Econ Focus, Fourth Quarter 2021 — Federal Reserve Bank of Richmond
Summary
This is the full Fourth Quarter 2021 issue of Econ Focus, the Federal Reserve Bank of Richmond's economics magazine (Volume 26, Number 3), whose cover story, A Pandemic-Era Startup Boom, asks whether a surge of interest in starting new businesses could reverse a long-running drought. Other features ask whether four-year degrees will become less of a gateway for high-paying jobs, and the issue carries an interview with Edward Glaeser and articles on forecasting inflation and on firms issuing digital currencies. A policy update covers Paycheck Protection and the pandemic.
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“Econ Focus, Fourth Quarter 2021 — Federal Reserve Bank of Richmond.”
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FEDERAL RESERVE BANK OF RICHMOND FOURTH QUARTER 2021
A PANDEMIC-ERA
STARTUP BOOM
A surge of interest in starting
new businesses could reverse
a long-running drought
Forecasting Seeking College Interview with
Inflation Alternatives Edward Glaeser
VOLUME 26 ■ NUMBER 3
FOURTH QUARTER 2021
FEATURES
Econ Focus is the economics
magazine of the Federal Reserve
Bank of Richmond. It covers
4 A PANDEMIC-ERA STARTUP BOOM
economic issues affecting the
Fifth Federal Reserve District
and the nation and is published
by the Bank’s Research Department. A surge of interest in starting new businesses could reverse a long-running drought
The Fifth District consists of the
District of Columbia, Maryland,
North Carolina, South Carolina,
Virginia, and most of West Virginia.
8 AN EVOLVING ROLE FOR COLLEGE
Will four-year degrees become less of a gateway for high-paying jobs? Should they?
DI R EC TO R O F R E S E ARC H
Kartik Athreya
DEPARTMENTS
DI R EC TO R O F P U B L ICATI ONS
Jessie Romero
ED ITO R
David A. Price
MA N AG IN G E D ITO R 1 PRESIDENT’S MESSAGE
Lisa Kenney Challenges of Forward Guidance
STA F F WR ITE R S
John Mullin 3 UPFRONT
Tim Sablik New from the Richmond Fed’s Regional Matters Blog
ED ITO R IA L A SSO C IATE
Katrina Mullen 13 RESEARCH SPOTLIGHT
CON TR IB U TO R S When Will Firms Issue Digital Currencies?
Erika Bell
Rosemary Coskrey
Neeraja Deshpande 14 ECONOMIC HISTORY
Colton Lapp Genghis Khan, Trade Warrior
Stephanie Norris
Raymond Owens
Santiago Pinto
18 AT THE RICHMOND FED
DE S IG N
Rural America Week
Janin/Cliff Design, Inc.
19 INTERVIEW
PU B L IS H E D BY Edward Glaeser
the Federal Reserve Bank
of Richmond
P.O. Box 27622 24 FEDERAL RESERVE
Richmond, VA 23261 Forecasting Inflation
www.richmondfed.org
www.twitter.com/RichFedResearch
28 POLICY UPDATE
Subscriptions and additional copies: Paycheck Protection and the Pandemic
Available free of charge through our website at
www.richmondfed.org/publications or by calling
Research Publications at (800) 322-0565.
30 DISTRICT DIGEST
Reprints: Text may be reprinted
Trends in Criminal Activity, Crime Reporting, and Public Perceptions
35 BOOK REVIEW
with the disclaimer in italics below. Permission
from the editor is required before reprinting
photos, charts, and tables. Credit Econ Focus and The Spirit of Green: The Economics of Collisions and Contagions in a Crowded World
send the editor a copy of the publication in which
the reprinted material appears.
The views expressed in Econ Focus are those of
36 OPINION
the contributors and not necessarily those of the Where Did the Workers Go?
Federal Reserve Bank of Richmond or the Federal
Reserve System.
Cover Image: Getty Images
ISSN 2327-0241 (Print)
ISSN 2327-025x (Online)
PRESIDENT’S MESSAGE
Challenges of Forward Guidance
F
or much of its history, the Fed was an effort to provide the public with a
famously tight-lipped about its clearer understanding of how the Fed
actions. It’s hard to believe now, would react to new data, and it gave
but until 1994, we did not publicly the Fed greater flexibility in times of
release a policy statement after each heightened uncertainty.
Federal Open Market Committee Still, the transition to outcome-based
(FOMC) meeting. The minutes of meet- guidance wasn’t seamless. The formula
ings also remained secret until the outlined at that time isn’t a simple one.
late 1960s and then were released only Certainly, those three criteria don’t
after about a 90-day lag. just roll off the tongue. It’s also not
We have come a long way since those a precise one, as judgment calls are
days. Today, the Fed issues a policy required. How would the public know
statement immediately after each if inflation expectations were no longer
FOMC meeting, releases the minutes well-anchored? (See “Forecasting
three weeks later, and releases verba- Inflation,” p. 24.)
tim transcripts after five years. This Another potential problem is that
increased transparency is healthy for the outcomes in the statement could
the Fed as a public institution, and it prove wrong if the economy shifted.
was also supported by a growing body This means that as with dates, the Fed
of research that emphasized the impor- worried that tying future policy to a might need to revise its outcomes,
tance of central bank communication date put the Fed in an awkward posi- leading to similar communication
and credibility. tion. If economic conditions didn’t and credibility challenges. This is one
The Fed’s initial steps toward greater evolve the way policymakers predicted, reason why the Fed doesn’t attach a
transparency involved providing more then they would either have to follow specific number to the employment
information about current monetary through on a date-based plan that goal in its forward guidance today.
policy. But in the early 2000s, the Fed no longer made sense or revise the The Fed is facing challenges now
also began to provide general infor- date, diminishing its value as a signal as it seeks to navigate a highly uncer-
mation about the likely path of future of future behavior. In times of great tain recovery from the pandemic.
policy through “forward guidance.” uncertainty, that was asking for Fed Inflation has been above our long-
During the Great Recession, the Fed credibility to be put on the line. run 2 percent target for months, but
again employed and continued to how long will this run-up in prices
evolve its forward guidance. At first, THE SHIFT TO OUTCOME-BASED persist? Employment remains far below
the FOMC used general language as GUIDANCE pre-pandemic levels, but has the econ-
it had previously. Then, it introduced omy changed in ways that have shifted
specific, calendar-based guidance in its In December 2012, the FOMC moved the maximum level of employment?
August 2011 statement, signaling that it from calendar- to outcome-based guid- What about fiscal policies not imagined
would likely be necessary to maintain ance. It said it would be “appropri- when our guidance was defined?
low rates “at least through mid-2013.” ate” to keep rates low “at least as long Finally, it seems clear to me that
The move to calendar-based forward as the unemployment rate remains many audiences find outcome-based
guidance was heavily debated within above 6-1/2 percent, inflation between guidance unsatisfying because it
the committee at the time, as the one and two years ahead is projected cannot provide a definitive roadmap of
transcripts of the meetings from that to be no more than a half percentage the Fed’s future policy path. Trading
period reveal. Some policymakers point above the Committee’s 2 percent instruments are often date-based, so
felt that a calendar date helped rein- longer-run goal, and longer-term infla- traders would prefer to know exactly
force the Fed’s forecasts for the future tion expectations continue to be well when monetary policy is going to
path of the economy, which the FOMC anchored.” change. For reporters and the public
began releasing in the form of the This approach made it clearer they serve, outcome-based guidance
Summary of Economic Projections, that Fed policy would be driven by can seem like inside baseball and is not
or SEP, earlier that year. But others economic conditions, not dates. It was as easy to process as dates.
Share this article: https://bit.ly/q4-presidents-message econ focus • fourth quarter • 2021 1
PR E S IDE NT ’ S ME S S AG E
WHERE DO WE GO FROM HERE? run into a communication problem surprised when the time to start taper-
where the SEP and policy statement ing came, as it did in November.
If the public keeps asking for dates, send conflicting messages. That still leaves forward guidance on
should the Fed go back to issuing Ultimately, I think the most import- rates, which is explicitly different. We
calendar-based forward guidance? It’s ant thing we can do to build confi- said in September 2020 that we would
clear from past experience that this dence in forward guidance is to cleanly keep rates near zero until “labor market
isn’t the optimal path. Markets and execute. In the early 2000s, the Fed conditions have reached levels consis-
reporters may want clear dates, but in signaled that it would follow a gradual tent with the Committee’s assessments
times of high uncertainty, the Fed can’t path for rate liftoff and then did so. The of maximum employment and inflation
credibly commit to guiding policy by so-called “taper tantrum” of 2013 — has risen to 2 percent and is on track to
dates rather than data. when long-term bond yields surged moderately exceed 2 percent for some
Sticking with outcome-based guid- suddenly in reaction to an announce- time.” We have hit 2 percent on infla-
ance, the Fed could try to be more ment by the Fed that it would soon tion, but we still have a lot to learn
specific about its thresholds, but past taper its buying of bonds — was an about whether recent inflation levels
experience also suggests this approach example of when Fed communications will be sustained and how much room
has limitations. It’s harder to get align- and forward guidance were not so well we have to run in the labor market
ment among the committee. The higher aligned. until we get to maximum employment.
the level of specificity, the higher the Hopefully, we are executing during As COVID-19 eases, if all goes well, I
risk that you’ll bind yourself to a less the COVID-19 recovery in a way expect the answers to these questions
than optimal path. Surely, there’s some that builds credibility. Regarding to become clearer.
value to leveraging good judgment. In our guidance on asset purchases, we Cleanly executing communica-
addition, some of the Fed’s objectives, have maintained a stable course. In tion is my goal. Doing so best cements
like maximum employment, are hard to December, we said we would continue outcome-based guidance as a tool
forecast and are influenced by factors “until substantial further progress has comfortable for us and valuable for the
outside of our control. been made toward the Committee’s markets and for the public. EF
We could strengthen the connec- maximum employment and price
tion between the SEP and outcome- stability goals.” In July, we said that
based guidance. I like the SEP because “the economy has made progress
it disciplines me to tie my policy toward these goals.” In September, we
prescription to my economic forecast. said that “if progress continues broadly
In times when forward guidance is a as expected, the Committee judges
crucial component of Fed communica- that a moderation in the pace of asset
tions, I think that through very care- purchases may soon be warranted.” A longer version of this essay was deliv-
fully. That said, since the SEP isn’t a That is the advance warning we had ered as an address to the Forecasters
committee consensus, we could still promised so that no one would be Club of New York on Oct. 14, 2021.
OUR RELATED RESEARCH
“How Broad-Based Is the Recent High Inflation?” “What Does the FOMC's Shift in Fed Funds Rate Target
Economic Brief No. 21-30, September 2021 Language Mean?” Economic Brief No. 21-22, July 2021
“The Fed's New Framework,” Econ Focus, First Quarter “How Macroeconomic Forecasters Adjusted During the
2021 COVID-19 Pandemic,” Economic Brief No. 21-19, June
2021
“Lending Relationships and Optimal Monetary Policy,”
Working Paper No. 20-13, September 2020 “Monetary Policy across Space and Time,” Economic Brief
No. 19-08, August 2019
2 econ focus • fourth quarter • 2021
UPFRONT
b y k at r i n a m u l l e n
New from the Richmond Fed’s Regional Matters blog
Roisin McCord. “Wages Are Rising: How Far Will They Go?” Lucas Moyon and Laura Dawson Ullrich. “State Budget Surpluses,
The “availability of skills needed” indexes — which measure the the COVID-19 Impact, and ARPA Funds.”
percentage difference in firms that report it is easier or harder to Economists and policymakers expected dire revenue losses for
find workers — is produced by the Richmond Fed as part of its Fifth state governments in 2020 because of the COVID-19 pandemic.
District manufacturing and services surveys. These data suggest Much to their surprise, however, all Fifth District states — except
that across the country, and in the Fifth District, firms are finding for West Virginia — experienced the opposite, including a
it increasingly difficult to hire workers. Of quicker recovery in revenues compared
the 74 percent of firms that reported this to past recessions. These state and local
hiring challenge in a recent administration of governments saw not only increased
The CFO Survey, more than half said it was revenues, but also budget surpluses ranging
decreasing their revenue. Perhaps as a result, from $413 million in West Virginia to $2.6
Fifth District firms have reported increasing billion in Virginia. Congress responded
wages since last August with accelerating quickly to the pandemic with fiscal relief to
year-over-year wage growth throughout this state and local governments: the CARES Act
year, and almost half believe wage changes and the American Rescue Plan Act, which
will trend greater than normal in the coming have given governments the opportunity
months. and flexibility to spend on programs and
improvements.
Tiffany Hollin-Wright and Surekha
Carpenter. “Rural Spotlight: A Path to Katie Daniluk and Sierra Latham. “The
Redevelopment in West Virginia.” Pandemic’s Toll on Minority Women in the
The City of Elkins in Randolph County, W.Va., is Labor Force.”
home to Woodlands Development Group and Although the Black and Hispanic labor forces
Woodlands Community Lenders. Collectively experienced steeper declines in employment
known as Woodlands, the community development corporation and compared to White workers during the peak of the COVID-19 pandemic,
financial institution acts as a lender and real estate developer. With they have seen a faster recovery this year. Yet women, particularly
generally lower median household incomes and higher poverty rates in Black and Hispanic women, have not experienced the same recovery,
its service area compared with the state overall, Woodlands collaborates largely due to child care responsibilities and job losses in heavily
with other community development financial institutions, banks, and female-populated industries, such as accommodation and food services,
organizations. It also leverages its unique dual mission to finance and education, and health services. In addition to child care, workforce
restore residential and commercial developments. The influx of federal challenges persist: burnout, health risks, and mismatches between
dollars and recent policies, such as West Virginia’s permanent State workers’ skills and firms’ needs.
Historic Rehabilitation Tax Credit, SB344, has given Woodlands more
financial stability and more ability to invest in long-term projects. Renee Haltom. “Rural Spotlight: Advancing Early Childhood
Education in Danville-Pittsylvania.”
Roisin McCord and Alexander Nikolov. “Demand for Goods Grows: Early childhood education has come a long way in Danville and
Will Manufacturers Be Able to Meet It?” Pittsylvania County, Va. Compared with the state as a whole, these
Shortly after the start of the COVID-19 pandemic, consumer spending on areas have high poverty levels for children under 6. The region’s
goods increased. Spending has continued to grow, which has hindered children also have low test scores and inadequate literacy skills. The
manufacturers’ ability to keep up with demand. Comments from business Danville Regional Foundation invested $5.4 million in the region’s
managers in the Richmond Fed’s business surveys supported this. Even early childhood education efforts, including $3.4 million in Smart
as manufacturers attempted to increase production, supply chains Beginnings Danville Pittsylvania (SBDP), a partnership among
suffered: Manufacturers still face long backlogs, depleted inventories, organizations, schools, and families that prepares children for
disruptions, and labor shortages. In turn, labor shortages have affected kindergarten. In the last decade, SBDP has built an early childhood
production as employers struggle with skill matching, absenteeism, and education ecosystem that has given more students access and
transportation delays. resources to thrive. EF
econ focus • fourth quarter • 2021 3
BY TIM SABLIK
A Pandemic-Era
Startup Boom
A
A surge of lthough the data are still coming in, early evidence suggests that
the economic downturn triggered by the coronavirus pandemic
interest in in 2020 hit businesses hard. University of California, Santa Cruz
economist Robert Fairlie estimated that the number of active busi-
starting new ness owners in the United States fell by 3.3 million or 22 percent
in the first few months of the pandemic. Some of those closures
businesses could were a temporary response to lockdown requirements, but even so, the pandemic
represented a historic challenge for many business owners.
At the same time, recessions can present opportunities for those looking to start
reverse a long- their own business. Many successful startups were born in recessions, including
the Walt Disney Co., Microsoft, CNN, Trader Joe’s, Uber, and Airbnb. That entre-
running drought preneurial spirit appears to be alive and well today.
One business founder of the pandemic era is Chris Evans of Raleigh, N.C.
Evans, who describes himself as a “serial entrepreneur,” started his first company
in the 1980s during his freshman year at North Carolina State University and has
built startups in a variety of fields since. When the pandemic hit, he partnered
with an inventor at N.C. State to start Aries, a company that produces breathable,
high-filtration masks using a new type of fabric technology.
“This felt like a moment to do something different and be part of the solution to
the pandemic,” says Evans.
According to the U.S. Census Bureau’s Business Formation Statistics, which
collects the number of people filing for an Employer Identification Number (EIN)
with the IRS, Evans is far from alone in seeing new opportunities during the last
year. Business owners expecting to hire employees must file for an EIN for payroll
tax purposes, and many sole proprietors choose to file for one to facilitate various
business activities.
