia Out in the Cold. Ten years later, people still ask us the Siberian question. Last week I received an inquiry from a journalist who had been tasked to write about Russia’s new plans for Siberian development. My replies to a couple of her questions might be of interest.

Could Siberia be Russia's secret economic weapon?

It is interesting that you entertain the thesis that Siberia could be "Russia's secret economic weapon." My view is pretty different. It’s the same that Fiona Hill and I expressed in our book. I recently had a chance to restate it directly to a Russian audience.

This past February I was invited to Krasnoyarsk for the annual Krasnoyarsk Economic Forum. At a breakout session moderated by Russian Prime Minister Dmitry Medvedev, economist Vladislav Inozemtsev and I debated the governor of Krasnoyarsk Kray, Lev Kuznetsov, and the aluminum oligarch Oleg Deripaska, about policies for Siberian development. My basic points were as follows:

First, Siberia is part of Russia. That means Siberian development has to be viewed as a national problem, not a local one. Second, even though there are important noneconomic reasons - national security, culture, history - why one might prefer one or another path for Siberian development, one needs to know the economic costs and benefits. Taken together, these two points mean that the question has to be: Does this or that plan for Siberia reflect the best use of Russia’s resources for the nation’s well-being? Specifically, as far as regional policy is concerned, the general rule should be: "Locate economic activity in Siberia only if it cannot be done more efficiently (at lower cost) elsewhere."
The Siberian dilemma is that, while Siberia has more natural wealth than any other place in the world, it also has unequaled disadvantages of cold and remoteness. Siberia's main activity will continue to be resource extraction. (This is not the same as low-tech. Resource industries do not have to be low-tech.) Siberia does not have a comparative advantage in manufacturing. The share of manufacturing and other industry in Siberia should be relatively small. It should be businesses that primarily serve the local region. In the future, large-scale manufacturing plants should not be located to Siberia.
In the past, (largely in the Soviet period, although to some extent even before that) this rule of efficient economic location was violated. It may or may not have been justified for non-economic reasons. That does not matter today. Russia today is burdened with massive amounts of physical and human capital that is handicapped by location. Today, the point is to remove the handicaps if possible, and most important, avoid unnecessary ones in the future. Merely compensating for the disadvantages through subsidies, artificially low rail and electricity tariffs, and the like, is not enough. That is still costly. (Russia’s handicapped capital is the theme of my new book with Barry Ickes, Bear Traps on Russia’s Road to Modernization.)
The issue of Siberian development must also consider the particular problem Russia now faces with its population. Russia's most critical bottleneck in the next 20-30 years is its shrinking labor force. Under those circumstances it makes no sense to have policies intended to attract more people to Siberia. They would be less productive there than elsewhere, and that would weaken the national economy. In the future, Siberia must be developed by a different approach than in the past. Massive concentrated investments to build and support large cities was the past approach. Now, Russia needs to find ways to develop its resources with the fewest number of people possible. So-called Canadian methods — temporary stationing of work teams for resource development at the point of extraction, and so on — would be more important for Russia than Canada.

Why Russia has been late to develop its eastern territory further?

You ask why Russia has been late in developing its eastern regions. I'd say it's just the opposite: its East is far over-developed. Consider the contrast between Russia, on the one hand, and the US and Canada, on the other. In terms of relative shares of total national population and territory, Eastern Siberia and the Russian Far East are roughly 15 times more densely populated than Alaska and Canada's northern territories. Alaska has only 710,000 residents; Canada's Northwest Territory and Yukon Territory together have 79,000. Russians complain about the "depopulation" of the East. But if Eastern Siberia and the Russian Far East had followed the American and Canadian patterns, they would in total have barely 1 million residents instead of their current 15 million.

But if your focus is on Siberia as a target for international investment, then all that matters is whether these investments can be profitable for the investor. If Mr. Putin wants to defy sound economics and damage Russia’s national economic health by spending tens or hundreds of billions of dollars to subsidize manufacturing, high-tech, or build infrastructure in Siberia, it may still represent an opportunity for a business that jumps on that bandwagon. But then the profitability of the venture will depend on the continued commitment (and resources) from the government to subsidize the East. The Russian state will have to continue to be strong enough to channel resources to that end. This gets to the question of the durability of the Putin regime and/or the likelihood that any successor government will share his same commitment and ability to distribute oil and gas rents to subsidize Siberia.

Authors

Clifford G. Gaddy

Image Source: © RIA Novosti / Reuters

State Budget Transparency: A Look Behind the Numbers

Tracy Gordon — Tue, 18 Jun 2013 11:14:00 -0400

Most states are now wrapping up their 2013-2014 budget cycles and apparently in good shape too. Even California, that perpetual budget laggard, is expected to end next fiscal year with a modest surplus thanks to temporary tax increases and a gradually improving national economy.

Critics are quick to point out that California’s budget is not exactly balanced given a $4.5 billion annual payment the state’s Teachers' Retirement System says it needs to meet its obligations. Nor is California alone in overlooking these “hidden liabilities.” Taken together, state and local governments are estimated to owe up to $4 trillion more than they have set aside for pensions and retiree health care.

Many observers concerned about state and local government finances have urged greater budget transparency. For example, Representatives Nunes (R-CA), Ryan (R-WI), and Issa (R-CA) have proposed requiring stricter accounting standards for states and municipalities as a condition of these governments’ continuing to receive tax exempt borrowing authority.

I’d like to focus on a different kind of transparency here. Right now, there is plenty of information on state and local government revenues thanks to numerous think tanks and non-profits that track state and local taxes or revenue burdens by state. However, the spending side of the budget remains a bit of an enigma.

Clearly, New York differs from North Dakota in what it spends each year. It also differs in its demographics, service costs, and labor market conditions. A framework I’ve been developing with co-authors sheds light on these factors and how they drive spending outcomes.

Let’s look at an example from K-12 education, states’ single largest expenditure item (excluding federal funds) and the one most popular with voters. A recent Census Bureau report confirms wide disparities exist among the states: In 2011, New York spent about twice as much per capita on public schools as Idaho (about $2,750 versus $1,150).

(Importantly, the Census report includes only spending by charter schools run by government agencies like universities, cities, counties, or public school systems – it excludes the most common type of charter school run by a private nonprofit. This is an issue for states like Arizona with a big charter school presence.)

But spending per capita is only the tip of the iceberg. States also differ in their student populations. Some (such as Texas and California) are home to more kids, while others (Texas) also have more kids enrolled in public schools, whether because of stronger compulsory education laws or more families who elect to send their kids to public versus private schools.

Because of its larger student population, Texas – which ranks near the national average in K-12 education spending per capita ($1,637) – is near the bottom when it comes to spending per student ($8,740). It displays a tradeoff common in many states and across many budget categories: broader participation in public programs versus lower spending per beneficiary or recipient.

We can dig deeper by looking at where spending goes. K-12 education – like most areas of state and local government – is labor intensive, so most costs are borne in employee compensation or payroll. New York, which had few kids enrolled in public school in 2011, was able to pay among the highest K-12 education salaries and benefits ($90,000 per year) in the nation.

Salaries and benefits reflect many factors, including costs of living and amenities that differ from state to state. However, in past work I found that taking into account the premium that all employers in a state – public and private – must pay to attract employees of a given education and experience level reduces, but does not eliminate, differences in K-12 education salaries.