According to these figures, applications for new businesses surged to record
highs starting in the summer of 2020 and have remained above pre-pandemic
levels. (See chart.) Filing for an EIN is free, and not everyone who applies will
necessarily open a business, so these numbers almost certainly overstate the
number of actual new businesses being created. But economists who study busi-
ness activity have found that EIN applications have historically been a good lead-
ing indicator of startup activity over the next one to two years. This suggests that
we may soon be in the midst of a startup wave, which is not what most research-
ers would have predicted.
DECADES OF DECLINING DYNAMISM
When the COVID-19 recession began, many economists worried that the even-
tual recovery would be slow, like the aftermath of the Great Recession of 2007-
2009. In the wake of that downturn, the startup rate for new businesses declined
and remained depressed long after the recession had ended: It was still 24
percent lower in 2018, nine years into the recovery, than it had been in 2006. That
wasn’t all. Economists who began researching the startup decline after the Great
4 econ focus • fourth quarter • 2021 Share this article: https://bit.ly/covid-startup
Startup Surge
Applications for new IRS Employer Identification Numbers
Recession discovered that it was only 600,000
part of a longer-running trend stretch-
ing back decades to the early 1980s. 500,000
Fewer new firms means that
economic activity has increasingly 400,000
become concentrated in larger, older
businesses, and there is mounting 300,000
evidence that this has had several
negative consequences for the 200,000
economy.
First, young firms create a dispropor- 100,000
tionate share of jobs. Policymakers often
refer to small businesses as the engines 0
of growth in the economy, but that is 2004 2006 2008 2010 2012 2014 2016 2018 2020
not quite right. In a 2013 article in the
Non-High-Propensity Business Application
Review of Economics and Statistics,
High-Propensity Business Applications
John Haltiwanger of the University of
Maryland, Ron Jarmin of the Census NOTE: Counts are the quantity of federal Employer Identification Number (EIN) applications. The Census Bureau classifies
Bureau, and Javier Miranda of the Halle high-propensity businesses as those most likely to hire employees, based on their indications of intent to hire in their EIN
applications and other factors.
Institute for Economic Research and the SOURCE: U.S. Census Bureau Business Formation Statistics
University of Jena found that a firm’s
age rather than its size is the key. New
firms, rather than small businesses in Benjamin Pugsley of the University of measure of the overall productive effi-
general, are the more significant sources Notre Dame and Ayşegül Şahin of the ciency of the economy) in the 2000s
of job creation. University of Texas at Austin argued would have been about 33 percent
Young firms are more likely to grow that the lower startup rate and over- larger.
rapidly than older businesses, and since all aging of businesses in the economy
new businesses tend to be small when has contributed to more “jobless recov- AN UNEXPECTED RECOVERY
they start, this explains the apparent eries” from recessions. That’s partly
correlation between small businesses because the decline in startups has There was every reason to expect that
and growth. But not all small busi- an immediate effect on employment the startup shortfall would continue
nesses grow — most stay small (think growth, but also because over time this through the pandemic. The climate for
of a family-run restaurant or a solo decline has shifted the composition of starting a new small business certainly
services provider, like a self-employed the economy toward older firms, which didn’t look very hospitable in the spring
plumber). New businesses that are tend to respond less to business cycles. of 2020. Large sectors of the economy
poised for growth tend to either grow “In the recovery to a business cycle, were shut down in an effort to slow
rapidly early in their life cycle or fail. we don’t expect older firms to expand the spread of the virus, and even in
Jay Bigelow, head of entre- as quickly as the business environment the absence of local mandates, demand
preneurship at the Council for improves,” says Pugsley. for in-person services like dining out,
Entrepreneurial Development (CED) Fewer startups could also hurt travel, and hospitality was severely
in North Carolina, has seen this rapid productivity growth. Austrian-born depressed as many consumers stayed
growth in startups many times. CED economist Joseph Schumpeter popu- away to avoid infection.
is a nonprofit focused on connecting larized the term “creative destruction” After an initial drop, though, appli-
entrepreneurs in the Research Triangle to describe the process in which capi- cations for new businesses quickly
area of North Carolina with mentors, tal and labor are reallocated from fail- surged. From a low point of nearly
financial backing, training programs, ing firms to new ones. As startup rates 235,000 in April 2020, applications for
and other resources. Bigelow says he’s have fallen, businesses have become new business EINs more than doubled
seen many tech startups grow from a less responsive to changes in produc- to nearly 553,000 just a few months
handful of employees to hundreds in tivity, and the pace of job reallocation later. Over the past year, monthly appli-
just a few years. has slowed, according to a 2020 arti- cations have continued to come in at
“Once these companies start to scale, cle in the American Economic Review a pace faster than any time since the
they tend to hire fast,” he says. by Haltiwanger, Jarmin, Miranda, and start of the data series in 2004.
The role that young businesses Ryan Decker of the Federal Reserve The industry that saw the biggest
play in job creation also means the Board of Governors. They concluded spike in applications was retail trade
decline in the startup rate has impli- that if the pace of job reallocation had — specifically, online retail. While
cations for how the economy recov- remained the same as in the early e-commerce has been around for decades,
ers from recessions. In a 2019 article, 1980s, total factor productivity (a in 2019 it still only accounted for
econ focus • fourth quarter • 2021 5
Entrepreneurship Across the Region
High-propensity business applications in the Fifth District
6,000 half of the people who started a busi-
ness on Etsy in 2020 did so because of
5,000 COVID-19, according to a survey by the
company. One in five sellers reported
4,000 turning to Etsy because they lost their
job or were unable to find work, while
3,000 another 8 percent said they were
unable to work because they had to
2,000 care for a family member. To be sure,
some of these entrepreneurs may have
1,000 preferred to stick with a wage-earning
job, so it is possible that not all of this
0 startup activity will prove to be opti-
2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2 2021 Q3 2021 Q4
mal for the economy.
Whether someone chooses to become
an entrepreneur out of necessity or from
DC MD WV VA NC SC a desire to be his or her own boss, start-
NOTE: Counts are the quantity of federal Employer Identification Number (EIN) applications. The Census Bureau classifies ing a new business takes capital. It is
high-propensity businesses as those most likely to hire employees, based on their indications of intent to hire in their EIN perhaps unsurprising, then, that econo-
applications and other factors. mists have found that wealthier individ-
SOURCE: U.S. Census Bureau Business Formation Statistics uals are more likely to become entrepre-
neurs. Unlike in most recessions, many
11 percent of total retail sales in the applications, although the increase has households actually became wealth-
United States. But in 2020, online sales been more pronounced in Virginia, ier during the pandemic. The personal
jumped by about 32 percent. With Maryland, and the Carolinas than in savings rate jumped from around 7
many brick-and-mortar stores tempo- West Virginia and Washington, D.C. percent before COVID-19 to nearly 34
rarily closed, households went online (See chart.) percent in April 2020. Savings fell back
to do their shopping. At the same time, “After an initial downturn, we’ve defi- to pre-pandemic levels by summer 2021,
websites like Shopify and Etsy have nitely seen an increase in the number but they remained elevated for much of
made it easier for anyone to open an of individuals who are seeking assis- the past year.
online business. Both platforms reported tance to launch a new business,” says The surge in savings was thanks
significant growth over the last year. Jody Keenan, the state director of the in part to multiple rounds of stimu-
In some places, the pandemic Virginia Small Business Development lus checks sent out to the majority of
seems to have supercharged preex- Center, which partners with the U.S. American households. Additionally,
isting entrepreneurial trends. North Small Business Administration to help many households postponed spend-
Carolina has long had a strong startup entrepreneurs and small-business ing on travel and dining out during
climate, but 2020 and 2021 have been owners across Virginia. the pandemic. Some of that spend-
record-setting years for new business ing shifted to durable goods, but some
filings. North Carolina’s secretary of WHAT CHANGED? simply banked money they weren’t
state’s office recently projected that spending on services. These savings
startups there would exceed 190,000 in Why has the startup recovery been so would help cover the startup costs to
2021. In a survey of these new entre- much stronger this time compared to open a business.
preneurs, the department found that the Great Recession? Another source of capital for entre-
most of them decided to start their One difference is that the initial preneurs is the equity in their homes.
own business to seek new opportuni- economic hit of the pandemic was Unlike in the Great Recession, home
ties rather than to replace lost income. much deeper than the financial crisis. prices have appreciated dramatically
“People are putting their faith in The unemployment rate peaked at 10 over the past year. According to the
themselves and taking greater control percent in 2009 but reached nearly S&P/Case-Shiller U.S. National Home
over their own future,” says Thom 15 percent in 2020. That means there Price Index, home prices in July 2021
Ruhe, CEO and president of NC IDEA, were potentially more people in need were nearly 20 percent higher than in
a private foundation that supports of an alternative source of income who July 2020.
entrepreneurs in North Carolina. Ruhe decided to start their own business. These differences could explain
says they have seen a record number The pandemic also disrupted schools the current rise in business applica-
of applications for their programs over and day care services, prompting some tions, but economists have also identi-
the last year. parents to find new sources of income fied long-running factors that appear
States across the Fifth District that allowed them to work from home to have contributed to the depressed
have seen a bump in new business and care for their children. Nearly startup rate in recent decades, and
6 econ focus • fourth quarter • 2021
those haven’t changed. In a recent what it takes to change a consumer that a significant share of the post-pan-
paper with Fatih Karahan of the New habit,” he says. “They may be offering demic startup surge may not last.
York Fed, Şahin and Pugsley argued a better way to do something, but that “We don’t know how ‘sticky’ these
that much of the decline in new busi- doesn’t necessarily lead to adoption.” new business starts will be,” says
nesses since the late 1970s can be Keenan of the Virginia Small Business
explained by demographics. LOOKING AHEAD Development Center. “Some people
“There is an incredible decline in the start something to fill an immedi-
growth rate of the labor supply over The Census Bureau’s Business ate need, and then when the economy
the exact same period where you see Formation Statistics also offer another recovers, if their business hasn’t been
the decline in the business entry rate,” clue about the future of startups. When as fruitful as they wanted it to be, they
says Pugsley. The postwar baby boom registering for an EIN, applicants indicate may jump back into the job market.”
and the entry of more women into the whether they plan to hire workers and “While we have seen a signifi-
workforce boosted the labor supply in pay wages or not. Based on this and other cant uptick in new businesses, many
the 1960s and 1970s, but those forces characteristics, the Census Bureau classi- are not surviving or thriving,” says
began to wane by the 1980s, when the fies new business filings that are likely Jay Nwachu, president and CEO of
startup rate also began to decline. to have a payroll as “high-propensity Innovation Works in Baltimore, which
Pugsley explains that there is a business applications.” supports entrepreneurs who serve the
strong economic argument why these A recent article in AEA Papers and most distressed neighborhoods in the
two trends should be linked. More Proceedings by Haltiwanger, Emin city. “Some people might be starting
workers means downward pressure on Dinlersoz of the Census Bureau, businesses, but their ability to grow
wages, initially making existing busi- Timothy Dunne of the University of that business is going to face the same
nesses more profitable. It also makes Notre Dame, and Veronika Penciakova challenges as before because the infra-
it more enticing for new businesses of the Atlanta Fed found that while structure didn’t get any better as a
to enter the market. As a result, the both high-propensity and nonemployer result of the pandemic.”
number of businesses grows as labor applications rebounded after the sharp But others point to the pandemic
demand expands to meet labor supply. decline in spring of 2020, the surge inspiring more people to take a chance
These forces work in reverse when the in nonemployer applications has been on their own ideas. Bigelow of CED has
labor supply shrinks. much stronger. spent three decades in the Research
Other researchers have also pointed It’s hard to say for sure how many Triangle of North Carolina both start-
to growing market power among of these nonemployer businesses will ing his own companies and help-
incumbent firms as a force that is contribute to job creation, but histor- ing other entrepreneurs get started.
depressing startups. (See “Are Markets ically that number has been low. In a He says that in the past, many people
Too Concentrated?” Econ Focus, First 2019 article, Nikolas Zolas of the Census preferred to go work for big corpora-
Quarter 2018.) Bureau along with Miranda and Fairlie tions. But now, more business schools
Evans of Aries says that in some found that very few nonemployer start- are teaching entrepreneurship, and he
ways, the opportunity cost of becom- ups go on to hire anyone else. If they do, sees a greater interest in people taking
ing an entrepreneur has gone down. it typically happens within the first year the risk to start their own venture.
Entrepreneurs can get access to health after the business is created. “I think 20 years ago if you said you
insurance without an employer, and In addition, there’s a question of were an entrepreneur, most people
the gig economy provides a safety net how many of these nonemployer firms would have thought that it was because
for them to fall back on if their idea will endure at all. Miranda, Zolas, and you couldn’t get hired,” says Bigelow.
doesn’t pan out. On the other hand, he Fairlie also found that nonemployer “Now, people are leaving corporations
believes it has become harder to break startups have a much lower survival to start their own business not because
into markets with large incumbent rate than young firms with employees. they were laid off, but because they
firms and to build a startup that lasts. In their sample, fewer than a quar- see an opportunity and they want to
“Most new companies underestimate ter made it to year five. This suggests control their own destiny.” EF
READINGS
Decker, Ryan A., John Haltiwanger, Ron S. Jarmin, and Javier Fairlie, Robert W., Javier Miranda, and Nikolas Zolas. “Measuring
Miranda. “Changing Business Dynamism and Productivity: Job Creation, Growth, and Survival Among the Universe of Start-
Shocks versus Responsiveness.” American Economic Review, ups in the United States Using a Combined Start-up Panel Data
December 2020, vol. 110, no. 12, pp. 3952-3990. Set.” ILR Review, October 2019, vol. 72, no. 5, pp. 1262-1277.
Dinlersoz, Emin, Timothy Dunne, John Haltiwanger, and Pugsley, Benjamin Wild, and Ayşegül Şahin. “Grown-up Business
Veronika Penciakova. “Business Formation: A Tale of Two Cycles.” Review of Financial Studies, March 2019, vol. 32, no. 3,
Recessions.” AEA Papers and Proceedings, May 2021, vol. 111, pp. 1102-1147.
pp. 253-257.
econ focus • fourth quarter • 2021 7
An Evolving Role
for College
T
here are 165.2 million According to researchers at the
Will four-year student loan accounts in the Cleveland Fed, all growth in real
United States that hold an wages for bachelor’s degree holders
degrees become less aggregate student debt of
$1.57 trillion, a historic high. On its own,
since the 2000s was accounted for by
those who also have a master’s degree.
this situation might be fine: If students Meanwhile, the wages of the bottom
of a gateway for take out loans to finance an educa- 60 percent of college graduates have
tion they otherwise would not be able actually fallen by 2.4 percent between
high-paying jobs? to afford, and if this education provides
graduates with better employment pros-
2000 and 2018, according to analysis by
economist Elise Gould of the Economic
Should they? pects and an increased wage that allows
them to repay their student loans, then
Policy Institute. (See chart.) Simply
put, college, with rising debt and fall-
the system is working. ing payoffs, may be a shakier invest-
What’s concerning is that while a ment today than it has been in the past.
BY NEER AJA DESHPANDE college wage premium exists for bach- Some firms are starting to see
elor’s degrees, it has been stagnating. degree requirements as needlessly
8 econ focus • fourth quarter • 2021 Share this article: https://bit.ly/college-alternative
Many College Grads Have Seen Wage Declines
prohibitive and believe that dropping Cumulative percentage change since 2000 in real hourly wages of college-educated workers,
degree requirements for some posi- by wage percentile
tions can actually be a net advan-
tage to their bottom lines. Moreover, 20
especially in light of the COVID-
19 pandemic’s disruptions to labor 15
markets, building a more open labor
force for all has become a central aim 10
of policymaking — the Federal Open
PERCENT
Market Committee, for instance, has 5
said in its 2020 Statement on Longer-
Run Goals and Monetary Policy 0
Strategy that maximum employment
is “a broad-based and inclusive goal.” -5
What is the role of higher education in
a more inclusive labor force? -10
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
COLLEGE AND WORK: A HISTORICAL 30th percentile 50th percentile 70th percentile 90th percentile
PERSPECTIVE
NOTE: Sample based on workers with only a four-year college degree.
While the importance of obtaining a SOURCE: Economic Policy Institute analysis of Current Population Survey Outgoing Rotation Group microdata
university education in order to get a from the U.S. Census Bureau.
well-paying job is often perceived as
a distinctly modern phenomenon, the requiring higher and higher levels of education. Likewise, in 1999, Stanford
American university’s role in students’ formal education for jobs that previ- University historian of education David
labor market preparedness began as far ously did not require it. The primary Labaree argued in How to Succeed in
back as the 19th century. Advances in difference between then and now is School Without Really Learning: The
science as well as growing public inter- that the rising credential requirements Credentials Race in American Education
est in the social problems wrought by that were once limited to professional that social mobility, not learning, had
industrialization increased the returns careers have now spread to nearly become the primary goal of educational
to academic specialization along with all white-collar careers, a phenome- attainment, distorting education itself
the number of subjects that universities non that Harvard Business School’s from a public good, to be shared by all,
offered. By the end of the 19th century, “Managing the Future of Work” proj- to a private good, reserved for each
universities shifted from being institu- ect has labeled “degree inflation.” individual.
tions of teaching to being institutions The project’s 2017 report, Dismissed Two decades later, Labaree says
of teaching and research, giving them by Degrees: How Degree Inflation Is the current educational system, for
the capacity to grow their programs. Undermining U.S. Competitiveness and better and for worse, is a meritocracy.
Universities then began to supplant Hurting America’s Middle Class, found “The hierarchy is not just defined by
professional institutions, such as medi- that middle-skill positions — like who is capable, but the rewards are
cal schools and law schools, that used those of secretaries, clerks, and sales so much higher for being just a notch
to stand independently of the university representatives — that have been seen, above other people,” he says. In other
system and usually did not require any culturally, as pathways to middle- words, many of today’s social and
college education prior to entry. class life, now mostly require college financial returns to college come from
Informal apprenticeships that degrees, despite not having required the competitive edge over non-college
used to suffice as professional train- them in the past. Bachelor’s degree educated workers that college-educated
ing were progressively deemed inad- attainment has persistently climbed workers gain from their degrees.
equate over the course of the 20th over the decades, having risen more
century. Scientific advancement, state than eightfold between 1940 and 2019, WHERE THE COLLEGE PREMIUM
credentialing requirements, and a from 4.6 percent of the U.S. popula- COMES FROM
greater desire for reputational legiti- tion to 36 percent.
macy among professional fields made Criticism of hiring practices that Despite stagnation in the college wage
formal, academic education the default rely on college degrees has histori- premium, it still exists and remains
for anyone desiring to enter professions cal precedent too. As far back as 1970, large. The field of economics has two
like medicine, dentistry, pharmacy, University of Pennsylvania sociolo- theories as to why: human capital and
engineering, and law. Eventually, a gist Ivar Berg wrote in Education and signaling.
four-year degree became a prerequisite Jobs: The Great Training Robbery that The idea of human capital was
to enter professional school. workers were overeducated relative to developed by economists Gary Becker,
There is, then, a historical prece- their actual productivity gains, which Jacob Mincer, and Theodore Schultz
dent for today’s pattern of employers meant society was overinvesting in in the late 1950s and early 1960s.
econ focus • fourth quarter • 2021 9
Human capital functions much like A degree provides requisite sophistica- University of Pennsylvania Wharton
regular capital, but instead of machines tion, meaning graduates gain that addi- School professor of management Peter
or natural resources, human capital is tional human capital they otherwise Cappelli argued that the so-called skills
the stock of human ability, knowledge, would not have without the degree. gap between the needs of the employer
and, more generally, the investments “The fact that this means more people and the abilities of the applicant pool
that people make in themselves and in need to go on to get more education is exists in large part due to employers not
each other — investments like educa- a market outcome.” investing in the employee training that
tion. If a well-prepared student goes Conversely, if signaling explains was fairly commonplace in the recent
to college, studies something that the the returns to education, the socie- past. That said, an employee spend-
labor market demands, and graduates tal response should be to invest less in ing all of his or her career with the
with a degree, human capital theory higher education, so that people don’t same employer was also fairly common-
states that his or her productivity will find themselves trapped in expensive place in the recent past — that’s far less
increase as a result of that education, and time-consuming arms races for common today, Capelli noted.
which explains why his or her wage is higher and higher levels of credentials. “What’s interesting about training
higher than that of someone with only As Labaree notes, college is expensive, in this context is that there’s specific
a high school diploma. both in dollars and in time. “One issue training versus general training,”
Signaling theory presents a perhaps is the huge investment in time at the Levine explains. “If your employer
less optimistic view of college educa- age when you’re actually going to be a teaches you how to use the firm’s
tion’s effect on workers’ productivity productive member of the workforce. proprietary software, and you’re never
gains, in which the college premium But the other problem is that as you going to be able to use that anywhere
is created less by the instructors than move up the scale of education, from else, your employer should pay you for
by the admissions office. Pioneered by elementary school to college, it costs that specific training.” And they have
economists Michael Spence, Kenneth more and more to educate you.” an incentive to do so, he notes.
Arrow, and Joseph Stiglitz, the signal- Ana Hernández Kent, a senior “But with general training,” he
ing explanation of the college premium researcher for the Institute for continues, “if you can learn how to code
says that college completion has less Economic Equity at the St. Louis Fed, with, say, Python, your employer is
to do with the attainment of certain points to research on degree require- never going to train you for that because
skills or knowledge, and more to do ments during recessions to make they’ll just train you, and you’ll leave to
with a credential that points to, say, the case that there is, in fact, a large use those skills elsewhere.” It follows
competence, intelligence, timeliness, or amount of signaling going on in labor that college degrees may very well be
motivation, among other attributes — markets. “In times when the labor the most efficient mechanism by which
traits that are valued by employers but market has a little more slack, qual- to match the labor supply of workers
difficult to assess directly. Employers ifications like education begin to be with the demand for labor from employ-
may view a degree as a good, simple required more and more.” But in ers, if firms are, by and large, primarily
screening mechanism for these unob- a tighter labor market, she notes, looking for general training.
servables, and its primary usefulness, “Employers tend to drop those educa-
under this explanation of the wage tional qualifications for the exact same A SHIFT AWAY FROM DEGREES?
premium, lies in its ability to provide jobs. So is it really the education that
a clear signal of traits that the worker employers are interested in?” she says. What’s clear amid all this discussion
may have already had before setting “Or is it really a skill set for which is that there is no easy answer. No one
foot on campus. education is acting as a proxy? I think can say for sure whether the college
If human capital explains the returns workers would be better served across wage premium is mostly driven by
to education, the best societal response the board if employers could figure college graduates’ human capital acqui-
will likely be to invest in more college out what skills they need for the job sition while getting their degrees, or
education, so that the workforce is instead of trying to use education as a whether it is mostly driven by signal-
more productive. Wellesley College proxy.” ing difficult-to-observe characteris-
professor of economics Philip Levine It may also be the case that colleges tics. By most economic accounts, both
says that while there may be some are simply providing the skills educa- explanations drive the college wage
signaling in labor market outcomes, a tion that employers themselves used premium in differing capacities and
“very large component of labor market to provide. Students are mostly choos- to differing extents. But regardless of
outcomes is the human capital attain- ing to major in areas that employ- which explanation dominates, there
ment associated with education,” from ers are interested in: The number of might be some career paths emerg-
preschool and kindergarten right degrees awarded in fields like computer ing that shelve degree requirements.
through college, so the United States science and law enforcement has shot Opportunity@Work, for example, is a
should invest more in education across up in recent years, while the liberal nonprofit that advocates firms hiring
the board. “The skills that are required arts have diminished in their prom- non-college educated workers who are
by the modern workforce involve more inence. In his 2012 book, Why Good “skilled through alternative routes”
sophistication than what a manual People Can’t Get Jobs: The Skills Gap (STARs), such as military service, boot-
labor job would require,” he points out. and What Companies Can Do About It, camps, micro-credential programs,
10 econ focus • fourth quarter • 2021
community colleges, trade schools, and low-wage work. The authors concluded hire efficiently, higher education of
apprenticeships. Citing “prohibitive that “there is a potentially vast pool of course has higher purposes in the eyes
costs,” “crippling debt,” and “educa- [non-college educated] skilled labor for of its defenders. Columbia University
tion deserts” (locations where there is US employers.” professor of American Studies Andrew
limited access to college), the organiza- Is anyone expanding hiring from this Delbanco is one of many who has
tion states on its website, “By excluding pool? According to January 2020 data made this case, arguing in his 2012
candidates without four-year college from Glassdoor, a job search website, book College: What It Was, Is, and
degrees, employers overlook millions of firms like Google, Apple, and Hilton Should Be that the American univer-
Americans who are [STARs] and have have recently dropped degree require- sity’s purpose is to aid students in
the valuable skills, talent, and drive to ments for some jobs. Kenneth Frazier, self-discovery and to teach them how
succeed in today’s workforce.” the CEO of Merck & Co., a Kenilworth, to think. For Delbanco, college ought
Similarly, Microsoft-owned N.J.-based pharmaceutical company, to be “an aid to reflection, a place and
LinkedIn started a new initiative in told the Wall Street Journal in May, process whereby young people take
March called Skills Path, with the “It’s really important for us to recog- stock of their talents and passions
tag line, “A new way to help compa- nize that because people haven’t had and begin to sort out their lives in a
nies hire for skills.” In the social an opportunity early in their lives, it way that is true to themselves and
media platform’s press release, Hari doesn’t mean that they can’t make a responsible to others.” Additionally,
Srinivasan, a LinkedIn vice presi- real contribution to your company.” college-educated people are more
dent, wrote that “by taking a skills- Likewise, IBM’s chief human resources likely to vote and to get married, and
based approach to opportunity we can officer, Nickle LaMoreaux, noted in are less likely to commit crime, all
remove barriers for candidates that an interview for the website of the of which might be socially desirable
might not have the degree or network, management consulting and polling behaviors and outcomes. (Of course,
while also increasing the size of firm Gallup that half of IBM’s jobs as of the line of causation might run in the
employer talent pools, often letting April did not require a degree. “When other direction: People more inclined
them pinpoint quality applicants for you break down what people actually in those directions might also be the
hard-to-fill roles.” do every day, whether it's software ones most likely to opt for college.)
If a four-year college degree nowa- development, or digital design testing, Insofar as higher education carries
days signals for many jobs what a high or security, or even artificial intelli- some nonpecuniary benefits, soci-
school diploma used to signal — matu- gence, you have to ask if that role needs ety may want to continue invest-
rity, competence, and drive, among a four-year degree or it's a set of skills ing significantly in college education
other desirable traits — alternative that's needed,” she said. and to encourage more people to get
routes could, at least in theory, signal Yet in the immediate future, there degrees.
those same traits at a lower individ- isn’t any indication that most compa- Any considerations as to what
ual and societal cost while poten- nies are dropping four-year degree college’s role should be in labor
tially allowing skilled, but non-college requirements, even if some are. With markets — and indeed, as to what
educated, people to attain well-paying 55 percent of highly paid jobs going college’s role should be in society at
jobs for which they are otherwise quali- to workers with bachelor’s degrees, large — will involve coming to terms
fied. Among those routes are apprentice- a college education is still probably with real financial and social trade-
ships and similar job-based programs in the best decision for well-prepared offs, whether the United States as a
which employers can observe workers’ students. From a societal perspective, whole invests more, invests less, or
traits before moving them up. A recent though, the question remains whether continues to invest the same amount
National Bureau of Economic Research this burden on individuals is equitable in higher education. Making informed
working paper about STARs by Peter and socially efficient. decisions about degree require-
Blair of Harvard University’s Graduate Moreover, society might want ments and creating an education
School of Education, along with to collectively invest in college for system that better supports work-
co-authors, found that of the 16 million reasons that are not explicitly tied ers’ future outcomes are likely going
non-college educated workers with to labor market outcomes. Beyond to be concerns of broader relevance
skills for high-wage work, 11 million human capital attainment that results and public discussion as policymak-
workers, whom they termed "Rising in productivity gains, and beyond a ers and citizens alike seek better labor
STARs," are employed in middle- to signaling mechanism that helps firms markets that work for all. EF
READINGS
Athreya, Kartik. “Why Do College Graduates Earn More?” Econ Goldin, Claudia, and Lawrence F. Katz. "The Shaping of Higher
Focus, Second Quarter 2015. Education: The Formative Years in the United States, 1890 to
Blair, Peter Q., et al. “Searching for STARs: Work Experience as 1940." Journal of Economic Perspectives, Winter 1999, vol. 13, no. 1,
a Job Market Signal for Workers without Bachelor's Degrees.” pp. 37-62.
National Bureau of Economic Research Working Paper No.
26844, March 2020.
econ focus • fourth quarter • 2021 11
In our new Rural Spotlight series, the Richmond Fed explores
solutions to the economic challenges faced by rural communities
in the Fifth District.
Read about these topics in Regional Matters or listen to the
discussions in the Speaking of the Economy podcast:
• Bringing Broadband to Maryland’s Eastern Shore
• Strengthening Economic Opportunity North of Raleigh-Durham
• A Path to Redevelopment in West Virginia
• Creating Family Economic Security in Western Maryland
• Advancing Early Childhood Education in Danville-Pittsylvania
• A Framework for Rural Economic Development
https://www.richmondfed.org/research/regional_economy/regional_matters
https://www.richmondfed.org/podcasts/speaking_of_the_economy
12 econ focus • fourth quarter • 2021
RESEARCH SPOTLIGHT
b y c o lt o n l a p p
When Will Firms Issue Digital Currencies?
Jonathan Chiu and Tsz-Nga Wong. Dynamics and Control, researchers For example, if the cost of holding
“Payments on Digital Platforms: Jonathan Chiu of the Bank of Canada cash is high, which might occur in
Resiliency, Interoperability and and Russell Wong of the Richmond an economy with high interest rates,
Welfare.” Journal of Economic Fed sought to answer this question by then holding wealth in a firm’s digi-
Dynamics and Control (forthcoming). modeling a firm’s choice between issu- tal currency can mitigate the effects
ing a digital token system and accept- of inflation. Furthermore, if a compa-
O
ver the last several years, public ing cash. In their model, implementing ny’s market share is large enough, or if
awareness of digital curren- a digital token system has both bene- the company provides unique access to
cies has grown rapidly. In the fits and costs that depend not only on certain products, consumers may have
last year, for example, more than 10 the properties of the firm, but also on little choice but to participate in the
percent of Americans have reportedly the broader economic context of the digital token system in order to gain
traded or bought cryptocurrencies, in country in which the firm is operat- access to these goods.
part fueled by increased institutional ing. Looking at the world through their The researchers noted several find-
adoption and public attention in the model, it becomes clear why Alibaba, a ings. First, for a token-issuing firm,
media. This increased engagement large online retailer in China, decided it is not possible to increase profits
has captured the attention of both to implement its own digital payment by accepting cash alongside the issu-
the general public and central bank- system while Amazon has yet to do the ance of tokens because doing so would
ers alike. same in the United States. reduce token demand. In addition,
Alongside the increased adoption of In the authors’ model, many possi- from a social welfare perspective, the
decentralized cryptocurrencies, some ble downsides are associated with authors showed that a firm may make
companies in the United States have setting up a digital payment system. a suboptimal decision when deciding
also received attention for their own Not only is it expensive to develop and whether or not to create a digital token
ventures into alternative forms of digi- maintain the infrastructure of a new system. This finding results from the
tal payment systems. Most notably, currency system, but there are also fact that as the firm makes its deci-
Facebook made headlines in 2019 when country-specific regulation constraints sion, it does not take into account the
it announced plans to launch its own that can stymie project implemen- potential benefits or costs to society of
digital currency — Libra — but ulti- tation. Consumer acceptance of the its actions. For example, a firm might
mately decided to put the project on system may also be low if users do not consider the broader implications
hold after receiving criticism from both not believe that the company will that digital payment adoption could
Democratic and Republican senators. be able to maintain the value of the have on the effectiveness of a central
Outside of Facebook, however, the currency — whether due to cyberse- bank’s monetary policy, among other
United States has generally seen limited curity threats or simply poor financial consequences.
implementation of platform-issued soundness. Finally, the authors considered the
currencies. This stands in stark contrast If a firm is able to overcome these effects of implementing traditional
to other countries, such as China, where barriers, however, there are several banking-style regulatory measures
some nonbank, platform-centered firms benefits related to implement- on the nonbank companies that issue
like Alibaba and Tencent have success- ing a new digital payment system. digital currencies, such as reserve
fully created their own digital currency The main benefit to the firm is the requirements or deposit insurance.