Higher compensation costs often translate into lower staffing ratios, or fewer full-time equivalent employees per student. For example, New Jersey, which was not far behind New York in average K-12 education salaries, had lower staffing ratios in 2011 because it also had more kids per capita than New York. California exhibited a similar tradeoff between high payroll costs and low staffing levels.

The approach used here could be extended to health care, transportation, public safety, or any area of state and local budgets. It could be augmented with performance measures, although links between spending and outcomes are not always clear. Still, this framework would be a vast improvement over current “e-budgeting” efforts, which usually amount to little more than a few charts online or documents available as pdfs.

State and local officials would do well to engage in a productive conversation about budget tradeoffs. Voters need to understand what spending arises from policy choices versus background conditions – or which levers of government can be pulled and which cannot.

Authors

Tracy Gordon

Publication: Real Clear Markets

Image Source: © Mario Anzuoni / Reuters

Dealing with “Too Important to Fail” Banks

Fri, 14 Jun 2013 10:00:00 -0400

Event Information

June 14, 2013
10:00 AM - 11:30 AM EDT

Falk Auditorium

1775 Massachusetts Ave., NW
Washington, DC

Webcast Archive:
Introduction

Full Event

There is a heated debate about how to handle banks that are too big or otherwise too important for governments to allow them to fail in a crisis. Some call for the largest banks to be broken up, or for them to divest all or part of their investment banking operations, in the spirit of the old days of the Glass-Steagall Act. Others suggest forcing banks to be funded with much more shareholder money to try to make failure very unlikely. Still others assert that the Dodd-Frank Wall Street Reform and Consumer Protection Act and global regulatory reforms have reduced the problem so much that major structural reforms such as these are unnecessary.

On June 14, the Economic Studies program at Brookings reviewed and debated the issue of bank size and bank funding. Panelists included FDIC Vice Chairman Thomas Hoenig, banking expert Rodgin Cohen, and Senior Fellow and Director of the Initiative on Business and Public Policy Martin Baily. Douglas Elliott, fellow in Economic Studies, served as moderator.

Join the discussion on Twitter using hashtag #TooBigToFail.

Video

Audio

Dealing with “Too Important to Fail” Banks

Event Materials

14 dealing with too important to fail banks baily presentation

Participants

Panelists

Ted Gayer

Co-Director, Economic Studies
Joseph A. Pechman Senior Fellow

Douglas J. Elliott

Fellow, Economic Studies, Initiative on Business and Public Policy

Martin Neil Baily

Senior Fellow, Economic Studies
Bernard L. Schwartz Chair in Economic Policy Development

H. Rodgin Cohen

Senior Chairman

Thomas Hoenig

Vice Chairman

The End of Nostalgia : Mexico Confronts the Challenges of Global Competition

Diana Villiers Negroponte, ed. — Fri, 14 Jun 2013 00:00:00 -0400

Brookings Institution Press 2013 160pp.

Editor Dr. Diana Villiers Negroponte recieved her JD from Georgetown University and practiced law specializing in international law and aviation matters. She played an active role with the U.S. Chamber of Commerce in Mexico during the negotiations for the North American Free Trade Agreement. She has assembled colleagues from both sides of the Rio Grande to examine the steps necessary for this proud nation to continue its momentum toward effective participation in a highly competitive world. With one foot on North America and the other in South America, it is a land in transition, from a one-party political system steeped in a colonial Spanish past toward a modern liberal democracy with open markets.

Excerpt:

In 1993, this author’s speech before an association of engineering companies in Guadalajara on the opportunities presented by the North American Free Trade Agreement (NAFTA) was greeted with significant criticism. The prospects of competitive trade implied a threat, and all the questions from the audience centered on how their businesses might survive. Twenty years later, the same companies have either gone out of business or adapted to the reality of international trade and global competition.

Metamorphosis is not easy; economic and political transformation, in particular, is hard. However, a proud trading people can find confidence in their heritage.

Today, Mexico has become a manufacturing center, with family-owned companies engaging in international trade and acquiring new technologies. Protectionist regulations are being dismantled, and young business leaders learn colloquial English, study at international business schools, and connect easily with foreigners. The young men and women whom I met over two years at a business summit held in the colonial city of Queretaro are not resigned to the new reality; instead, they seek to thrive in a competitive world. Their network is global, including colleagues encountered at school, at professional conferences, and on social media. They interact with foreigners with enthusiasm; they take on new international contracts with excitement.

But the old ways are hard to eradicate. The yearning for the predictability of government contracts, dependence on political patrons, and reliance on family ties have not disappeared. The authors of these chapters therefore agreed on the need to analyze and relate how the old Mexican system is changing. Metamorphosis is not easy; economic and political transformation, in particular, is hard. However, a proud trading people can find confidence in their heritage. Continued democratization and exposure to foreign competition is inevitable, but efforts to put the brakes on that process should not be ruled out. Therefore this volume is also about protest and conflict deep within the Mexican political economy.

* * *

The End of Nostalgia is available in both hardcover and eBook formats:

What's Inside

Piecing Together the Puzzle of Mexico’s Growth - What happened to the lusty 7% growth of the 1960s and 1970s?
Arturo Franco (Harvard University)
What might explain Mexico’s lack of competitiveness? A comprehensive review of the factors that —rigid labor markets, inadequate infrastructure and access to finance, size of the informal labor sector, high cost of energy, poor education system, and Chinese competition yields no easy answers.

Unlocking Mexico’s Political Gridlock - Is the Mexican legislature a "Siesta Congress?"
Arturo Franco (Harvard University)
In the last 20 years, Mexico has moved from a hegemonic party system under the PRI to a political equilibrium in which the three major political parties together account for 90 percent of the votes but none exceeds 42 percent. Since the election of a president from the PAN in 2000, no president has enjoyed a majority in congress, and coalitions must be formed to pass legislation

Energy Challenges for the Pena Nieto Administration – An examination of the serious decline in petroleum reserves in Mexico
Duncan Wood (Director of the Mexico Institute at Woodrow Wilson International Center for Scholars)
With corrupt practices, political interference and lack of accountability within PEMEX, the state owned petroleum company, opportunities for natural resources may be missed. Wood presents specific solutions to augment energy supplies and is extraordinarily optimistic about Mexico’s renewable energy potential.

Toward Regional Competitiveness Agenda: U.S.–Mexico Trade and Investments – How trade and investments are strategic drives of the U.S.-Mexico relationship
Christopher Wilson (Mexico Institute of the Woodrow Wilson International Center for Scholars)
Mexico is the United States’ second-largest export market, and the United States is Mexico’s largest export destination. However, the high growth rate between bilateral trade and investment has slowed due to the increasingly low cost of labor. Wilson posits how to spur trade and increase regional competitiveness through a Trans-Pacific Partnership.

The Priority of Education in Mexico – An examination of the quantity and quality of education in Mexico
Armando Chacon (Mexican Institute for Competitiveness)
Pena Nieto’s administration has yet to propose a budget that provides the funding needed for critical education reforms. Yet, significant value is added with respect to health, absorption of new technologies, and parenting skills for every additional year of schooling beyond sixth grade. Chacon examines and provides recommendations around improving education public policies.

Security Policy and the Crisis of Violence in Mexico - A critical assessment of current public security in Mexico
Eduardo Guerrero (Lantía Consultores)
Under Presidents Calderón and Peña Nieto, intentional homicides have diminished. But serious problems remain: the slow pace of reforming to criminal justice procedures, inadequate resources to reform the correction system, and inadequate domestic intelligence capabilities. Guerrero presents eight recommendations tailored to address the main sources and consequences of organized crime–related violence.