systems that have been widely adopted by revenue earned via seignorage — They found that for these firms,
the public. This divergence raises a ques- that is, the difference between the these measures would be ineffective
tion: What differences between China face value of the created currency and welfare reducing, as they would
and the United States have led to such and the cost of maintaining that dissuade some firms from issuing
different outcomes in platform-issued currency system. Moreover, firms currencies when it would otherwise
currency adoption among these nonbank may also benefit by building be socially beneficial for them to do
companies? customer loyalty as well as harvest- so. The authors suggested that in the
In an article titled “Payments ing transaction data. future, their model of digital currency
on Digital Platforms: Resiliency, Consumers may also prefer to use issuance could be extended in a vari-
Interoperability and Welfare,” forth- a digital token system, depending on ety of ways depending on the research
coming in the Journal of Economic specific macroeconomic conditions. question of interest. EF
Share this article: https://bit.ly/digital-token econ focus • fourth quarter • 2021 13
ECONOMIC HISTORY
BY JOHN MULLIN
Genghis Khan, Trade Warrior
His Pax Mongolica connected Europe and China, leading to
exchanges of technology and culture
I
t was no coincidence that Marco Polo’s famed trip to China of cultures and
came at the Mongol Empire’s peak in the 13th century. His knowledge that
party of Venetian merchants traversed an overland route came with it.
between the Middle East and China on what would much Spices, tea, porce-
later be called the Silk Road. Their passage over the perilous lain, and silk
terrain would scarcely have been possible without the system moved west, along
of order, referred to by historians as Pax Mongolica, that the with numerous
empire had imposed across central Asia. Chinese technolog-
Polo’s party traveled under the sponsorship of Mongol ical innovations.
ruler and Yuan dynasty emperor Khubilai Khan, the grand- Gold, medical
son of the Mongol Empire’s founding ruler or “khan,” manuscripts, and
Genghis. The sponsorship took the form of an extraordi- astronomical tomes
nary passport. According to Polo’s account, they had been headed east. These Mongol emperor Genghis Khan
given a “Tablet of Gold on which was inscribed that [they] new exchanges had
should be supplied with everything needful in all the coun- enormous implications and have been judged by one histo-
tries through which they should pass — with horses, with rian as the “onset of global history.”
escorts, and, in short, whatever they should require.” With
this tablet, Polo’s party was able to draw on the substan- GENGHIS KHAN, ADMINISTRATOR
tial infrastructure that the empire maintained along central
Asian trade routes. Genghis Khan, born under the name Timüjin, was an
Apparently, the Venetian merchants were far from alone unlikely candidate to unify the warring Mongol tribes of
in their use of this infrastructure. By the time they reached his homeland, much less found a vast empire. The future
Cambaluc, the winter capital of the Yuan dynasty at the emperor was the son of an outcast family — a family aban-
site of modern-day Beijing, they discovered that numer- doned by its clan to die on the steppes. Yet it appears that
ous European merchants had preceded them. The vast he came to believe that he was divinely destined to unify
suburbs of Cambaluc, according to Polo, “lodge the foreign the world — all the land under Tengri, the sky god of his
merchants and travelers, of whom there are always great shamanistic religious tradition. In an ascent marked by
numbers who have come to bring presents to the Emperor, incredible political and military savvy, he proceeded to
or to sell articles at Court, or because the city affords so defeat a long string of ever more powerful enemies.
good a mart to attract traders.” Separate inns were provided What is perhaps equally incredible is that this man with no
for merchants from different parts of the world, including formal education and an extremely limited understanding of
“one for the Lombards, another for the Germans, and a third the outside world would prove to be an adept administrator.
for the Frenchmen.” Breaking with Mongol tradition, Genghis was a strong adher-
These direct contacts between Europe and China appear ent of meritocracy. To overcome intra-Mongol tribal rivalries,
to have been a wholly new phenomenon, something that had he organized his army and much of the remaining population
not occurred before Pax Mongolica. “Prior to this period, into groups of 1,000. He tended to promote and demote based
we don’t have evidence of direct trade between Europe and on performance, with little or no regard to tribal connections.
i m age : n at i o na l pa lace mus e um , ta i pei , ta i wan .
China,” says anthropologist Jack Weatherford, author of A fundamental problem Genghis faced was the grow-
Genghis Khan and the Making of the Modern World. ing numerical mismatch between the conquerors and the
It is hard to overestimate the historical significance of Pax conquered. “He had an army of 100,000 and he ruled over
Mongolica. Its establishment had come at a terrible price. In hundreds of millions of people,” says Weatherford. “There is
conquests that expanded the Mongolian Empire to China in no way you could rule over that many people solely by force
the East and to the Danube River in the West, the Mongol with such a relatively small army. It's just not possible.” To
armies may have killed upward of 40 million people. Yet complement his military power, he relied on non-Mongol
Pax Mongolica created a relatively stable environment for advisers to provide the know-how and manpower to admin-
the development of global trade and the cross-fertilization ister his expanding empire. As a means of countering local
14 econ focus • fourth quarter • 2021 Share this article: https://bit.ly/genghis-khan-trade
sources of power in conquered territories, Genghis and his They traded frequently with their neighbors in China and
successors frequently brought in advisers from other lands. central Asia, primarily offering animals and animal-based
Such was the case in China, where Khubilai relied heavily products in exchange for craft articles and grain.
on Muslim advisers from central Asia out of distrust for the With the growth of their empire, the Mongols’ fondness
indigenous Chinese Mandarin class. for trade was enhanced by the method they used to divide
One of the great strengths of Genghis and his immedi- the spoils of conquest. Their traditional system of shares,
ate successors was their openness to new ideas. Without called “khubi,” was formalized by Genghis Khan. Under the
their own systems to draw upon, the Mongol leaders proved system, each member of the ruling family was entitled to a
willing to apply newfound knowledge and techniques. They share of wealth from each part of the empire. The shares
combined various systems, generally favoring pragmatic solu- were paid in kind: Mongols who ruled in Persia would send
tions. In the first stages of the empire, the Mongols’ gains spices, steel, jewels, and pearls to their counterparts in
from conquered territories came from the spoils of victory China, while the rulers in China would send porcelain and
(war booty, military requisitioning, and tribute). By Khubilai’s medicine to Persia.
time, however, they had developed a much more systematic The transport of war booty was not limited to goods, as
tax system. The collection and allocation of war gains and the Mongols recognized the usefulness of having people
taxes over such vast territories required massive record keep- with knowledge and skills at their disposal. Even in cases
ing, so their clerks used the abacus for calculations and drew where the Mongols would massacre most of the people in
on innovations from Arabic and Indian mathematics (such as a conquered territory, the Mongol armies would round up
the number zero and negative numbers). Effective administra- craftsmen, translators, doctors, astronomers, and mathema-
tion also required the ability to accurately mark time across ticians to be allocated across the empire.
far-flung territories that used different calendars, so Khubilai The khubi system encouraged trade, as the recipients of
established the Academy for Calendrical Studies and a print- in-kind payments would naturally wish to trade at least some
ing office that mass produced calendars. of their allocations for alternative goods. Combined, the allo-
The Mongol empire was full of juxtaposition. In their cation system and its ripple effects on trade created a constant
military conquests, the Mongols countered resistance with flow of goods and people between the Middle East and China.
ruthless violence. Yet after establishing control, their rule Even during periods of intense conflict among different parts
over conquered territories could be more nuanced. In the of the empire (and there were many), the flow of goods was
“Yasa” legal code that Genghis promulgated to complement usually not interrupted for long. The shared interest in the
customary Mongol law, the death penalty was ubiquitous. allocation of war booty and the exchange of goods through
Acts of robbery and treason were punished with sever- trade appears to have outweighed competing interests.
ity — but the Yuan legal code that the Mongols established The Mongols also sought to encourage trade by elevat-
in China had only half the number of capital crimes as the ing the societal status of merchants, offering them stra-
Song dynasty code that it supplanted, and the death penalty tegic inducements and providing them with a vast infra-
appears to have been used only sparingly on civilians. structure and a good measure of security. The Mongols’
The Mongol conquest and occupation were devastating for attitude toward merchants stood in stark contrast to
Chinese agriculture. Large parts of the rural population were that of the Chinese, whose social hierarchy prior to the
killed or enslaved, and many of the remaining farmers were Mongol-ruled Yuan dynasty ranked merchants just one
subject to capricious taxation and the transformation of their step above robbers. The Mongols officially raised the status
farms into grazing and hunting grounds. Yet some of Khubilai’s of merchants in China to the highest level of all profes-
policies, such as the provision of social insurance against crop sions, just below government officials. “The Chinese grad-
failures and natural disasters, suggest a real concern for the ually acquiesced to Mongol practices,” says Morris Rossabi
welfare of his subjects. According to Marco Polo’s account, of the City University of New York, who has written exten-
“if the people are afflicted by any dearth through unfavor- sively about Mongol history. “That is, they accepted the
able seasons, or storms or locusts, or other like calamity... no idea of merchants, and the status of merchants rose during
taxes are exacted for that year; nay more, he causes them to be that period and China never went back. During the Ming
supplied with corn of his own for food and seed.” dynasty, after the Mongols left, merchants became more and
more powerful and respected.”
TRADE PROMOTER Genghis Khan would often offer highly favorable terms in
his direct dealing with merchants — and his son and imme-
The Mongols relied heavily on trade, even before the estab- diate successor, Ogodei, was even more generous. “When a
lishment of their empire. As a nomadic people whose suste- merchant came to him, Ogodei would pay them double, triple
nance relied on herding and hunting, they had little in the what they asked for,” says Weatherford. “He did that because
way of industry. Although they crafted some basic items, it he was trying to encourage trade.” A further encourage-
appears they had few weapons makers, potters, or weavers. ment for merchants was the granting of special passports that
econ focus • fourth quarter • 2021 15
E C ONOMIC HIS TORY GENGHIS KHAN AND HIS TIMES
1162: Traditional birth year of Genghis Khan (born with the 1229: Sixth Crusade under excommunicated Holy Roman
name Temüjin) Emperor Frederick II captures Jerusalem
1163: Construction of 1240-41: The westernmost Khanate, known as the Golden
Notre-Dame Cathedral in Horde, invades Eastern Europe, taking Kiev, Cracow, and
Paris begins Liegnitz. Crossing the Danube, the
Mongols begin raids near Vienna
1201: The Incan ruler
Manco Capac oversees 1260: Khubilai Khan becomes the
construction of the city- Great Khan
state of Cuzco in modern-
1271: Khubilai Khan proclaims the
day Peru Notre-Dame de Paris Cathedral
beginning of the Yuan Dynasty in China
1206: After years of conflict, an official meeting of Mongol
1275-1292: Marco Polo resides in
tribes proclaims Temüjin to be Genghis Khan
Khubilai’s court Khubilai Khan
1215: Magna Carta is signed by King John of England
1294: Khubilai Khan dies. His successors
1227: Genghis Khan dies after a series of military conquests lack his political savvy. A series of plagues and natural disas-
that stretch the Mongolian Empire to parts of northern ters exacerbate dissent within the empire, and large-scale
China in the East and to the Caspian Sea in the West. At rebellions erupt in the 1340s
Genghis’ instruction, the empire is subsequently split into
1368: The Ming Dynasty (1368-1644) is established after
four Khanates, with his son Ogodei presiding over them as
the last of Khubilai’s nine successors is driven out of Beijing
the Great Khan
provided the holders with protection, accommodations, trans- Economy in the Second Millennium. “One of the main reasons
port, and exemption from local taxes and duties. Marco Polo’s the Mongols were so beneficial to trade was that their unifi-
golden tablet was the highest level of these. cation of large chunks of Eurasia provided people with secu-
rity.” Indeed, the Mongol military operated and maintained
NETWORK BUILDER troops along the entire Yam system.
The Mongols developed a vast system of roads, canals, and FINANCIAL INNOVATOR
postal stations. They originally did so for military reasons,
but the resulting network eventually facilitated trade. The The Mongols relied extensively on foreign merchants as agents
postal system, known as the Yam system, was a sort of to conduct their business. The trade and money-lending part-
medieval pony express with stations positioned at intervals nerships they formed were called the Ortoq system, a term
of 20-30 miles. At each station, an “arrow messenger” would that derived from the Turkic word for “partner.” Ortoq part-
i m ag es : n ot r e - da m e , ge tt y i m ag es ; khubilai khan, n at i o n al pa l ace mus e um , ta i p ei , ta i wa n .
mount a fresh horse and ride to the next station at a full nerships were similar in many respects to modern limited
gallop. According to Marco Polo’s account, “at each of these partnerships because a principal’s liability was capped at the
stations used by the messengers, there is a large and hand- amount of the original investment.
some building .… with fine beds and all other necessary arti- Ortoq partnerships arose relatively early during the reign
cles .… on all these posts taken together there are more than of Genghis, and by the time of Khubilai’s reign, most Mongol-
300,000 horses kept up .… and the great buildings.… are more ruled territories that bordered the sea had begun to employ
than 10,000 in number.” the partnerships for maritime trade. This coincided with
The Yam postal system was devised mainly for the bene- Khubilai’s massive expansion of China’s maritime fleet. “The
fit of the Mongols’ communications system, but they also Ortoqs helped reduce risks in case something went wrong,”
extended it to merchants. For passport-holding merchants, says Rossabi. “If one merchant financed a whole venture, and
such as Marco Polo, the Yam system provided indispensable the caravan or ship didn’t make it, he’d be wiped out. But if
support. you spread the risk, no one would suffer dramatically.”
Yet the Yam system’s value to merchants hinged on the Women played a dominant role in the Mongol side of the
security that the Mongols could provide along the routes. Ortoq partnerships. “Mongol men were not supposed to be
“The big obstacle to open trade was security, because the concerned with the accumulation of wealth. They were not
trade routes crossed a lot of dangerous territory,” says econ- supposed to be concerned with anything beyond warfare,
omist Kevin O’Rourke of New York University Abu Dhabi, religion, and hunting animals,” says Weatherford. “Women
co-author of Power and Plenty: Trade, War, and the World handled money and wealth and the accumulation of goods.
16 econ focus • fourth quarter • 2021
And therefore, the women were involved with the trading Iberian Peninsula dated to between the ninth and 11th
system of merchants.” centuries. But there is no evidence of direct contact between
The Ortoq system helped Mongol women convert the spoils Europe and China prior to the 13th century. In The Mongols
of war into money, which they used to buy luxury consump- and Global History, Rossabi posits that “The thirteenth
tion goods or lend at interest. Lending money must have been century witnessed the first direct and personal contact
particularly attractive, since, unencumbered by the usury between Europe and China.”
laws of the Islamic and Christian worlds, the Ortoqs report- Pax Mongolica changed the world in many ways. It intro-
edly lent money at a compound annual rate of 100 percent. duced new goods to Europe, including fabrics such as satin,
Khubilai greatly expanded the use of paper money damask silk, and muslin. It also allowed for the exchange of
in China. The currency issued under his reign — the technology. With Mongol encouragement, Muslim doctors
Zhongtong Chao — was ostensibly backed by silver, and it gained knowledge of Chinese pharmacology, while Chinese
kept its value in the early years after its introduction. Marco doctors learned surgical techniques from their counterparts
Polo observed that the currency was accepted throughout in the Middle East. On the less benign side of the ledger, the
the empire, stating, “Nobody, however important he may Mongol introduction of gunpowder, a Chinese invention,
think himself, dare to refuse [it] on pain of death.” But the to the Western world accelerated the history of European
evidence suggests that additional measures were required warfare. Increased long-distance trade also facilitated the
to maintain its value. In the early years, the government transmission of deadly diseases, such as the bubonic plague.
periodically supported the currency by buying it back Yet perhaps the greatest consequence of Pax Mongolica
with silver. The government also used what amounted to stemmed from the enormous profits that it conferred on
exchange controls. According to Marco Polo’s account, “All successful traders. Trade, whether across land or sea, was a
merchants arriving from India or other countries, and bring- high-risk, high-reward venture. Power and Plenty recounts
ing with them gold or silver or gems or pearls, are prohib- a story of how a single successful shipment compensated a
ited from selling to anyone but the Emperor.” Occupants of merchant for the loss of several other ships. The potential
the empire were similarly prohibited from buying and sell- for outsized gains created a large incentive to lower trad-
ing silver among themselves. The currency’s value fluctuated ing costs and risks through the establishment of new trade
over time with the forces of supply and demand, ultimately routes. By whetting the European appetite for trade, Pax
depreciating greatly during the later years of the Yuan Mongolica encouraged the explorations of Vasco de Gama and
dynasty as the regime’s fiscal situation deteriorated. Christopher Columbus, which served as springboards to the
modern world — with all its breakthroughs and destruction.
THE LEGACY OF PAX MONGOLICA But the effects of Pax Mongolica were hardly symmet-
ric. Europe — a commodity exporter that lagged China and
There is a broad consensus among scholars that Pax the Middle East technologically — gained greatly from the
Mongolica transformed world history. The period of rela- exchange of ideas with China. And although the Mongols
tive stability, which spanned roughly 1250-1350, allowed for killed many knights in Hungary, Europe’s location largely
an unprecedented exchange of goods and ideas. In Power spared it from the brunt of the Mongol armies. Conversely,
and Plenty: Trade, War, and the World Economy in the Second China’s gains from the exchange of ideas were relatively
Millennium, O’Rourke and his co-author Ronald Findlay of modest, and it bore a much heavier burden from the Mongol
Columbia University go so far as to argue that “globaliza- conquest and occupation. Moreover, China’s Mongol problem
tion.… began with the unification of the central Eurasian would endure well after the end of Mongol rule in China.
landmass by the Mongol conquests.” As late as the 16th century, Ming dynasty emperors contin-
Many Chinese innovations had made their way from ued to anxiously devote substantial resources to counter
China to the Middle East and Europe prior to Pax the perceived threat from the northern steppes. So, while
Mongolica, silk and porcelain among them. The Byzantines Pax Mongolica encouraged Europeans to look outward, the
had obtained silkworm eggs and begun their own silk continuing Mongol threat compelled the Chinese to look
production as early as the sixth century, and recent arche- inward, reinforcing a pattern that would have profound
ological evidence has discovered Chinese porcelain on the consequences for global history. EF
READINGS
Findlay, Ronald, and Kevin H. O’Rourke. Power and Plenty: Trade, Rossabi, Morris. The Mongols and Global History. New York: W.W.
War, and the World Economy in the Second Millennium. Princeton, Norton and Co., 2011.
N.J.: Princeton University Press, 2007. Weatherford, Jack. Genghis Khan and the Making of the Modern
Ratchnevsky, Paul. Genghis Khan: His Life and Legacy. Oxford, World. New York: Crown Publishers, 2004.
U.K.: Blackwell Publishing, 1991.
econ focus • fourth quarter • 2021 17
AT THE RICHMOND FED
by erik a bell and stephanie norris
Rural America Week
A
bout a quarter of the population of the Fifth District pathways available through partnerships with local busi-
live in rural counties. Rural communities and small nesses. Rather than viewing each other as competitors,
towns face a distinct set of challenges to economic Chester noted, the businesses in the program work together
opportunity and employment growth. As part of a larger toward the common goal of educating and retaining the next
set of initiatives to address these issues, the Richmond Fed generation of workers.
hosted its second annual Rural America Week on Oct. 4-6. Participants in Rural America Week also consid-
Bank leaders and experts from across the nation shared ered the crucial role of education in rural communities.
ideas, successes, opportunities, and solutions during the Speakers provided updates on several issues explored in
virtual event. Rural America Week is one of a number of the Richmond Fed’s District Dialogues virtual series that
Richmond Fed events intended to connect a broad group focused on educational disparities, and they discussed how
of rural community leaders, policymakers, and representa- educators continue to address learning loss, what learning
tives from financial institutions and foundations to looks like in the midst of an evolving pandemic,
collaborate and learn from one another. and learning beyond high school in rural places.
The week’s program began with a live virtual
“As these Rebecca Evans, a kindergarten teacher from rural
pitch session for the Richmond Fed’s Investment children grow Hampton County, S.C., and Anthony Swann,
Connection program. (See “Investment up and enter a sixth grade instructional coach in Franklin
Connection,” Econ Focus, First Quarter 2021.)
Hosted by Richmond Fed Community Development
the workforce, County, Va., shared challenges, solutions, and
hopes for the future. Evans noted some things
Regional Manager Peter Dolkart, the program flexibility is a she is seeing in her young students as a result of
featured representatives of five nonprofits in the positive. Just living through a pandemic. “I already see so much
Fifth District, who presented community and being able to progress with the flexibility of these students,”
economic development projects in rural communi- she said. “As these children grow up and enter
ties. Presenters outlined project objectives, require- monitor and the workforce, flexibility is a positive. Just being
ments, and costs in the hope of gaining funding adjust is a able to monitor and adjust is a skill that they did
from public and private funders in attendance. The skill that they not know they were developing.” Ann Macheras,
initiatives addressed increasing affordable home group vice president in the Richmond Fed’s
ownership in South Carolina and Virginia, increas- did not know Research Department, summarized, “At the heart
ing financial education and entrepreneurship for they were of economic opportunity, it takes skills, educa-
K-8 students in North Carolina, supporting commu- developing.” tion, and jobs so that individuals can earn a living
nity revitalization in West Virginia, and improving and support further growth for themselves, their
healthy food access in Maryland. families, and their communities.”
One theme of this year’s Rural America Week was the value The capstone of the education discussion was an inter-
of collaboration in building locally driven solutions. In a panel view with Danette Howard of the Lumina Foundation, a
discussion moderated by Richmond Fed Regional Executive nationwide private foundation dedicated to creating learning
Renee Haltom, three community leaders representing differ- opportunities for all beyond high school. She offered prom-
ent perspectives on rural economic development — Sara ising strategies for increasing access and success for rural
Chester, co-executive director of The Industrial Commons students, including increasing dual enrollment participation,
in Morganton, N.C.; Laschelle McKay, town administrator supporting community colleges as anchor institutions, offer-
of Leonardtown, Md.; and Jay Langston, executive director ing holistic student supports, and embracing remote learning
of the Shenandoah Valley Partnership in Harrisonburg, Va. and work.
— discussed strategies for addressing economic challenges. Throughout the Rural America Week sessions, speakers
Panelists cited the importance of understanding and leverag- touched on key themes of championing collaboration and
ing community assets and engaging a broad range of stake- partnerships, leveraging local assets, and focusing on place-
holders to develop a shared vision for change. Each panelist based initiatives. During the Richmond Fed’s Investing in
emphasized the importance of fostering partnerships among Rural America Conference in the spring, attendees will hear
local governments, institutions, and businesses as critical insights and ideas from rural experts on topics like nonskill
in his or her approach to building momentum on economic barriers to labor force participation and the future of work-
development initiatives. Chester offered an example of the force development in rural communities. The event is
importance of collaboration from her organization’s Work in planned for March 30, 2022, in person, in Greensboro, N.C.,
Burke program, which educates young people about career or attendees may participate virtually. EF
18 econ focus • fourth quarter • 2021 Share this article: https://bit.ly/rural-america-week
INTERVIEW
Edward Glaeser
On urbanization, the future of small towns,
and “Yes In My Back Yard”
H
arvard University’s Edward Glaeser, considered
by many to be the foremost economist of cities
and of the forces influencing their development,
is known for defending the role of cities as places where
businesses and residents can exploit the benefits of
social and economic interactions.
As a teenager, he lived on the Upper East Side of New
York during the Bonfire of the Vanities era. His eventual
specialization in urban economics was influenced, he
says, by his growing up in the city during its times of cri-
sis and recovery. “My childhood was shaped by the arc of
New York City during the ’70s and ’80s, first as a period
of startling decline as crime rates exploded and the city
teetered on the brink of bankruptcy, and then its remark- EF: In your new book, Survival of the City, you argue that
able comeback,” he remembers. “And it was hard as a child technological changes in the postwar period were mostly
not to wonder at this amazing variety of things that were “centrifugal,” leading people and companies to move
happening in the city.” away from urban cores, while technological changes in
Glaeser was promoted to chair of Harvard’s econom- the 21st century have been “centripetal,” leading to more
ics department in July. He has authored scores of journal concentration in urban cores. Please explain.
articles and book chapters and is a member of the edito-
rial board of five journals of urban or regional econom- Glaeser: I see urban growth as almost uniformly a dance
ics. He is the author or editor of 12 books, many of them between technologies that pull us together and ones that
on the economics of cities or on housing policy. His most push us apart.
recent, Survival of the City: Living and Thriving in an Age Technologies of the 19th century, like the skyscraper
of Isolation, written with Harvard colleague David Cutler, — which is really the combination of a steel frame and an
was published in September. elevator — the streetcar, the steam engine, all of these things
David A. Price interviewed Glaeser by phone in September enabled the growth of 19th century cities. They brought
2021. people together. This was a centripetal age.
In the mid-20th century, we had technologies that were
major jumps forward in transportation cost. In transporta-
tion technology, like the car, and in technology for trans-
porting ideas and entertainment — television and radio —
i m ag e co u rt e sy : MARTHA STEWART/COURTESY OF HARVARD UNIVERSITY
these were centrifugal forces that basically flattened the
Earth and made it easier to live in far-flung suburbs or even
rural areas.
Those centrifugal technologies were the backdrop for New
York’s decline during the 1970s. They were the backdrop for
the exodus of people from dense cities that had been built
around streetcars and subways and to suburbs that were
built around the car.
But then in the late 20th century and early 21st century,
the tides turned again. And it was somewhat surprising.
With this shift came a vision in which the rise in these
forms of information technology would lead the knowl-
edge workers that still existed in cities to follow the path
Share this article: https://bit.ly/int-glaeser econ focus • fourth quarter • 2021 19
INT E RVIE W
of industrial workers and essen- Glaeser: I still maintain my traditional
tially deurbanize. Knowledge workers Edward Glaeser aversion to place-based policies. I have
would work remotely from electronic not completely gone away from it.
■ present position
cottages. But I do think that the persistence
But for most of the last 40 years, Fred and Eleanor Glimp Professor of
of prime-age male joblessness is
that hasn’t been correct at all. That Economics and Department Chair, Harvard
worrisome. If you look at the rela-
hasn’t been happening in cities. We’ve University
tionship in the Public Use Microdata
started to see the electronic cottages ■ selected additional affiliations Areas between joblessness in 2010 and
become a force during the pandemic, Director, Urban Economics Working Group, joblessness in 1980, the correlation is
and suburbanization has continued, but National Bureau of Economic Research; over 80 percent. We have an endur-
downtowns are vastly stronger than Editorial Board Member, Journal of Urban ing level of local economic dysfunction.
they were in the 1980s. And I think Economics; Board Member, Social Science I don’t think that this makes the case
the primary reason is that globaliza- Research Council; Fellow, Econometrics for large-scale redistribution in these
tion and new technologies have radi- Society; Member, American Academy of Arts areas. I think there are many good
cally increased the returns to being and Sciences reasons for being wary of that, but at
smart, and we are a social species that ■ education the same time, I think it’s necessary
gets smart by being around other smart Ph.D. (1992), University of Chicago; A.B. to think about policies that are more
people. That’s why people are will- (1988), Princeton University place-specific.
ing to pay so much to be in the heart Take housing. You really don’t
of Silicon Valley and why they’re will- need to subsidize the production
ing to pay so much for downtown of low-income housing in most of
real estate in Chicago or New York or “We want better surfing, let’s relocate Texas, because they have an unfet-
London. to Honolulu.” That feels entirely plausi- tered market that does a great job of
ble to me. The technology supports the providing lots of low-cost housing to
EF: What does the future of small mobility en masse of these groups to middle-income residents. If you have
towns look like after the pandemic? some different area. Places they’re most Detroit, you don’t want to produce
likely to relocate to are high-amenity more low-cost housing, because they’ve
Glaeser: I think that’s going to be a places that will appeal to them along got an abundance of low-cost housing
tale of two towns. If you are a small one of these dimensions. there. But on the other hand, there’s
town like a college town, a place with These would be probably the best probably a good case for doing some-
high levels of amenities and beautiful index right now of whether or not a thing about low-cost housing in San
scenery where rich people want to go, I place is likely to benefit: Among small Francisco or New York or Boston.
think that the combination of the abil- towns, is it a skilled place already? That suggests to me, at least, that
ity to do work remotely and perhaps Prior to COVID-19, did it do a good job you want policies like the low-income
some enduring pandemic fears means of attracting large numbers of college housing tax credit that subsidizes new
that you are as strong as you’ve ever graduates or people who had advanced housing construction. You want that
been, if not more so. These places are degrees? to be spatially limited. You want it to
poised to benefit. On the other hand, if you’re talking go in areas where there’s a genuine
Take your Silicon Valley startup with about small towns in relatively dearth of low-income housing. At the
15 smart, hungry young people. Do we low-amenity places, places that are low same time, you could have more hous-
truly think in five years these people density, farmland, low levels of educa- ing vouchers in the areas where hous-
are just going to be Zooming it in from tion, these places have been declining ing supply is elastic. You can have the
their suburban bedrooms? That sounds for decades, and I see little reason why right policy for the right place, which is
totally implausible to me. That sounds the decline would be reversed anytime something that America has tradition-
like a totally different work model that soon. ally found very difficult to do. But it’s
will lack all the energy and high quality just basic economics.
in-person connections you get from being EF: Place-based policies — that is, Likewise, if you’re going to have
in the same room as one another. policies aimed at improving specific a large-scale employment subsidy, it
But on the other hand, are these areas — are often criticized by econ- makes more sense to put that subsidy
15 people going to decide, “Well we omists. You’ve argued that they may into places where it will actually
all love skiing, we’re tired of paying be justified for some areas of the encourage the most employment.
Silicon Valley prices, should we relo- American heartland where men have That’s much more likely in places that
cate to Vail?” Or say, “We don’t want to low labor force participation. Why is start with high levels of nonemploy-
pay taxes, let’s relocate to Austin.” Or, that? ment, like the eastern heartland.
20 econ focus • fourth quarter • 2021
Now, my own preference is that you percent, I think, of homes were aware of the limitations and difficul-
make it feel relatively budget neutral owner-occupied. The usual view of the ties of doing that. So, we’ll have to see
and figure out other things to deliver housing economics community was how this plays out. I can’t help think-
more of to other areas. But I think we that the agency problems involved in ing some part of it just has to be that
have to realize that the eastern heart- renting them out were huge. There are investors are simply searching for new
land, particularly, has very specific estimates that suggest that renting out investment products.
circumstances that need distinct poli- for a year involves a 1 percent decline
cies. So, when we’re discussing a $15 in the value of the house, or some- EF: In Survival of the City, you write
national minimum wage, that’s fine in thing like that, because the renter just about development restrictions as
Seattle; we’ve had a whole bunch of doesn’t treat it properly. favoring insiders, by which you mean
papers on this over the past homeowners. Homeowners
five or six years that show it might say, “Don’t we want
won’t hurt employment much. “I think we have to realize that the eastern local government to be
If you have a $15 minimum responsive to local inter-
wage in West Virginia, you’re
heartland, particularly, has very specific
ests?” Is this a good thing as
risking much more of an circumstances that need distinct policies. So, well as a bad thing?
increased joblessness problem when we’re discussing a $15 national minimum
there because you’re starting wage, that’s fine in Seattle; we’ve had a whole Glaeser: I certainly don’t
at a very different place. want local government to be
bunch of papers on this over the past five or nonresponsive to local inter-
EF: What is your view of six years that show it won’t hurt employment ests. The problem is that local
opportunity zones as a much. If you have a $15 minimum wage in West majorities are not necessar-
policy in this regard? ily going to take into account
Virginia, you’re risking much more of an increased everyone. They won’t neces-
Glaeser: We have a paper joblessness problem there.” sarily take into account
on this that does try and minorities, and they certainly
compare them with truly won’t take into account people
comparable areas. We’re focused By contrast, traditionally more than who are not in the locality right now.
mainly on the effect on housing prices, 85 percent of multi-family housing was As always in the case of democracy,
which we thought would be one rented, at least once you get to over five we want something that empowers the
measure of whether things are getting stories. It’s much easier to manage a majority, but also slightly restrains it
better in the area. We find almost no multi-unit building when you have one in different ways. We want the Bill of
effect from these zones on prices. owner. One roof, one owner, because Rights as well as the grants of power
I think in general that the needs of otherwise you’ve got the problems of in the Constitution. And in the case of
these places are really about human coordination of the condo association localities, I think that the idea of plac-
capital problems rather than a lack of or the co-op board, which can be more ing some restriction on what localities
entrepreneurship. But the opportu- fractious. can do is quite reasonable to me.
nity zone structures are very oriented So those were the things, I think, For example, in the area of housing,
toward more investment in physical that were responsible for tying owner- you have Massachusetts Chapter 40B,
capital, including housing and apart- ship type and structure type so closely which basically enables developers to
ments and such, which does not partic- together. We are starting to see that work around local zoning if the local-
ularly seem like the right thing to do break down, which is quite interest- ity has almost no affordable housing
for these disadvantaged areas. When I ing. I don’t know if these buyers have and if the developer is providing some
think about what I would like to see in fully internalized their difficulties with low-cost units to buyers. They’re able
a zone, it’s much more focused on the the maintenance that goes into rental to take advantage of the state process
human capital than the physical side. houses as a long-run issue. Or if tech- rather than the local process for
nology has changed in such a way that getting approval. So, you’re not getting
EF: Why have major investing insti- they think that they can actually solve rid of all local power over zoning. But
tutions recently started buying that agency problem and that they can if your local power means that you
single-family homes in large numbers? figure out ways to deal with the main- produce nothing that’s affordable, we’re
tenance costs in some efficient fashion. going to maintain a way for the build-
Glaeser: Traditionally, single-family I’m happy to see an emergence of a ers of affordable housing to basically
homes were overwhelmingly owner- healthy rental market in single-fam- bypass you. That sort of hybrid model
occupied in the U.S. More than 85 ily detached housing, but I’m keenly seems like a good one to me.