The Merida Initiative: A Mechanism for Bilateral Cooperation – Tracing the evolution of the Merida Initiative
Diana Villiers Negroponte (The Brookings Institution)
The Merida Initiative has evolved from a mechanism for the delivery of sophisticated, custom-made equipment to being a developer of programs that support training of law enforcement and gang prevention. Now, the Mexican government is reexamining its security policy, and U.S. priorities have also shifted. Negroponte asks if Merida has run its course, and if so, what mechanism should emerge to continue U.S. support and funding.

Mexico and the United States: Where Are We and Where Should We Be? – An expert view on the U.S.-Mexican bilateral relationship
Andres Rozental (Eminent Ambassador of Mexico)
Rozental demonstrates his deep knowledge of the U.S.-Mexican bilateral relationship, based on thirty years of negotiations with the U.S. government on maritime boundaries, nuclear proliferation, border issues, and immigration. Rozental recommends de-scrutinizing the bilateral agenda and prioritizing trade, investment, climate change, and the Trans-Pacific Partnership.

ABOUT THE EDITOR

Diana Villiers Negroponte

Downloads

Ordering Information:

{9ABF977A-E4A6-41C8-B030-0FD655E07DBF}, 978-0-8157-2494-0, $26.95 Order

Fed Policy, Stock Markets and Japan

Douglas J. Elliott — Thu, 13 Jun 2013 08:45:00 -0400

The 6.4% fall in the Japanese stock market overnight, and the general retreat in global stock markets since late May, underline the importance of monetary policy for financial markets. There’s a reason for the old Wall Street saying that you should “never fight the Fed.” Monetary policy is a major determinant of economic activity and therefore of the value of the stocks and bonds of companies, since they are all affected by the level of economic growth. It also affects the cost of funding investment activities; lower interest rates make virtually all investments more attractive. Securities purchases by the Fed and other central banks around the world have a similar effect by bidding up prices. Further, the level of a country’s interest rates has a major impact on currency rates, with money tending to flow to where it can earn the highest interest and away from where it can be borrowed most cheaply. (The so-called “carry trade” focuses specifically on borrowing in currencies with cheap money and investing in currencies with higher interest rates.)

The Japanese are engaged in a massive exercise of monetary loosening in an attempt to increase asset prices and lower exchange rates in the anticipation that both factors will spur economic growth. This has led to sharply higher Japanese stock prices over the last half year, a gain that is being partially unwound as new doubts arise about how fully effective the new policies will be. The big question is whether this is (a) simply an adjustment to a more realistic view of policies that should remain quite supportive of the markets and economic growth or (b) a realization that the policy may be ineffective or ultimately counterproductive. I suspect that the answer is (a), but that the adjustment has further to go, since hopes have been quite inflated and there was insufficient recognition of the dangers and costs of the approach. That said, Japanese stock prices were massively beaten up over the last two decades and it may be that they are responding substantially to a reduction of an excessive and pervasive pessimism.

Markets around the world are also responding to the likelihood that the Fed will begin tightening monetary policy soon. For more on the implications of this, please see my recent presentation at an investor conference.

Authors

Douglas J. Elliott

Image Source: © Toru Hanai / Reuters

The Sub-Bachelor STEM Economy

Jonathan Rothwell — Thu, 13 Jun 2013 12:55:00 -0400

To make it in this economy, you have to have skills that customers or employers value. The need for skilled workers is at the heart of debates about immigration policy, innovation, education, and opportunity. It raises questions about how to better prepare students, spark entrepreneurship, and spur innovation as part of the broader quest to revamp our stagnant economy and bring more Americans into the middle class.

But these questions can’t be answered without a proper definition of our skilled workforce, and we don’t have that. It is well established that knowledge in science, technology, engineering, and mathematics (STEM) subjects leads to high-paying careers, but we have the misconception that all STEM workers are advanced degree holders.

As my new report shows, half of America’s highly-skilled technical workers do not possess a doctorate or even a bachelor’s degree. Instead their knowledge is acquired through a combination of on-the-job-training, experience, and relatively short periods of post-secondary education. These are unheralded STEM jobs, in the background of every city and town, far removed the public accolades, or support, reserved for scientists and tech workers.

As of 2011, one out of every 10 U.S. jobs are sub-bachelor’s STEM jobs. With an average salary of $53,000, they provide decent-paying career paths at a time when less than one-third of young adults are finishing expensive four-year degrees. Examples of these occupations include industrial machinery mechanics, registered nurses, auto-mechanics, carpenters, supervisors of production workers, electricians, machinists, pipefitters, welders, machine programmers, chemical technicians, and sheet metal workers.

None of these jobs are considered part of the “science and engineering” workforce under current definitions, including the most influential one from the National Science Foundation.

Though they get little credit, sub-bachelor’s degree STEM workers contribute to economic growth in a variety of ways, by providing advice to inventors, producing energy, administering treatments, inspecting infrastructure, reducing product defects, and making processes more efficient.

Moreover, sub-bachelor’s STEM jobs are available in most metropolitan areas but often take longer to fill than even non-STEM professional jobs. In the average large metro area, 12 percent of all job vacancies advertised on-line were for sub-bachelor’s level STEM jobs in 2011, and in metro areas like Milwaukee, Dallas, Chattanooga and Birmingham over 15 percent fell into this category.

Also in 2011, STEM workers without a bachelor’s degree had an unemployment rate 2.2 percentage points below non-STEM workers without a bachelor’s degree and earned wages 64 percent higher.

Nevertheless, these jobs get little political support. Most federal government spending on STEM education goes to universities for bachelor’s degree or higher education. NSF-funded programs have been very successful in boosting STEM retention and attainment at the bachelor’s or higher level, but just a small slice of these programs go to community colleges. The other federal sources for sub-bachelor’s STEM training go through the Department of Labor in programs funded by fees on H-1B visa fees, which could be increased by new legislation being debated now, or stimulus dollars, which will expire.

More broadly, research universities get 4.6 times more dollars per student from the federal government than community colleges. State and local governments also slight their public community colleges relative to their research universities, even though students from the latter are less likely to work in the region.

Culturally, too, the sub-bachelor’s level STEM jobs are afforded little respect. Professional STEM workers receive presidential medals and Nobel prizes. The closest thing for sub-bachelor’s level STEM workers might be the Craft Professional of the Year award, given out by the Associated Builders and Contractors. This year’s winner, an electrician named Michael Arledge, received a pickup truck, but neither national press nor a Wikipedia entry.

It’s time to give these occupations the esteem they deserve. While spending years at a university is still the surest route to earning a middle class salary, it is not the only means of acquiring valuable knowledge. The many working in skilled occupations with an associate’s degree or training certification are among the most scientifically and technically sophisticated workers in our economy. Public policies should acknowledge the legitimacy and vitality of this career path.

Editor's Note: This op-ed originally appeared on Huffington Post.

Authors

Jonathan Rothwell

Image Source: © Jason Reed / Reuters

A Rapidly Evolving World

Jean-David Levitte — Wed, 12 Jun 2013 09:17:00 -0400

As a diplomat for 42 years, 16 of which I spent at the Elysée, under three presidents (Valéry Giscard d’Estaing, Jacques Chirac and Nicolas Sarkozy), I’ve always believed that one of the most difficult tasks of an advisor involved in the action is to understand the long-term consequences of key events beyond their immediate impact, which can be misleading.