econ focus • fourth quarter • 2021 21
INT E RVIE W
The new California law, SB 9, on to take a short building and replace it to fix the very visible woes of cities.
speedy permitting of two-unit build- with a tall building. And if you stop What that meant was that just at the
ings will also be a state restriction on that process, as she was so instrumen- time cities were asking businesses to
local power. This was the first time in tal in doing in the Greenwich Village pay more, asking the rich to pay more,
many years we’ve had a victory for the historic preservation district — which it was becoming easier for the rich and
“Yes In My Back Yard” movement — was part of a great popular wave of for businesses to get out. And that’s
the YIMBYs. It may be a small victory, opposition to rebuilding New York — exactly what happened.
but you know, when I started thinking you aren’t promoting affordability, you On top of that, of course, there was
about this stuff in 2001, there was noth- are freezing a neighborhood in amber. an inability to deal with the crime
ing. There was no popular movement of In the case of Greenwich Village, problem. That’s something that I worry
any form to reduce the local about today. There is a totally
straitjacket on building. understandable desire to
“If you stop that process, as [Jane Jacobs] try and deal with the terri-
EF: The famous 1961 book was so instrumental in doing in the Greenwich ble inequities of urban life.
by Jane Jacobs, The Death There’s a totally understand-
and Life of Great American Village historic preservation district, you aren’t able desire to want to do
Cities, has been influential promoting affordability, you are freezing a something about policing and
over the years in people’s neighborhood in amber. That’s no recipe for the experience that many
thinking about urban devel- people have with the police.
opment. What was she right
affordable urban space that scrappy startups and But if the changes that occur
about, and what was she young families can buy, which is how she was either end up targeting the
wrong about? thinking about it.” taxpaying members of the
urban community or end up
Glaeser: It’s a wonder- leading to a significant deterio-
ful, wonderful book. It’s so wise in you have created a situation in which ration in the quality of life — for exam-
its understanding of urban neighbor- townhouses start, at least before the ple, with an increase in crime rates —
hoods and the street life and the ability pandemic, at over $7 million. That’s no that risks replaying the 1970s.
of neighborhoods to just work and the recipe for affordable urban space that One of the reasons why I wrote the
dangers of trying to engage in planning. scrappy startups and young families book was to emphasize that we had
All of that stuff is fantastic. can buy, which is how she was think- paths to try to reduce those inequi-
Where she kind of screws up is when ing about it. ties and could make those cities not
she gets into a discussion of how cities That was, I think, the thing that she just more functional but more humane.
need old buildings. It’s not that she’s got most wrong. She was right in many But at the same time, cities have to do
totally wrong, not at all. It’s great for of her ground-level observations, but that in a way that respects the need to
cities to have some form of inexpensive economics is really helpful for thinking continue to attract the taxpayers who
space. And in most cities, that inexpen- through the long-run implications of a ultimately fund things.
sive space comes from older buildings policy intervention.
that have not yet been upgraded. The EF: You wrote that court-ordered
way that affordability is supposed to EF: You wrote in your book that the school busing and the reaction to it
work is that you build new buildings, 1970s were a catastrophic decade for played a role. In what way?
which are usually not that cheap, and much of urban America. Why were
that reduces the pressure to gentrify the 1970s catastrophic for cities? Glaeser: The way that busing got
old buildings. So that’s where afford- implemented was the court require-
ability comes from. Glaeser: It’s that combination of the ment getting rid of segregation in
But that led her to the policy view centrifugal technologies — the fact that cities. But there was also a court ruling
that you actually want to prevent tear- container ships and highways made it saying that you could not force deseg-
ing down old buildings and replac- easy for factories to relocate to places regation across city boundaries.
ing them with new buildings. Now, if where land and labor were cheaper, and For example, the Supreme Court
the two buildings are exactly the same highways made it possible for wealthier decision in Milliken v. Bradley in 1974
size, I agree that replacing the old urbanites to leave for suburbs. said essentially that federal courts
building with the new building will not That process collided with the could not require desegregation across
promote affordability. dreams of progressive mayors, like school districts. What that meant was
But that’s not typically what devel- New York’s John Lindsay or Detroit’s that if you wanted to avoid busing,
opers want to do. Typically, they want Jerome Cavanagh, who were trying either for racist reasons or for some
22 econ focus • fourth quarter • 2021
other reasons, you could get that only Glaeser: Yes, he was right. It’s one of rarely does great architecture happen
by leaving the school districts — by the greatest of all lines about architec- by committee. And very rarely will a
leaving the city. And so, for thousands ture, absolutely. zoning board be the best judge of what
and thousands of parents, that’s when The regulation of architecture is design is going to create joy in people for
they moved, sometimes just outside the probably the most straightforward decades to come. It doesn’t take much to
city’s school district. element of this in some sense. I have convince me that there’s a market fail-
If you had metropolitan-area-level a paper with Nikhil Naik, who is a ure in many cases, that cities are chock
desegregation efforts, that would not computer scientist, where we look at full of externalities, but saying that the
have created the same incentive. Or the connection between the appear- government is actually going to make it
if you had something that was more ance of your neighbor’s home and your better is a much heavier lift. I’m not sure
like a charter school system or like a housing value. We find significant it’s here in this case.
voucher school system. Anything that effects, and the effects are much stron- In terms of how buildings shape us,
breaks the link between where you live ger if you are on the same street as I certainly believe that the structure
and where you go to school would’ve opposed to being, say, half a block away of our offices shapes who we inter-
been less harmful for cities. But as it outside of the sightline. People value act with and end up shaping our lives.
was, this was yet another huge incen- having nicer homes to look at, and that There is evidence to show that people
tive for parents to get out. And a harm- creates at least some scope for benefits who are physically proximate to each
ful one. from regulating architecture. other end up influencing each other.
And ex post, if you look at the On the other hand, I believe people I think about, say, Bruce Sacerdote’s
Opportunity Atlas data created by my are willing to pay for architecture. work at Dartmouth on randomized
colleague Raj Chetty and his co-authors, Moreover, as the son of an architec- roommates. There’s an older MIT
there was a clear and discernable break tural historian, I continue to be skep- study that suggests that if you are
in upward mobility at the border of tical about the abilities of states to randomly put closer to each other,
central city school districts across regulate architecture well. [Glaeser’s you are more likely to form friend-
America. Opportunity jumps up if you’re father, Ludwig Glaeser, was a cura- ships. Plenty of evidence suggests that
just outside the central city school tor in architecture and design at the human proximity shapes interactions.
districts as opposed to just inside it. Museum of Modern Art.] None of this is surprising, but it is
This is a cohort that was born between There are special cases. The vista of powerful and reminds us that physi-
1978 and 1983, and you can see it in a city or the elegance or the magic of, cal proximity continues to be highly
their adult earnings. They are also for example, some streets of Barcelona important.
significantly less likely to be incarcer- or the Place des Vosges in Paris — For those younger economists who
ated as an adult. these are magical urban spaces. And are reading this, I think that would be
certainly, I am OK with protecting a great place to think about using, say,
EF: Winston Churchill said in 1943, those pieces of architecture that are randomized controlled trials or some-
“We shape our buildings and after- widely accepted to be part of the patri- thing else to figure out to what extent
wards our buildings shape us.” Was mony of the city. Churchill is correct when it comes to
he right? And if he was, what are the But when it comes to building new day-to-day office life and street life and
trade-offs in regulating architecture? buildings, we have to be aware that very how our buildings are shaping us. EF
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econ focus • fourth quarter • 2021 23
FEDERAL RESERVE
by tim sablik
Forecasting Inflation
For policymakers and market participants, inflation can be challenging to predict
I
n recent months, inflation has absence of monetary policy intervention services consumed by the average
climbed to levels not seen in a gener- or gradually return to levels consistent household. Prices for some commonly
ation. The Fed’s preferred measure with the Fed’s target once the shocks consumed items are more volatile than
of inflation, the Personal Consumption from the pandemic fade. others and can swing indexes in either
Expenditures (PCE) price index, In April, when inflation pressures direction month to month. (See “Is
increased to 4.4 percent in September began emerging, Fed Chair Jerome Your Inflation Different?” Econ Focus,
2021 compared to the same month the Powell said that it seemed “unlikely” Second/Third Quarter 2021.)
previous year. The last time the index that inflation would move up in a To get a clearer sense of the general
reached such heights, George H.W. Bush persistent way. But at his press confer- price trend in the economy, Fed offi-
was president, and Alan Greenspan was ence following the Federal Open cials often turn to indexes that attempt
just finishing his first term as chair of Market Committee’s (FOMC) meeting to strip out some of that volatil-
the Fed’s Board of Governors. in September, he noted that the supply ity. Core PCE and core CPI exclude
Maintaining price stability is one bottlenecks contributing to rising prices food and energy prices, for example,
half of the Fed’s dual mandate, so Fed in many sectors “have been larger and while the Dallas Fed’s trimmed mean
officials have been watching this spike longer lasting than anticipated.” PCE excludes categories that experi-
in inflation closely. According to the Past experience during the 1970s ence the most extreme price changes
monetary policy framework adopted and 1980s taught the Fed that it can be each month. Another measure, the
by the Fed last year, it judges infla- costly to tame inflation after it has run Atlanta Fed’s sticky-price CPI, focuses
tion that averages 2 percent over time too high for too long. But the Fed’s new on components of the CPI that change
to be consistent with its price stability framework was built with the lessons prices infrequently.
mandate. While inflation measures in of the Great Recession in mind, which Each of these indexes shows an
recent months have come in above that highlighted the benefits of waiting as uptick in inflation in recent months,
2 percent threshold, that hasn’t been long as possible to normalize mone- some more pronounced than others.
entirely unexpected nor unwelcome. tary policy after an economic down- (See chart.) But even these attempts
Prices fell last year as the pandemic turn. Choosing the right approach, then, to smooth out volatility can be over-
rippled through the global economy. requires some estimate of where infla- whelmed by extreme events, such as
Some of the current surge in prices tion is headed — a forecast that can be a once-in-a-century global pandemic.
is actually “reflation” as the economy quite challenging to make. Prices have behaved in unexpected
ramps back up after months of lock- ways over the past year. In the spring
downs, and the Fed’s new framework MAKING SENSE OF THE DATA and early summer of 2021, the average
was designed to allow periods of higher cost of plywood surged before falling
inflation following periods when infla- When Fed officials talk about infla- in September to roughly the same level
tion is below target. (See “The Fed’s tion, they are taking a broader view as the beginning of the year. Used cars
New Framework,” Econ Focus, First than the typical household or business and trucks appreciated sharply start-
Quarter 2021.) might. On its website, the Fed Board ing in the spring of 2021 as the supply
But Fed officials have also admit- of Governors explains that “inflation of new vehicles has been constrained by
ted that inflation has proven more last- cannot be measured by an increase a shortage of computer chips and other
ing than they initially anticipated. As in the cost of one product or service, essential components. While used car
the economy has reopened, consumer or even several products or services. price growth seems to have leveled off,
demand has outpaced supply for some Rather, inflation is a general increase in prices have not yet decreased to their
goods and services. Lingering supply the overall price level of the goods and previous level.
chain disruptions have led to product services in the economy.” It can be hard for policymakers and
shortages and price increases that are One way to look at how prices are economic forecasters to interpret what
more than just a return to pre-pandemic moving across the economy is to use a such incoming data points might signal
trends. The challenge facing Fed policy- price index like PCE or the Consumer about future inflation. Are they outliers
makers now is trying to predict whether Price Index (CPI). These measure the that ought to be disregarded, or early
inflation will remain elevated in the price change in a basket of goods and signals of more lasting price pressures?
24 econ focus • fourth quarter • 2021 Share this article: https://bit.ly/forecast-inflation
Richmond Fed economist Alexander
Wolman dug into this question in a Inflation Has Moved Up — But For How Long?
September Economic Brief. Rather than Four measures of core inflation
trying to smooth or strip out vola-
tile components of PCE, he broke the 5.0
index down into its components to see 4.5
what was driving inflation in 2021. In 4.0
PERCENT CHANGE FROM YEAR AGO
March through June, the 5 percent of
3.5
consumption categories with the largest
price increases accounted for between 3.0
48 percent and 60 percent of over- 2.5
all inflation. But in July, that share fell 2.0
to 42 percent, suggesting that infla-
1.5
tion had become more broad-based. He
also compared the behavior of prices in 1.0
recent months to the last 25 years, when 0.5
inflation has been low and stable, and 0.0
this too provided some evidence of a
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
persistent upward shift in inflation.
“If a similar pattern appears in the Core PCE Core CPI Trimmed Mean PCE Sticky Price CPI
coming months, it would represent NOTE: Seasonally adjusted
tentative evidence that the increase in SOURCES: U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, Federal Reserve Bank of Dallas, Federal Reserve
inflation is a more persistent phenome- Bank of Atlanta
non that reflects monetary factors and
will not dissipate without an adjustment
of monetary policy,” Wolman wrote. One solution to this dilemma is to will remain stable. When looking at data
use a purely statistical approach that is from April 2021 and extrapolating it out
SEPARATING SIGNAL FROM NOISE more agnostic about the shocks hitting through the second quarter, Sarte and
the economy. Signal extraction models O’Trakoun estimated a slight increase
Even when comparing incoming infla- take incoming inflation data and sepa- in trend inflation, although it still
tion data to the past, it can be diffi- rate it into two components: a “signal” remained close to the Fed’s long-term 2
cult to determine whether those data about where underlying inflation is percent target.
signal a change in the long-run trend of trending and “noise” — temporary vola- But how reliable are statistical meth-
inflation or temporary volatility. That’s tility that will average out to zero over ods at predicting sudden changes
why many forecasters rely on models to the long run. in trend inflation? Not very, accord-
help them. “If successive inflation measures are ing to Ricardo Reis, an economist at
There’s no shortage of ways to model moving in a particular direction, the the London School of Economics and
the inflation process. Economic theory model will assign more weight to that Political Science who studies inflation.
points to many different potential driv- being a signal about underlying inflation “If you are trying to predict inflation
ers of inflation, from the amount of rather than noise,” says Richmond Fed over the next two or three months, the
slack in the labor market, to the level of economist Pierre-Daniel Sarte. statistical forecasting methods tend to
interest rates relative to the economy’s In a recent Economic Brief with do pretty well — with one exception,
natural rate of interest, to the size of the fellow Richmond Fed economist which is when there are big regime
money supply relative to the economy’s John O’Trakoun, Sarte used a signal changes,” says Reis.
productive capacity. But some of these extraction model to analyze decades In a June Economic Brief, Ho
variables are not directly observable, of core CPI and core PCE inflation wrote about the challenges that have
and it can be hard to know which might data. For the 1960s through the 1980s, plagued economic forecasters since the
be driving inflation in the moment. the model predicted underlying infla- pandemic began. In such periods of
“Inflation is a relatively volatile tion that was high and volatile, consis- high uncertainty, researchers need to
process affected by many different tent with the rising inflation of that decide whether the assumptions in their
factors, making it hard to figure out why period. For the period since the 1990s, models are still correct, or whether
inflation is evolving the way it is and the model treated the fluctuations of volatility has simply increased tempo-
predict its future path,” says Richmond incoming PCE and CPI data as mostly rarily. Ho argued that forecasters should
Fed economist Paul Ho. noise, predicting that trend inflation clearly communicate the assumptions
econ focus • fourth quarter • 2021 25
FE DE R AL R E S E RVE
household expectations, but a simple
Tracking Inflation Expectations inflation forecasting model also proved
The Fed's Index of Common Inflation Expectations to be just as accurate. Indeed, Sarte
and O’Trakoun also compared the
3.0 forecasts from their signal extraction
2.9 model to surveys of inflation expecta-
2.8 tions and found that the most signif-
2.7 icant difference was that the model-
2.6 based forecasts of PCE inflation were
about half a percentage point lower
PERCENT
2.5
2.4 than the surveys on average.