To take the image of a game of chess, how can you think not just tactically but strategically, calculating not just the next move but the fifth or sixth one down the line, based on all the possible reactions of the other player? With an additional difficulty: In international relations, the number of players—both state and non-state—is considerable.

The demise of the Soviet Empire and reforms in China marked the end of a century of ideologies. The market economy now reigned supreme.

Without rewriting history, it’s possible to illustrate my remarks by looking at key moments in recent decades that eventually led to upheavals that were unsuspected at the time.

1979: Soviet troops invaded Afghanistan on Christmas day. The USSR was on the offensive, making gains in Africa, Angola and Ethiopia. Faced with this event, along with the loss of an ally, Iran, and bogged down in the Teheran hostage crisis, President Carter projected an image of America on the defensive. This was also true on the economic front, due to the meteoric rise of Japan, which was buying up Hollywood properties and the Empire State Building. According to a number of analysts, it was about to become the world’s leading economic power.

1989: Just 10 years later, with the fall of the Berlin Wall in November, the Soviet empire imploded. Meanwhile, Japan entered a period of economic stagnation from which it is still trying to recover.

It is clear that the end of the USSR resulted partly from the Red Army’s failure in Afghanistan, and partly from the “Star Wars” program launched by Ronald Reagan, elected by the American people in response to the humiliation inflicted on President Carter by Iran. The American rebound was also economic: This was the beginning of the information technology revolution and the age of digital communication.

The demise of the Soviet Empire and reforms in China marked the end of a century of ideologies. The market economy now reigned supreme. The world was no longer bipolar, but global and unipolar. Without actively seeking it, the United States became the world’s only superpower—a hyperpower, as Hubert Védrine so aptly described it.

2001: Twelve years later, with the advent of September 11, this dominant America suddenly discovered its extreme vulnerability in the face of a few dozen jihadi suicide bombers.

Now more than ever, our planet is seen as a global village, interconnected. But there’s no one in the driver’s seat. Still feeling burned, the U.S. no longer wants to be the world’s policeman.

Where did al Qaeda come from? From the U.S. response to the Soviet invasion of Afghanistan in late 1979. In order to counter the USSR without engaging American troops, Washington armed Afghan, Pakistani and Arab “freedom fighters,” with Saudi support. After the Soviet withdrawal from Afghanistan, these war-hardened fighters sought other battles and “global jihad.” We are now having to deal with their successors in Mali.

Deeply destabilized, the U.S. became involved in two wars, in Afghanistan and then in Iraq, which would serve most notably to demonstrate the limits of the country’s military supremacy. No longer was the world unipolar. It had become multipolar, with the extraordinary ascent of China, followed by other major emerging countries: India, Brazil, South Africa. We had entered the era of “relative powers”; no one country alone could claim to resolve the problems of our time.

2013: Another 12 years have gone by and the world is already a different place. Along with the major emerging countries, new powers—Korea and Indonesia, Turkey and Mexico—are claiming their place at the decision-making table. We’ve experienced the Arab Spring. Here and there, from Ghana to Ethiopia and Côte d’Ivoire, Africa is taking off.

Now more than ever, our planet is seen as a global village, interconnected. But there’s no one in the driver’s seat. Still feeling burned, the U.S. no longer wants to be the world’s policeman. It is now reluctant to get involved militarily, as France saw in Libya and Mali. The major emerging countries want greater rights in multinational forums, which is understandable, but concerned first and foremost with their own economic and social development, they are loath to share responsibility for solving the major problems of our time, which is regrettable. And some want to reaffirm their dominant positions in their own regions first, which is dangerous. International organizations are struggling to evolve and are weakened by this lack of collective leadership, at a time when they are more necessary than ever.

The world is no longer multipolar; it is now apolar. Worse: The risk of fragmentation is very real. Despite the establishment of the G20 and efforts by the IMF, five years of financial crisis have led to a three-speed economy, consisting of the emerging countries, North America, and Europe and Japan. The failure of the Doha world trade talks is leading to a proliferation of regional, transpacific and transatlantic negotiations, and it is doubtful whether the nomination of the Brazilian Roberto Azevêdo to replace the Frenchman Pascal Lamy will be sufficient to revive the WTO. The natural gas and shale oil revolutions are freeing North America from its energy dependence on the Middle East; this is a major development with a myriad of strategic consequences that remain to be seen.

The past 30 years have not been a transition period between an old and a new order, as in 1815 or 1945. We are living in a period of disruptions and discontinuity that is far from ending and is increasingly out of control.

What lessons can we learn from these past decades? The main one seems to be this: On the global chessboard, we can no longer attempt to predict the future—whether of nations or of the international system—on the basis of past or present trends.

The past 30 years have not been a transition period between an old and a new order, as in 1815 or 1945. We are living in a period of disruptions and discontinuity that is far from ending and is increasingly out of control.

In this increasingly heterogeneous, complex world, one of the things that strikes us the most is the unprecedented acceleration of change in the power hierarchy.

Authors

Jean-David Levitte

Image Source: © Shannon Stapleton / Reuters

Quantitative Easing Withdrawal: How Bad Will it Hurt?

Douglas J. Elliott — Wed, 12 Jun 2013 16:09:00 -0400

The Fed's quantitative easing program and ultra-low interest rates will eventually come to an end, with purchases of new securities by the Fed potentially being reduced as early as this autumn. Financial markets are very focused on how this will occur and what effect it will have on securities of all kinds and on the economy as a whole. Economic Studies fellow Douglas Elliott recently gave a presentation to an investor conference on this issue. These slides are adapted from that presentation.

Downloads

QE Withdrawal: How Bad Will it Hurt?

Authors

Douglas J. Elliott

Image Source: © Brendan McDermid / Reuters

Hey, Where Did Our Economy-Threatening Fiscal Crisis Run Off To?

Bill Frenzel — Wed, 12 Jun 2013 15:18:00 -0400

Federal policy makers always seem to be looking for reasons to dodge the difficult choices necessary to avoid the fiscal crisis. This month, they got some new excuses.

First, in mid-May, CBO updated its fiscal outlook, predicting the Fiscal Year 2013 deficit would be $200 billion less than earlier forecast. That’s delightful, but the 10-year forecast remains substantially unchanged. It also remains dismal.

Later in May, the Trustees of Social Security and Medicare made their annual report. It again showed the Social Security Trust Fund going into the red in 2033, at which time, recipients, by law, will take a 23 percent cut in benefits. It also showed the Social Security Disability Trust fund going broke in 2016, with a similar benefit cut of 20 percent. But, Medicare looked a bit better. It does not tank until 2026, two years later than previously forecast. That small improvement was another excuse.

And when the debt ceiling extension ran out on May 19, nobody cared because the Treasury has a little wiggle room. The moment of default has been pushed back until after Labor Day – an eternity in Washington. The later default date was hailed as a positive sign of economic improvement.

Despite these tiny rays of sunshine, all the long-term forecasts remain dismal. The long-term deficit and debt problems have not changed. But, small reasons to refrain from hard choices are never wasted in Washington. Inaction marches on. Neither Congress, nor the President, is conducting any observable negotiations. Nobody wants to fix the debt.

Fiscal fatigue and political recalcitrance have smothered budget negotiations. Even tax reform, an essential element of a comprehensive budget solution, seems now to have been drained of its vitality. Hopes for a “grand bargain” in 2013 have faded. Now the best outcome is to successfully avoid the debt ceiling default.

Having side-stepped the long term problem, both branches and both parties are content to wait until the last moment before worrying about defaulting on the full faith and credit of the United States. For now, political practitioners are giving their attention to assessing their bargaining clout, and predicting election victories, rather than in solving either the long, or short-term fiscal crisis.

The three budgets (House, Senate and the president’s) are still dueling. There is no apparent negotiation for budget reconciliation in process. The Chairs of the House and Senate Budget Committees meet from time to time, but there is no formal conference committee, and the administration has not expressed concern.

In FY 2013, which closes at the end of September, there was no Congressional budget. Nor has there been one in 5 years. There will certainly be none again this year. Without a budget, the Appropriations Committees of the House and Senate, each following its own budget, will determine federal spending for FY 2014. That will be exciting because the Senate budget assumes away sequestration, while the House budget etches it in stone.

We are thus doomed again to another series of short-term Continuing Resolutions (CRs) to fund federal government operations in FY 2014. Long-term solutions are politically impossible. Our representatives have other priorities. In Washington, politics are more fun, and core constituencies more important, than solutions.

Another debt ceiling mini-crisis will probably be avoided in the fall, but long-term debt will continue to cloud our future. The easy stuff has been done. The sequester made some small progress in limiting discretionary expenses.

On the hard stuff, entitlements and taxes, we are no better off than we were five years ago. The size of the problem, and its dire consequences, have long been common knowledge. The most predictable crisis in history has, as yet, not even generated a good discussion.

Every minute of delay in doing the hard stuff will make its ultimate cost more painful, both for the taxpayers, and for the recipients of federal spending.

So the answer to the question of what ever happened to our fiscal crisis is: little or nothing. The threat has not subsided. It has merely been ignored. The economic albatross of deficit and debt continues to threaten our future.

Authors

Bill Frenzel

Publication: Forbes

Image Source: © Jim Young / Reuters

The U.S. and China: A New Kind of Great Power Relationship?

Wed, 12 Jun 2013 14:00:00 -0400

Event Information

June 12, 2013
2:00 PM - 3:30 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, DC 20036

Last weekend’s meeting between Presidents Barack Obama and Xi Jinping at the former Annenberg Estate in California presented the two leaders with an opportunity to address a wide range of pressing issues, from flash points in the Korean peninsula to climate change and the global economy. To China’s leaders, this meeting contributed to the development of a “new kind of great power relationship,” a concept that has been heavily promoted in recent months in state media and official pronouncements.

On June 12, the John L. Thornton China Center at Brookings hosted Madame Fu Ying, the spokeswoman for the China’s National People’s Congress (NPC) and the chair of the NPC’s Foreign Affairs Committee. As an experienced career diplomat and former vice minister of Foreign Affairs, and now the spokesperson for China’s national legislature, Ambassador Fu has played a unique role in both conducting foreign policy and explaining national policies to Chinese and foreign media. In her comments, she discussed the U.S.-China relationship in the wake of the Annenberg meeting and offer a Chinese perspective on the direction of U.S.-China relations. Senior Fellow Jonathan D. Pollack, director of the John L. Thornton China Center, gave introductory remarks.

Video

Audio

The U.S. and China: A New Kind of Great Power Relationship?

Event Materials

20130612_fu_ying_remarks

Why Isn’t Disruptive Technology Lifting Us Out of the Recession?

Martin Neil Baily and James M. Manyika — Tue, 11 Jun 2013 13:34:00 -0400

The weakness of the economic recovery in advanced economies raises questions about the ability of new technologies to drive growth. After all, in the years since the global financial crisis, consumers in advanced economies have adopted new technologies such as mobile Internet services, and companies have invested in big data and cloud computing. More than 1 billion smartphones have been sold around the world, making it one of the most rapidly adopted technologies ever. Yet nations such as the United States that lead the world in technology adoption are seeing only middling GDP growth and continue to struggle with high unemployment.

There are many reasons for the restrained expansion, not least of which is the severity of the recession, which wiped out trillions of dollars of wealth and more than 7 million US jobs. Relatively weak consumer demand since the end of the recession in 2009 has restrained hiring and there are also structural issues at play, including a growing mismatch between the increasingly technical needs of employers and the skills available in the labor force. And technology itself plays a role: companies continue to invest in labor-saving technologies that reduce demand for less-skilled workers.

So are we witnessing a failure of technology? Our answer is "no." Over the longer term, in fact, we see that technology continues to drive productivity and growth, a pattern that has been evident since the Industrial Revolution; steam power, mass-produced steel, and electricity drove successive waves of growth, which has continued into the 21st century with semiconductors and the Internet. Today, we see a dozen rapidly-evolving technology areas that have the potential for economic disruption as well in the next decade. They fall into four groups: IT and how we use it; machines that work for us; energy; and the building blocks of everything (next-gen genomics and synthetic biology).

Wide ranging impacts

These disruptive technologies not only have potential for economic impact—hundreds of billions per year and even trillions for the applications we have sized—but also are broad-based (affecting many people and industries) and have transformative effects: they can alter the status quo and create opportunities for new competitors.

While these technologies will contribute to productivity and growth, we must look at economic impact in a broader sense, which includes measures of surplus created and value shifted (for instance from producers to consumers, which has been a common result of Internet adoption). The greatest benefit we measured for autonomous vehicles—cars and trucks that can proceed from point A to point B with little or no human intervention. The largest economic impact we sized for autonomous vehicles is the enormous benefit to consumers that may be possible by reducing accidents caused by human error by 70 to 90 percent. That could translate into hundreds of billions a year in economic value by 2025.

Predicting how quickly even the most disruptive technologies will affect productivity is difficult. When the first commercial microprocessor appeared there was no such thing as a microcomputer—marketers at Intel thought traffic signal controllers might be a leading application for their chip. Today we see that social technologies, which have changed how people interact with friends and family and have provided new ways for marketers to connect with consumers, may have a much larger impact as a way to raise productivity in organizations by improving communication, knowledge-sharing, and collaboration.

There are also lags and displacements as new technologies are adopted and their effects on productivity are felt. Over the next decade, advances in robotics may make it possible to automate assembly jobs that require more dexterity than machines have provided or are assumed to be more economical to carry out with low-cost labor. Advances in artificial intelligence, big data, and user interfaces (e.g., computers that can interpret ordinary speech) make it possible to automate many knowledge worker tasks.

More good than bad

There are clearly challenges for societies and economies as disruptive technologies take hold, but the long-term effects, we believe, will continue to be higher productivity and growth across sectors and nations. In earlier work, for example, we looked at the relationship between productivity and employment, which are generally believed to be in conflict (i.e., when productivity rises, employment falls). And clearly, in the short term this can happen as employers find that they can substitute machinery for labor—especially if other innovations in the economy do not create demand for labor in other areas. However, if you look at the data for productivity and employment for longer periods—over decades, for example—you see that productivity and job growth do rise in tandem.

This does not mean that labor-saving technologies do not cause dislocations, but they also eventually create new opportunities. For example, the development of highly flexible and adaptable robots will require skilled workers on the shop floor who can program these machines and work out new routines as requirements change. And the same types of tools that can be used to automate knowledge worker tasks such as finding information can also be used to augment the powers of knowledge workers, potentially creating new types of jobs.