2.3 Policymakers can also look to the
2.2
stock market for information about
inflation expectations. One market-
2.1
based measure is the breakeven rate
2.0
between regular Treasury Securities
1.9 and Treasury Inflation-Protected
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Securities (TIPS). Created in 1997,
Forecasters Consumers
TIPS offer investors protection against
inflation and deflation by adjusting
NOTE: The Index of Common Inflation Expectations (CIE) summarizes the movement of 21 inflation expectations measures their interest payments and principal
based on a dynamic factor model. The "forecasters" measure shows the index projected onto the Survey of Professional Fore- based on changes in the CPI. The TIPS
casters 10-year-ahead PCE inflation expectations. The "consumers" measure, also known as the alternative CIE, shows the breakeven rate is the difference between
index projected onto the University of Michigan Surveys of Consumers inflation expectations for the next five to 10 years.
nominal Treasuries and TIPS of the
SOURCE: Federal Reserve Board of Governors
same maturity, providing a real-time
measure of the market’s inflation expec-
underlying their models. That way, of Michigan’s Surveys of Consumers tations. Another source of the market’s
even if someone disagrees with those and the Philadelphia Fed’s Survey inflation expectations can be found
assumptions, he or she could still learn of Professional Forecasters. The Fed by looking at inflation swap contracts,
something from the model by seeing Board of Governors collects data from which allow one party to transfer infla-
how those assumptions influence the 21 different inflation expectation tion risk to another for a fee.
forecast. measures and synthesizes them into In theory, one might expect market
a single Index of Common Inflation participants to pay closer atten-
LEARNING FROM OTHERS Expectations. That index shows that tion to inflation dynamics since they
inflation expectations have increased in are putting their money at stake.
Another option for Fed policymakers recent months. (See chart.) But a 2015 study by Michael Bauer
looking to understand where inflation Despite the theoretical ties between of the University of Hamburg and
may be headed is to seek the wisdom expected inflation and actual inflation, Erin McCarthy, formerly of the San
of the crowds. This can be particularly there is also plenty of evidence that Francisco Fed, suggests that such
useful in the case of inflation because households, businesses, and even profes- market-based indicators of future
there is a self-fulfilling aspect to the sional forecasters often guess wrong. inflation may not be any more accu-
public’s expectations for future infla- In a 2019 working paper with Anmol rate than surveys or simple forecasting
tion. For example, if business owners Bhandari of the University of Minnesota rules. They found that market measures
believe that their competitors and and Jaroslav Borovička of New York largely reflected current and past infla-
suppliers are going to raise prices, they University, Ho found that household tion movements and did not provide a
will raise their prices as well. If enough expectations of future inflation were lot of useful information about future
firms do this, then their expectations biased upward on average, and that bias inflation.
of higher prices become reality. increased during recessions.
Because of this dynamic, policy- In a recent article, Cleveland Fed WATCHING THE ANCHOR
makers pay close attention to surveys economists Randal Verbrugge and
that ask households, businesses, and Saeed Zaman concluded that the Although surveys and market measures
professional forecasters about their expectations of professional economists of expectations may not be reliable for
inflation expectations. Many such and business owners were more accu- forecasting future inflation, they still
surveys exist, including the University rate predictors of future inflation than provide a useful signal of where the
26 econ focus • fourth quarter • 2021
public expects inflation to head. Science thinks so. Although many of the of California, Berkeley, and Olivier
Under its new monetary policy frame- various surveys of inflation expectations Coibion of the University of Texas
work, the Fed has made it clear that it is available today did not exist at the time, at Austin examined a survey of U.S.
less concerned about inflation fluctuat- Reis collected data from market prices, firms’ inflation expectations. They
ing in the short run as long as it aver- professional surveys, and household found evidence that the expectations
ages 2 percent in the long run. Another surveys. In his paper discussed at the of business managers appeared “far
way of putting that is that the Fed Brookings Papers on Economic Activity from anchored.” Similarly, a July arti-
wants long-run inflation anchored at conference in September, he found cle by Chicago Fed researchers Gadi
2 percent. Throughout the year, Chair that while no individual data series Barlevy, Jonas Fisher, and May Tysinger
Powell and other Fed officials have indi- contained a perfect forecast of inflation, measured how well-anchored long-
cated that if long-run inflation expecta- the disagreement between these series term expectations were by looking at
tions were to drift from that 2 percent did provide a signal about how well- how sensitive short-term expectations
anchor, the Fed would intervene. anchored inflation expectations were. were to news about inflation. If long-run
“We are committed to our longer-run “When you just look at the average expectations are well-anchored, they
goal of 2 percent inflation and to having expectation of inflation from surveys, should not respond to news that affects
longer-term inflation expectations well- it tends to move super sluggishly,” says short-run inflation. But they found that
anchored at this goal,” Powell said at a Reis. “Once you combine sluggish move- the sensitivity of long-run expecta-
press conference following the FOMC’s ment with a lot of noise, it becomes tions to news about short-term inflation
November policy meeting. “If we were very hard to see much. But when you changes has increased, particularly in
to see signs that the path of inflation, measure the standard deviation and recent months.
or longer-term inflation expectations, skewness across surveys, which I call Economic theory and history suggest
was moving materially and persistently disagreement, you get a much better that fiscal and monetary policy play an
beyond levels consistent with our goal, idea of where expectations are heading.” important role in ensuring that inflation
we would use our tools to preserve price Since individual survey respondents expectations remain anchored. Atlanta
stability.” differ in how closely they pay attention Fed economist Federico Mandelman has
This commitment stems in large to inflation and how quickly they adjust examined inflation in the aftermath of
part from the lessons the Fed learned to new information about price changes, World War II. After the war, pent-up
during the Great Inflation of the 1970s. looking at the average of several differ- demand from years of rationing was
In that decade, inflation expectations ent surveys provides a muddled picture. released, and inflation shot up from 2
became unmoored, drifting higher and But tracking how expectations differ percent to 20 percent from 1946 to 1947.
fluctuating wildly with changes in the across surveys can provide a clearer But that spike was short-lived — by
market. To reestablish the anchor, the picture of where the inflation anchor 1949, inflation had fallen back to
Fed needed to convince the public that is headed. Applying this approach to 2 percent. Mandelman credited well-
it would do whatever it took to stabilize the data, Reis found that the inflation anchored inflation expectations inher-
long-run inflation. That meant allow- anchor began to drift as early as 1967. ited from the Great Depression as well
ing the federal funds rate, the Fed’s key What about the anchor today? as contractionary fiscal and monetary
policy interest rate, to rise above 20 Applying the same approach to current policy for quickly returning inflation to
percent in the early 1980s until long-run expectations data, Reis found that normal levels.
inflation expectations fell, prompting a the anchor has drifted, but it was still “In the end, it is policy that pins
long and severe economic recession. early in that process. Several other down inflation, not expectations,” says
Could Fed officials in the 1960s and recent papers have looked at this Reis. “A credible central bank uses
1970s have detected that inflation question as well. In a May National monetary policy to make expectations
expectations were drifting earlier — and Bureau of Economic Research work- that differ from its target unsustainable,
responded sooner? Reis of the London ing paper, Bernardo Candia and Yuriy ensuring that expectations and actual
School of Economics and Political Gorodnichenko of the University inflation are ultimately the same.” EF
READINGS
Candia, Bernardo, Olivier Coibion, and Yuriy Gorodnichenko. “The Reis, Ricardo. “The People versus the Markets: A Parsimonious
Inflation Expectations of U.S. Firms: Evidence from a New Survey.” Model of Inflation Expectations.” Manuscript. December 2020.
National Bureau of Economic Research Working Paper No. 28836, Stock, James H., and Mark W. Watson. “Core Inflation and Trend
May 2021. Inflation.” Review of Economics and Statistics, October 2016, vol. 98,
Reis, Ricardo. “Losing the Inflation Anchor.” Brookings Papers on no. 4, pp. 770-784.
Economic Activity, August 2021.
econ focus • fourth quarter • 2021 27
POLICY UPDATE
by rosemary coskrey
Paycheck Protection and the Pandemic
I
n March 2020, as COVID-19 rippled was 2 percent to 4.5 percent higher Granja of the University of Chicago
across the globe, small-business than at noneligible firms. Aggregating Booth School of Business and others
owners found the U.S. economy these results across all eligible firms, in May 2020 found small effects from
pivoting from a boom to a crisis. Aware the PPP would have helped main- the PPP on local economic outcomes
of the mounting challenges these busi- tain U.S. payroll employment for and business shutdowns following
nesses faced, Congress quickly passed about 2.3 million workers through the pandemic, and only modest posi-
legislation that allocated $350 billion the first week of June 2020. Although tive effects on employment outcomes.
to an initiative called the Paycheck this work was preliminary, and the They used the SBA’s loan-level micro-
Protection Program, or PPP. In late authors intend to refine their analysis data for all PPP loans approved under
April, Congress passed an additional and interpretation once better data the program and combined this data
$320 billion in funding after the initial become available, these initial results with Call Reports from all active
amount was exhausted. The PPP was suggest the PPP was moderately commercial banks, Homebase soft-
intended to help business owners effective in preserving small-business ware data on employment indicators,
sustain their employees’ wages during employment. Opportunity Insights data on
the pandemic. Set up as a guaran- Research by Alexander Bartik of county-level employment, and Womply
teed loan program, it allowed eligi- the University of Illinois Urbana- data on small-business revenues.
ble firms to apply for support through Champaign and others, also released Examining the flow of PPP funds
banks while the U.S. Small Business in July 2020, found similar evidence across the country, they contrasted
Administration (SBA) approved loans of the beneficial effects of the PPP, changes in local employment and
and forgiveness. Loans could be but they approached the issue from a economic outcomes in regions with
forgiven if no more than 25 percent of different perspective and used different high versus low PPP exposure. They
the loan amount went toward nonpay- data. Trying to understand the effec- also examined the role that banks
roll costs and if the firm did not cut pay tiveness of a program where private played in distributing loans but
or employment counts. actors distribute public resources, they reached a different conclusion from
The PPP was an exceptionally compared firms that received loans the Bartik group, finding that funds
large-scale fiscal intervention, and in the first wave (before April 16) of were not well-targeted to areas most
economists are eager to understand the PPP to firms that received loans adversely affected by the pandemic.
its efficacy. Several teams of econ- in the second wave (after April 24). In general, their results indicated
omists have conducted research on Their work relied on survey data from that the program’s short- and medi-
its effects using different types of small-business network Alignable, um-term effects on employment
analyses. which contained information on the were small relative to the program’s
A paper by David Autor of business owners’ PPP application size, but that funding did contrib-
the Massachusetts Institute of status, employment and payroll charac- ute to firms’ financial stability. In the
Technology and others, released in teristics, and operational expectations. future, they argued, the PPP’s effec-
July 2020, examined the PPP’s effi- Results of their analysis indicated tiveness in preventing permanent
cacy in maintaining employment at that providing firms loans promptly business closures may result in more
small firms. They used administrative made a big difference in program effi- pronounced positive employment
data from ADP, a provider of payroll cacy; firms receiving a PPP loan in the effects.
services, to measure and contrast first round self-reported an increase Overall, the studies indicate that
weekly employment changes of firms in survival probabilities ranging from the PPP helped prevent small-
above and below the PPP eligibil- 9 percentage points to 23 percentage business shutdowns and, to a lower
ity threshold within narrow indus- points, resulting in fewer small- degree, helped sustain employment.
try and state groups. The program’s business closures. In addition, they But evidence suggests that PPP funds
eligibility threshold was determined showed that PPP approval appeared to were not consistently distributed to
by firm size — in most industries, increase employment and that banks the highest-need firms. As more data
firms with more than 500 employ- effectively allocated funds but were emerge, economists will continue to
ees were ineligible for the program. somewhat biased toward better- explore the effectiveness of the PPP
According to their estimates, the level connected firms. and its implications for future fiscal
of employment at PPP-eligible firms Finally, work released by João interventions. EF
28 econ focus • fourth quarter • 2021 Share this article: https://bit.ly/covid-ppp
Diversity in economics is critical to ensuring that
the right questions are being asked.
For those studying economics (or a related field) in college,
the Richmond Fed's third annual DivEc conference was
an opportunity to join a meaningful conversation about
the diversity of people, perspectives and careers in the
economics field.
SESSION TOPICS INCLUDED:
Diverse Careers in Economics
Recent Graduates: Where Are They Now?
The Path of an Economist
Economics in Practice
Getting Started with My Career
Rewatch all sessions now on YouTube! https://www.youtube.com/RichmondFed
econ focus • fourth quarter • 2021 29
DISTRICT DIGEST
b y r ay m o n d o w e n s a n d s a n t i a g o p i n t o
Trends in Criminal Activity, Crime Reporting,
and Public Perceptions
I
n the United States, crime rates have recording different types of crimes, personal crimes (rape or sexual assault,
been falling sharply since their peak the UCR program standardizes the robbery, aggravated and simple assault,
in the 1990s. Researchers have put data collected from the agencies. The and personal larceny) and household
forward a wide range of explanations program then converts the data into property crimes (burglary/trespass-
to explain this shift. Despite the over- crime indices. ing, motor vehicle theft, and other
all long-term declining trend, people’s Index crimes — that is, crimes theft). It also includes information
perceptions of crime have been shifting, included in the indices — are classi- about certain household characteris-
according to various polls, in the oppo- fied into two broad categories: violent tics, such as household income and size
site direction. crime and property crime. The former and the race of the head of household.
Crime is a complex, multidimen- includes murder and nonnegligent A key feature of this survey is that it
sional problem. Different factors explain manslaughter, forcible rape, robbery, also provides information about the
the large observed variability in crime and aggravated assault; the latter number of both reported and unre-
rates across geographic areas and demo- includes burglary, larceny-theft, motor ported crimes. One disadvantage of
graphic groups. Ultimately, the imme- vehicle theft, and arson. the survey is that since it is designed
diate consequences of crime are highly The UCR data are widely used by to calculate victimization rates at the
localized, affecting the overall well- the media, policymakers, and research- national level, it does not offer informa-
being of communities. Recent highly ers to track crime behavior. The qual- tion about victimization rates at lower
publicized events involving police ity of the data has been improving over geographical levels.
violence have heightened concerns about time; however, the program still has More recently, some local govern-
crime and the criminal justice system. a number of well-known limitations. ments and law enforcement agencies
To assess existing law enforcement First, it includes only crimes that are have started to release crime data
and crime preventive policies, it is officially reported. In other words, it directly to the public. The Police Data
important to first understand what kind tracks only crimes that are known to Initiative is an example of this effort.
of data are available to track crime, how law enforcement officials. Second, it At the moment, approximately 130
the data are collected, what the data’s includes only crimes known by state local enforcement agencies publicly
limitations are, and what the data say. and local law enforcement authorities; share data as part of this initiative.
it does not consider federal crimes or As with the UCR, caution is needed
SOURCES OF CRIME DATA crimes at certain institutions such as when comparing information across
jails or prisons. Third, since participa- agencies since local law enforcement
The two primary sources of crime data tion is voluntary, local agencies may agencies may follow different prac-
in the United States are the Uniform not consistently submit data to the tices in recording and classifying
Crime Reporting (UCR) program, program. The FBI relies on certain crimes.
administered by the FBI, and the processes to impute missing or unre-
National Crime Victimization Survey liable data, which may vary across DEVELOPMENTS IN CRIME TRENDS
(NCVS), conducted by the U.S. Census years. The UCR warns users that the
Bureau for the Bureau of Justice data cannot be used to make reliable In general, crime data show a rela-
Statistics. comparisons across law enforcement tively sharp decline from 1990 through
The UCR program compiles crime agencies. roughly 1999 in both violent crime and
data from local law enforcement agen- The NCVS is a nationally represen- property crime, followed by a more
cies. Even though participation in this tative survey of households conducted gradual decline over the next two
program is voluntary, about 18,000 annually throughout the year, which decades. (See chart.)
law enforcement agencies, repre- asks participants about themselves Most recently, the UCR data show
senting 95 percent of U.S. popula- and whether they were victims of a that the property crime rate declined
tion, are involved in it. Because local crime. The survey started in the early from 2,131 per 100,000 people in 2019
law enforcement agencies across 1970s and currently conducts about to 1,958 in 2020. The violent crime
the country do not generally follow 240,000 interviews annually. The rate, however, increased from 381
uniform practices when classifying and survey reports information on nonfatal to 399 per 100,000 people. The most
30 econ focus • fourth quarter • 2021 Share this article: https://bit.ly/crime-rate-trends
U.S. Violent Crime Rate and Property Crime Rate
Even though property crimes are
800 6,000
more frequent, violent crimes have
700 a larger impact on society and are
5,000
more costly. In a 2009 article in the
VIOLENT CRIMES PER 100,000 PROPERTY CRIMES PER 100,000
600
Journal of Quantitative Criminology,
4,000
500 Mark Cohen of Vanderbilt University
and Alex Piquero of the University of
400 3,000
Texas at Dallas performed a careful
300 and comprehensive estimation of the
2,000
costs associated with different types
200
of crimes. These estimates include
1,000
100 the present value of the victim’s costs,
costs associated with the functioning
0 0
1985 1990 1995 2000 2005 2010 2015 2020 of the criminal justice system (police,
courts, prisons), and the offender’s
Violent crimes Property crimes productivity loss due to incarceration
NOTE: Rates are per 100,000 people. Scale for violent crime rate is on left axis; scale for property crime rate is on right axis. or other form of incapacitation. Based
SOURCE: Federal Bureau of Investigation Uniform Crime Reporting Program on their calculations, a 2017 National
Bureau of Economic Research work-
ing paper by David Autor, Christopher
Violent Victimization Rate by Location of Residence Palmer, and Parag Pathak of the
Massachusetts Institute of Technology
120 concluded that the (weighted) average
direct cost per violent crime is about
100 $68,000, compared to $4,000 per prop-
erty crime — or, equivalently, violent
80 crimes are on average 17 times more
RATE PER 1,000
costly than property crimes.