Over the next decade it will become clearer how these technologies will be used to raise productivity and growth. There will be surprises along the way—when mass-produced steel became practical in the 19th century nobody could predict how it would enable the automobile industry in the 20th. And there will be societal challenges that policy makers will need to address, for example by making sure that educational systems keep up with the demands of the new technologies.

For business leaders the emergence of disruptive technologies can open up great new possibilities and can also lead to new threats—disruptive technologies have a habit of creating new competitors and undermining old business models. Incumbents will want to ensure their organizations continue to look forward and think long-term. Leaders themselves will need to know how technologies work and see to it that tech- and IT-savvy employees are included in every function and every team. Businesses and other institutions will need new skill sets and cannot assume that the talent they need will be available in the labor market.

Authors

Publication: Yahoo! Finance

The Hidden STEM Economy

Jonathan Rothwell — Mon, 10 Jun 2013 00:00:00 -0400

Workers in STEM (science, technology, engineering, and math) fields play a direct role in driving economic growth. Yet, because of how the STEM economy has been defined, policymakers have mainly focused on supporting workers with at least a bachelor’s (BA) degree, overlooking a strong potential workforce of those with less education but substantial STEM skills.

An analysis of the occupational requirements for STEM knowledge finds that:

As of 2011, 26 million U.S. jobs—20 percent of all jobs—require a high level of knowledge in any one STEM field. STEM jobs have doubled as a share of all jobs since the Industrial Revolution, from less than 10 percent in 1850 to 20 percent in 2010.

Half of all STEM jobs are available to workers without a four-year college degree, and these jobs pay $53,000 on average—a wage 10 percent higher than jobs with similar educational requirements. Half of all STEM jobs are in manufacturing, health care, or construction industries. Installation, maintenance, and repair occupations constitute 12 percent of all STEM jobs, one of the largest occupational categories. Other blue-collar or technical jobs in fields such as construction and production also frequently demand STEM knowledge.

STEM jobs that require at least a bachelor’s degree are highly clustered in certain metropolitan areas, while sub-bachelor’s STEM jobs are prevalent in every large metropolitan area. Of large metro areas, San Jose, CA, and Washington, D.C., have the most STEM-based economies, but Baton Rouge, LA, Birmingham, AL, and Wichita, KS, have among the largest share of STEM jobs in fields that do not require four-year college degrees. These sub-bachelor’s STEM jobs pay relatively high wages in every large metropolitan area.

Share of workers in STEM occupations, 100 largest metro areas
Click a metro area to view its detailed profile (PDF)

More STEM-oriented metropolitan economies perform strongly on a wide variety of economic indicators, from innovation to employment. Job growth, employment rates, patenting, wages, and exports are all higher in more STEM-based economies. The presence of sub-bachelor’s degree STEM workers helps boost innovation measures one-fourth to one-half as much as bachelor’s degree STEM workers, holding other factors constant. Concentrations of these jobs are also associated with less income inequality.

This report presents a new and more rigorous way to define STEM occupations, and in doing so presents a new portrait of the STEM economy. Of the $4.3 billion spent annually by the federal government on STEM education and training, only one-fifth goes towards supporting sub-bachelor’s level training, while twice as much supports bachelor’s or higher level-STEM careers. The vast majority of National Science Foundation spending ignores community colleges. In fact, STEM knowledge offers attractive wage and job opportunities to many workers with a post-secondary certificate or associate’s degree. Policy makers and leaders can do more to foster a broader absorption of STEM knowledge to the U.S workforce and its regional economies.

Downloads

Authors

Jonathan Rothwell

The Hidden STEM Economy: Key Findings

Jonathan Rothwell — Mon, 10 Jun 2013 10:36:00 -0400

Downloads

Authors

Jonathan Rothwell

A Plea for Europe

Jean-David Levitte — Mon, 10 Jun 2013 09:55:00 -0400

Current economic difficulties are fueling a growing and understandable pessimism vis-à-vis Europe. Let’s step back a little to gauge what Europe has given us in half a century and what must still be achieved today.

Based on the French-German entente—a treasure to be preserved at all costs—European construction brought us, first, something that our continent had never experienced in a lasting way: peace. We’re in the longest peacetime period since the Roman Empire. It’s enough to observe Sino-Japanese relations to understand that building a common future is not a given. Another fundamental gain: democracy. In 1990, when the Soviet empire imploded, Europe was united for the first time in history not by conflict but by the free will of the people.

This unity created a demographic and economic giant. The USSR numbered 300 million citizens; today’s Russia numbers 142 million. The six-nation European Community had less than 200 million inhabitants; the 27 nation European Union has more than 500 million, including 100 million from the East who had no experience of democracy or a market economy, and whom we managed to integrate in just a few years. Among the 21st-century giants, the EU is now the third-largest in terms population, behind China and India and far ahead of the United States (315 million). It is the leading economic power, with 23 percent of global GDP, ahead of the U.S. (21 percent) and China (12 percent).

Based on the French-German entente—a treasure to be preserved at all costs—European construction brought us, first, something that our continent had never experienced in a lasting way: peace.

Peaceful, democratic and united, Europe was built with a single market and common agricultural policy, which enabled France to undergo an unprecedented economic transformation. Because the EU is the largest global market, European standards are used everywhere, a considerable advantage for our manufacturers and farmers. Europe also signifies the free movement of people among the 26 nations of the Schengen Area, accompanied by strict controls (with improvements still to be made) along their common external border. It signifies the proliferation of European student exchanges thanks to the Erasmus program.

And finally, it’s the euro, a logical complement to the single market, born of François Mitterrand’s determination to balance Europe’s enlargement to the east by a decisive advance in its integration. As soon as it was introduced in 2002, the euro asserted itself as a remarkably stable and strong currency, the second-strongest in the world. The 17 countries that adopted it enjoyed historically low rates of inflation and interest rates, accompanied by growth that was as fast, and created as many jobs, as in the United States, until the global crisis sparked by the collapse of Lehman Brothers in 2008.

Without the euro, our countries would have been caught up in a currency war. But the crisis revealed the weaknesses of certain countries. While Schroeder’s Germany was undertaking courageous reforms, Greece hired bureaucrats, Italy accumulated debt, Spain created a real estate bubble and Ireland created a banking bubble. Whose fault was it? First, the governments of the countries that took advantage of the euro by ignoring its disciplinary aspects. But it was also the fault of incomplete monetary construction.

Over the past five years, the 17 euro countries have corrected those flaws in four ways: imposing greater responsibility and discipline (the “golden rule”); greater solidarity (particularly with the establishment of the European Stability Mechanism, the “IMF” of the euro zone); a greater convergence of budgets and competitiveness; and finally, more governance, with summits held at least twice a year. At the same time, the European Central Bank has assumed its responsibilities.

Are our institutions complex? Unquestionably, but look at the gridlock in Washington between the White House and the House of Representatives. The difference is that the American Constitution is engraved in marble; our European institutions are still a work in progress that can still be improved.

Having attended the summits that punctuated the crisis over the past five years, I was struck by the determination of our leaders to do everything possible to save the euro. All of them shared the same conviction: losing the euro would have sealed the fate of the European adventure; we would have stepped out of history. Did the decision-making process seem hesitant, too slow? Yes, but no more than it was in the U.S., and in the eurozone, 17 governments under parliamentary control have to decide together. Are our institutions complex? Unquestionably, but look at the gridlock in Washington between the White House and the House of Representatives. The difference is that the American Constitution is engraved in marble; our European institutions are still a work in progress that can still be improved.

What are the initiatives that could show Europeans that now more than ever, the EU remains their future? First we must complete the reforms made essential by the existence of the euro, starting with the banking union. But these reforms are meaningful only if each of the 17 states, including France, implements its commitments. Beyond debates on the balance between austerity and growth, all our countries must confront the consequences of an aging population by reforming the retirement system; improving our ability to innovate in order to increase our prospects for growth; and guaranteeing jobs and the future for young people who are today faced with the scourge of mass unemployment.

President Hollande is right to take up President Sarkozy’s proposal to create an economic government for the eurozone; that would make it possible to better coordinate national policies and would facilitate the adoption of ambitious joint programs to create jobs, particularly for young people, but also to train them through a reinforced and expanded Erasmus program. The euro is leading us toward ever-closer integration. It is our best chance to be competitive with the 21st-century giants while adapting the European “social model.”

Other areas in which progress is crucial: foreign and defense policy. The EU alone provides half of global development aid, twice as much as the U.S. Who is aware of that? Together, the 27 EU nations represent 20 percent of global military expenditures, far behind the U.S. but ahead of China (8 percent) and Russia (4 percent). But where’s the indispensable integration? The path to move forward is enhanced cooperation, whether in the weapons industry or foreign initiatives. Libya, more than Mali, showed that European “coalitions of the willing” could act effectively. Three countries are well suited, despite their differences, to spearhead such operations: France, the United Kingdom and Germany. The U.S.’s unwillingness to get involved makes summit talks between these three countries essential after the German elections in September.

A third area to work on: European elections. Citizens’ disaffection with Europe could lead to a victory by Eurosceptic parties in the May 2014 elections. To avoid that, how about placing two pro-Europe champions at the head of the two main parties, the People’s Party and the Socialist Party, who would be candidates to replace Mr. Barroso as president of the Commission and would advocate specific programs?

Couldn’t all the EU nations’ history books have two or three common chapters? They would underscore the things we have in common and which distinguish us from other civilizations: our Judeo-Christian heritage, the Renaissance and the Enlightenment, human rights.

The election campaign would then take on a new, more concrete dimension throughout Europe. There would be no need to change treaties for that. On the flip side, the two candidates should receive the preliminary (if implicit) approval of the members of the European Council.

A final area that fuels Euroscepticism: Seen as bureaucratic and distant, Europe has been unable to create the sense of sharing a common destiny that exists at the national level. Progress in the other three areas will help, of course. But we must add a bit of history and geography, in short, road markers that provide orientation. Raising questions about EU borders is delicate. But a borderless Europe is destabilizing in this globalized world. As for history, each nation is legitimately attached to its stories, its symbols and its celebrations. Still, couldn’t all the EU nations’ history books have two or three common chapters? They would underscore the things we have in common and which distinguish us from other civilizations: our Judeo-Christian heritage, the Renaissance and the Enlightenment, human rights. They would explain to schoolchildren throughout Europe the ambition we’ve shared for half a century and which has no equivalent in history or in today’s world.

Authors

Jean-David Levitte

Obama and Xi at Sunnylands: A Good Start

Richard C. Bush III — Mon, 10 Jun 2013 00:00:00 -0400

Based on the briefings after the Sunnylands Summit, it appears that the encounter between President Obama and Chinese president Xi Jinping met its primary goal of deepening the personal relationship between the two, and in charting a way forward on the key issues of their bilateral relationship.

Of course, the briefers are going to put the meetings in the best possible light, since Washington and Beijing had invested a lot in this meeting. But the two leaders appear to have genuinely connected in a positive way during their eight hours together. Tom Donilon, President Obama’s National Security Adviser, called the conversations “positive and constructive, wide-ranging and quite successful in achieving the goals that we set forth for this meeting.” They began by describing their respective vision for their countries, both domestically and externally. The implication is that a positive U.S.-China relationship will allow each to fulfill his goals. Or, neither will be able to succeed without a cooperative U.S.-China relationship.

On specific issues, Obama and Xi appear to have had the most agreement on North Korea: on the strategic dangers posed by Pyongyang’s nuclear ambitions, and on the need to fully enforce the resolutions of the UN Security Council to create pressure on the North to choose between nuclear weapons and a normal relationship with the international community. President Obama discussed the problem of cyber-theft targeting public and private American entities. He also urged restraint by all parties to disputes in the East and South China Seas. President Xi reportedly (and not unexpectedly) raised the issue of U.S. arms sales to Taiwan and Obama reportedly reiterated the long-standing U.S. position. Xi also asked for more information on regarding the multilateral trade negotiations on the Trans-Pacific Partnership, and Obama pledged to provide that transparency.

Thus, the Sunnylands Summit did not resolve the issues in the U.S.-China relationship, but that was never its objective. Instead, the goal was to create a more effective platform for addressing those issues in the future by deepening the Xi-Obama personal relationship and by making explicit the reality that the success of each will affect the success of the other. This was a good beginning, but it is just a beginning. Chinese observers should not, as they have in the past, infer that all the problems of the bilateral relationship have disappeared simply because the two leaders had a good meeting.

Still, the stakes here are high. Both leaders understand from history that when a country has quickly accumulated power in the past and challenged the existing international system, the result was usually conflict and war. Obama and Xi appear to understand both the need and the opportunity to create a “new model of relations between great powers,” and that their own choices and actions – and their personal interaction – will be crucial in avoiding the old model.

Authors

Richard C. Bush III

Is an Aging Workforce Less Productive?

Gary Burtless — Mon, 10 Jun 2013 14:52:00 -0400

As the population grows older an increasing percentage of the workforce will be past age 60. Older workers are ordinarily thought to be less productive than younger ones, raising the question of whether an aging workforce will also be a less productive one.

In new research funded by the Social Security Administration, I consider whether an aging workforce has dragged down average worker productivity over the past quarter century. At least so far, the answer is an emphatic “No.” Improved education among the population past 60 and delays in retirement among better educated Americans have tended to boost the earnings of older workers compared with younger ones.

Using one standard benchmark of individual worker productivity—hourly wages—workers between 60 and 74 now earn more than an average worker who is between 25 and 59. The hourly pay premium for older men was about 22 percent in 2011. For older women it was about 10 percent. Other earnings benchmarks show a somewhat less favorable picture, but all of them show considerable improvement in the relative position of aged workers compared with the nonaged over the past two decades. None of the indicators of male productivity suggest that older male workers are less productive than average male workers who are between 25 and 59.

There are two main reasons for the surge in older workers’ earnings. First, the sheer size of the baby boom generation means that the number of Americans attaining age 60 each year is climbing steeply (see Chart 1). Second, labor force participation rates of adults between 60 and 74 have increased. The share of all labor income earned by older workers has soared in recent years because these workers have enjoyed faster wage gains than workers who are younger. It is crucial to understand why this is the case. A major reason is that older workers are now better educated compared with prime-age workers than was the case in the past. Twenty-five years ago the gap in education between prime-age workers and older Americans was large. Americans past 60 had much less schooling than workers who were younger. That gap is now much narrower.

Educational attainment is also important for understanding the increase in Americans’ labor force participation rates at older ages. At older ages there are major differences between the participation rates of highly educated and less educated people, and these differences have persisted and even widened in recent several decades (see Chart 2). In the early 1990s nearly 60 percent of 62-74 year-old men with doctoral and professional degrees were still in labor force. In contrast, only 20 percent of male high school dropouts the same age remained in the workforce. The participation-rate gap was smaller for older women, but it was still sizeable and it has grown over time.

In the past quarter century there has been a steady improvement in older Americans’ educational credentials, both absolutely and in comparison to the qualifications of younger cohorts still in their prime working ages (see Charts 3 and 4). The improvement in older Americans’ educational attainment has improved their job market position. This is especially true for the men and women who remain in the workforce, because older Americans who stay attached to the labor force after 62 are much more likely to have received schooling after high school than the workers who retire at younger ages.

Changes in the distribution of educational attainment have influenced the age profile of earnings. Older workers now receive much better compensation compared with their prime-age counterparts (see Chart 5). Workers younger than 50 have seen a modest decline in their relative annual earnings, but workers past 55 have enjoyed impressive relative earnings gains. Compared with the earnings of an average 35-54 year-old worker, the average worker between 65 and 69 has seen his or her earnings climb 30 percentage points. Workers between 70 and 74 experienced a 28-percentage-point gain in their relative earnings. As noted, the relative earnings gains of older workers can be traced to the improvement in their educational attainment compared with younger workers. However, this development does not fully explain their gains. When I separately tabulate the age-earnings profiles of workers within each educational group I find similar, though generally far smaller, income gains among workers in the oldest age categories.

Using data from the March CPS files, I tabulated the distribution of annual earned income received by 25-74 year-old workers. I find that the share of male earnings received by 60-74 year-olds increased from 7.3 percent in 2000 to 12.7 percent in 2010. Among female earners, the share increased from 5.8 percent of total female earnings in 2000 to 11.7 percent of earnings in 2010. The magnitude of these gains is partly explained by the rising share of older workers in the labor force, partly by their increasing levels of work, and partly by improvements in their relative earnings if they do work. Even if employment and earnings patterns of older workers do not change during the next two decades, the share of all labor income received by older workers will continue to rise through about 2025. At their peak in importance, 60-74 year-old men will account for about 16 percent of male earnings and 60-74 year-old women will earn about 14½ percent of total female earnings.

What has been the impact of older workers on workforce productivity? If worker productivity has been harmed by the surge of older workers into the labor force the fact is not evident in the earnings statistics for the elderly themselves. The average worker between 60 and 74 now earns a higher hourly wage than workers who are between 25 and 59 (see the top panel of Chart 6). The hourly earnings premium enjoyed by older men and women has increased steadily since the turn of the century. The gains are equally impressive when we consider trends in annual labor income (wages plus self-employment earnings). The average annual earnings of working men between 60 and 74 is now slightly higher than that of men age 25-59. The yearly earnings of women between 60 and 74 is currently about 11 percent below that of working women between 25 and 59, but the gap is much narrower than it was at the turn of the century, when older women earned 28 percent less than their younger counterparts.

The expectation that older workers will reduce average productivity may be fueled by the perception that the aged are less healthy, less educated, less up-to-date in their knowledge, and more fragile than the young. While all these images of the elderly are accurate to some degree, they do not necessarily describe the people who choose to remain employed at older ages. My research shows there are enormous differences between the labor force participation rates of older Americans depending on their level of schooling. People with limited education have low employment rates in old age. People with college and advanced degrees tend to remain in the workforce longer. If less productive workers selectively exit the workforce at younger ages, the average productivity of the older workers who remain may compare favorably to the average productivity of the young. A surge in the percentage of the potential workforce that is old may simply increase the proportion of the workforce that consists of comparatively skilled older workers.

Note: This is a research summary of Gary Burtless, “The Impact of Population Aging and Delayed Retirement on Workforce Productivity,” Working Paper 2013-11 (Chestnut Hill, MA: Center for Retirement Research at Boston College, June 2013). < http://crr.bc.edu/wp-content/uploads/2013/05/wp_2013-111.pdf >

Authors

Gary Burtless

Where U.S.-China Relations Are Headed After the Xi-Obama Meetings

Cheng Li — Mon, 10 Jun 2013 00:00:00 -0400

In an interview with anchor Anand Naidoo of CCTV America, Cheng Li discusses what was achieved during the recent meetings between Presidents Obama and Xi, in particular in the areas of cybersecurity, bilateral trade relations as North Korea. Li also examines the future directions of U.S.-China relations, stressing that the development of a personal, working relationship between the two leaders trumps all issues on the agenda.

Authors

Cheng Li

Steady Employment Gains Offer Sign of Continued Expansion

Gary Burtless — Fri, 07 Jun 2013 10:47:00 -0400

Private payrolls grew for the 39^th consecutive month in May, increasing by 178,000. Perhaps coincidentally, this is exactly the same pace of job growth we have seen since March 2010 when the streak of private-sector employment gains began. Payrolls in the public sector, driven by a sizeable drop in federal employment, fell 3,000 in May. In the 39 months of private-sector job gains, federal, state, and local government payrolls have shrunk a total of 622,000—about 16,000 a month—offsetting 9% of the job gains in the private sector.

To put these numbers in perspective, the Census Bureau’s estimates of the working-age population suggest that about 80,000 new jobs a month are needed to keep the unemployment rate steady. If employment gains are faster than 80,000 a month we should expect to see a trend toward a lower unemployment rate. Of course, the unemployment rate is also affected by trends in the percentage of adults who want to hold a job. The deep recession caused the labor force participation rate to fall sharply in 2009, and the decline has continued through this year. Even though a sizeable part of the decline can be traced to population aging, we will nonetheless see some rebound in participation rates if Americans who are currently outside the workforce become more optimistic about their chances of finding a job.

The Labor Department’s household survey asks adults about their employment status and their efforts to find a job. The May survey showed a surge in the number of people who are either employed or looking for work. The number of employed increased 319,000 and the number seeking a job rose 101,000, producing an increase of 420,000 in the number of labor force participants. The participation rate edged up from its recent low in March and April. However, May’s big increase in the number of labor force participants offset equally big drops earlier in the year. Since January the number of people reporting they are either employed or looking for work has barely changed. The number with a job has increased 144,000 a month and the number looking for work has fallen 143,000 a month. If job growth remains at its current pace, however, we should expect to see more months like May in which the number of adults in the workforce climbs faster than the number of new jobs. In spite of the encouraging job numbers, both in the employer and household surveys, the unemployment rate edged up slightly in May, because the growth in employment fell short of the growing number adults in the workforce.

The fraction of adults who hold jobs held steady in May. Among Americans age 16 and older 58.6% were employed, roughly the same employment-to-population ratio we have seen since December 2011. This indicator seems to suggest the nation has made scant progress in recovering from the recession. A more accurate interpretation is that progress, at least in the job market, has been slow but steady. Because the adult population is growing older we would have expected the employment-to-population ratio to have fallen by slightly more than a half percentage point since late 2011, even if the nation enjoyed full employment. I estimate that U.S. employment would have to increase between 7 million and 7.5 million for the job market to return to full employment. Over the past 39 months we have made fairly steady progress toward closing the job gap, but the pace of improvement remains painfully slow.

Authors

Gary Burtless