60 The NCVS corroborates that victim-
ization rates (both violent and prop-
40 erty) have sharply declined since the
beginning of the 1990s, in line with the
20 UCR data. But victimization rates differ
among demographics and geographic
0 areas. In general, violent and prop-
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 erty victimization rates are higher for
Urban Suburban Rural Blacks compared to Whites and other
races (which includes Asians, Native
NOTE: Rate is per 1,000 persons aged 12 or over.
SOURCE: Bureau of Justice Statistics National Crime Victimization Survey Hawaiians, other Pacific Islanders,
American Indians, Alaska Natives,
and persons of two or more races).
common form of property crime was crime that has experienced an unusual Also, they are higher in urban areas
larceny-theft, followed by burglary and increase from 2019 to 2020 is the compared to suburban and rural areas.
motor vehicle theft. Among violent murder rate. The FBI reports that the (See chart.)
crimes, aggravated assault was the murder rate rose about 30 percent Perceptions of national crime
most common offense, followed by during this period, the largest annual reflected in opinion surveys, however,
robbery, rape, and murder/nonnegli- increase on record since the1960s, do not closely align with the FBI
gent manslaughter. when the agency started recording this data. The latest annual crime survey,
It is not uncommon for the data to kind of crime data. conducted by Gallup during the period
show unexpected year-to-year fluc- The data indicate that property Sept. 30 to Oct. 15, 2020, shows that an
tuations, especially as more specific crimes occur about five times more increasing number of people perceive
categories of crime are examined. frequently than violent crimes. But that crime has increased in the United
Even after considering these types the frequency with which crimes States since the beginning of the 2000s.
of changes, one category of violent occur doesn't tell the whole story. One interesting observation is that
econ focus • fourth quarter • 2021 31
DIS T R IC T DIG E S T Gallup: "Is there more crime in _____ than there was a year ago?"
concentration of crime is relatively
100
high within cities, but crime is not
90 concentrated in any specific city.
80 The concentration of crime at certain
PERCENT OF RESPONDENTS
70 sites in a city, typically known as “hot
spots,” is markedly high for crimes
60
such as robbery and motor vehi-
50 cle theft. These locations tend to be
40 specific places such as intersections,
30 street sections, or addresses, rather
than whole neighborhoods.
20
In an article in Criminology in 2015,
10 David Weisburd of George Mason
0 University coined the term “law of
1972
1974
1976
1978
1980
1982
1984
1986
1988 crime concentration” to refer to the
importance of this phenomenon in
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
explaining the spatial patterns of
2020
Your Area The United States
criminal activities. This type of crime
NOTE: Values are percent of respondents answering "more." behavior is also relevant when design-
SOURCE: Gallup
ing law enforcement policies, since
targeting police resources to these
while respondents are more likely to per 1,000 residents to 29.3), the violent areas would likely have a large impact
perceive that crime has increased at crime rate has actually increased (from on crime reduction.
the national level, they are also less 15.1 per 1,000 residents to 24.8).
likely to perceive an increase in crime CRIME REPORTING IN 2020
in their local areas. (See chart.) GEOGRAPHIC CONCENTRATION
Within the Fifth District, the UCR OF CRIME NCVS data indicate that most crimes
data show that crime rates have are not reported to the police. (See
followed the general declining trend. Index crimes are not concentrated chart on p. 34.) In 2019, for exam-
But there are wide discrepancies across in any particular state or city. This is ple, only 40.9 percent of violent crimes
states within the district. (See charts consistent with theory. As stated by and 32.5 percent of household prop-
on next page.) Property and violent Brendan O’Flaherty and Rajiv Sethi of erty crimes were reported to author-
crime rates in the District of Columbia Columbia University in a 2015 article ities. Motor vehicle theft is the crime
are the highest not only within the in the Handbook of Regional and Urban most frequently reported (an estimated
Fifth District, but also nationwide. Economics, crime is a nontradable activ- 80 percent of these crimes are reported)
Crime rates in South Carolina are ity, so, in principle, it is not expected to and theft/larceny is the least (about
generally above the national average. be concentrated in a specific geographic 27 percent), both property crimes. For
The violent crime rate in Maryland is area. The idea is that more trad- violent crimes, the lowest reporting
about the same as the one observed in able activities tend to cluster spatially percentage is for rapes/sexual assault
South Carolina, and the property crime because they benefit from agglomera- (34 percent) and the highest is for
rate has been following the national tion economies; by locating near other robbery (47 percent). (Homicide gener-
trend closely since 2005. In Virginia firms in cities or industrial clusters, ally has a high reporting rate, but it isn’t
and West Virginia, the crime rates participants can share knowledge and one of the crimes included in the NCVS.)
are lower than the national average. have access to a larger pool of inputs. Among the main reasons why a
Violent crime rates in North Carolina Nontradable activities, on the other crime was not reported, according to
track the national trend almost hand, can only be performed locally, respondents, were fear of reprisal or
perfectly. so they are generally more uniformly “getting the offender in trouble,” a feel-
But state averages often obscure distributed across locations. ing that police “would not or could not
crime in specific areas within the state, O’Flaherty and Sethi calculated do anything to help,” or a belief that
especially within cities. Data for the indexes of crime concentration, and the crime is “a personal issue or too
city of Baltimore, for example, obtained the indexes show that intrametro- trivial to report.”
from the Open Baltimore initiative, politan concentration of crime tends Most of the reported crimes are
show that while the property crime to be larger than intermetropolitan not solved. According to UCR data
rate has declined since 2011 (from 48.6 concentration. In other words, the for 2019, about 45 percent of officially
32 econ focus • fourth quarter • 2021
Fifth District Violent Crime Rates
3,000 calls was lower in 2020 compared to
2019, suggesting that a large number of
2,500 incidents were not reported in 2020.
This change in behavior observed
VIOLENT CRIMES PER 100,000
2,000 throughout 2020 can be attributed to a
variety of reasons. Taking a closer look
1,500 at the city of Baltimore, it appears that
the decline in 911 calls that started at
1,000 the end of March coincides with the
implementation of the stay-at-home
500 orders in Maryland. These orders stayed
in place from March 30 until May 15.
0 During this period, the number of 911
1985 1990 1995 2000 2005 2010 2015 2020 calls in 2020 was far less than in the
same periods in 2019 or 2021: 7,571
US VA DC WV NC SC MD
fewer 911 calls were made in 2020 rela-
tive to the same period in 2019; 5,249
Fifth District Property Crime Rates fewer calls were made in 2020 relative
to the same period in 2021.
10,000
This pattern was observed in other
9,000 cities as well. Lockdown policies imple-
8,000 mented by states and local govern-
PROPERTY CRIMES PER 100,000
7,000 ments during 2020 were intended to
6,000 lower the spread of COVID-19. They
decreased the overall level of mobil-
5,000
ity and, as a result, the intensity of
4,000
economic and social interactions taking
3,000 place across communities. All this
2,000 had an effect not only on the number
1,000 of criminal activities, but also on the
0
types and targets of crimes and the
1985 1990 1995 2000 2005 2010 2015 2020 likelihood of reporting certain crimes.
US VA DC WV NC SC MD ENGAGEMENT WITH POLICE IN 2020
NOTE: Rates are per 100,000 people.
SOURCE: Federal Bureau of Investigation Uniform Crime Reporting Program A recent article in the American
Journal of Health Economics by Lindsey
Bullinger, Jillian Carr, and Analisa
reported violent crimes are cleared rate declined from 2019, the violent Packham focused precisely on this
by arrest (or by exceptional means, crime rate actually went up. But these issue. The authors examined cell phone
which include the death of the offender statistics leave open the possibility that block-level activity data, 911 calls,
and other exceptional circumstances some people may have decided in 2020 and crime data for Chicago during
that prevented the prosecution of the not to engage with police by reporting the pandemic. They found that even
offender). For property crimes, 17 a crime or to report certain types of though the announcement of the stay-
percent of the offenses are cleared. crimes and not others. at-home orders led to a decrease in
The year 2020 was atypical in many Using publicly available data for the total calls for police service, the share
ways. COVID-19 and several high-pro- city of Baltimore, we examined the of domestic violence-related calls
file events involving police violence, extent to which residents changed increased. The article also showed
such as the murder of George Floyd their reporting behavior in 2020 that domestic-related crimes officially
in Minneapolis, had an effect on how compared to 2019. Changes in report- reported to the police and arrests actu-
people interacted. These events also ing are captured by the difference in ally declined. Specifically, reports fell
affected the overall level of crime, the the number of 911 calls between the by 6.8 percent and arrests for domes-
types of crimes, and the incentives to two years. The results show that from tic violence crimes fell by 26.4 percent
report crime. While the property crime March to August, the number of 911 relative to 2019. The authors concluded
econ focus • fourth quarter • 2021 33
DIS T R IC T DIG E S T Rates of Violent Victimization Reported to Police
general expenditures, and annual
35
per capita spending on corrections
30 increased by about 2.7 percent. As a
result, police spending as a share of
25 total spending remained fairly constant
during the period, at about 3.7 percent
20 of direct general expenditures; spend-
PERCENT ing on corrections increased from 1.6
15
percent in 1977 to 2.6 percent in 2018
10 (it reached a peak of 3.3 percent in
1999 and 2000).
5 Most spending on police is done by
local governments (about 86 percent).
0 While state expenditures on police are
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 mostly targeted to highway patrols,
local government spending supports
SOURCE: Bureau of Justice Statistics National Crime Victimization Survey
sheriffs' offices and police departments.
In the Fifth District, the District of
that during March and April 2020, Minneapolis, New York City, Richmond Columbia spent $908 on police protec-
about 1,000 cases of domestic violence (California), and San Diego. They found tion per capita and $366 on correc-
crimes in Chicago were not reported to that this ratio declined immediately tions per capita in 2018, leading all
the police. after Floyd’s murder. They also found the other jurisdictions in both catego-
In many locations, 911 calls in 2020 that this change in behavior is observed ries. South Carolina spent the least per
remained low even after the expiration in both predominantly non-White and capita in both categories. The amount
of the stay-at-home orders. Specifically, predominantly White neighborhoods spent on police protection as a percent-
in the city of Baltimore, from May 25 nationwide. They argued that this age of direct general expenditures in
to July 27, some 54,821 fewer 911 calls provides evidence of a causal effect of Maryland, the District of Columbia,
were made in 2020 compared to the police violence on the incentives of citi- and North Carolina exceeds the U.S.
same period in 2019 (45,750 fewer calls zens to engage and cooperate with the average, and the share spent on correc-
in 2020 relative to 2021). The drop police. tions is higher than the U.S. average in
in requests for a police response has Virginia and Maryland. More research
been attributed to a change in citizens’ STATE AND LOCAL SPENDING ON is needed, however, in order to deter-
reporting behavior after the high-pro- PREVENTION mine the effectiveness of spending on
file murder of George Floyd on May crime.
25, 2020. In the city of Baltimore, for The direct involvement of state and
example, public demonstrations over local governments in crime preventive CONCLUSION
the death of George Floyd were partic- activities is reflected in the amount of
ularly visible during this period. Such resources they devote to police protec- A regular review and assessment of
incidents may have affected the desire tion and corrections. In 2018, state and existing law enforcement practices is
of citizens to cooperate and engage local governments spent $121 billion on critical to ensure their continued effec-
with the police. police protection, roughly 3.7 percent tiveness. The commitment to engage in
Recent work by Desmond Ang of of direct general expenditures, or $369 such a process would also contribute
the Harvard Kennedy School, Panka per capita, and $82 billion on correc- to establishing a stronger connection
Bencsik of the University of Chicago, tions, 2.6 percent of expenditures, or between citizens and law enforcement.
Jesse Bruhn of Brown University, $255 per capita. Compared to other Such evaluation requires a careful
and Ellora Derenoncourt of Princeton spending categories, the share spent by examination of the data. It is important
University carefully examined changes state and local governments on police not only to understand what the data
in the ratio of police-related 911 calls and corrections is a little bit higher say, but also to be aware of their limita-
to the number of gunshots (detected than the share devoted to highways. tions. Any effort by local agencies and
through a technology known as During the period 1977-2018, real policymakers to improve the quality of
ShotSpotter that uses microphones scat- spending on police protection per the data and also make it broadly avail-
tered around different geographic areas) capita increased on average by 1.5 able to the public would enhance trans-
in eight cities: Baltimore, Cincinnati, percent annually, about the same rate parency and heighten confidence in the
the District of Columbia, Milwaukee, as the increase in state and local direct law enforcement institutions. EF
34 econ focus • fourth quarter • 2021
BOOK REVIEW
by john mullin
An Economist’s
Green New Deal
Y
ale University’s William property rights and contracts — but
Nordhaus won the Nobel Prize in it also means that efficient environ-
economics in 2018 for his work mental regulation requires impos-
on the interplay between econom- ing taxes to raise the private cost of
ics and the environment. One of his activities that have negative spillover
main contributions was the develop- effects on the environment. Efficient
ment of the Dynamic Integrated model management also requires public
of Climate and the Economy (DICE). support for investments in research
The model has become an import- and development, green and other-
ant tool for analyzing the costs and wise, that create positive spillover THE SPIRIT OF GREEN: THE ECONOM-
benefits associated with climate poli- effects for society. ICS OF COLLISIONS AND CONTAGIONS
cies, including the proposal favored by While Nordhaus agrees in prin- IN A CROWDED WORLD
Nordhaus and many of his fellow econ- ciple that there are many possible By William D. Nordhaus, Princeton, N.J.:
omists: the establishment of a global mechanisms for dealing with envi-
Princeton University Press, 2021, 355 pages
tax on carbon emissions. ronmental externalities, he is skepti-
The Spirit of Green presents cal about the efficacy of many of them.
Nordhaus’ case for a global carbon He recognizes that liability laws can According to Nordhaus, the Green
tax using language that is likely to be discourage pollution in some cases New Deal “avoided the inconvenient
accessible to a general audience. He but argues that these laws have seri- truth that climate-change policies...
argues for a point of view that he calls ous limitations when property rights would require aggressive price-rais-
“the Spirit of Green,” which he differ- are not well defined, such as with air ing measures, probably through
entiates from alternative viewpoints pollution. “Command and control” carbon taxes.” Moreover, he criticizes
on the political left and right. On the measures, such as auto emissions the Green New Deal for making no
left side of the spectrum stands “deep standards, may have played a positive mention of international coordina-
green,” which includes those environ- role in the past, but they are rather tion. According to Nordhaus, a global
mentalists and scientists who, in his crude tools that generally do not accu- climate compact is needed — with
view, place an inordinate value on the rately reflect the costs and benefits of penalties for nonparticipants — to
preservation of nature at the expense pollution abatement. He argues that overcome the “free rider” problems
of human welfare. At the far right of cap and trade policies have had prob- associated with carbon abatement.
the spectrum stands “muck brown,” lems in practice, pointing to the case The Spirit of Green covers a great
which consists of “incentivized skep- of sulfur dioxide, where U.S. emis- breadth of additional topics, including
tics” who have economic or political sions caps were set so high that the green national accounting and the ethi-
motives to oppose green policies. And market price of emissions permits cal responsibilities of individuals and
on the moderate right stands “free eventually declined to the point where corporations. Yet Nordhaus’ exposition
market,” a viewpoint that is some- “emissions were essentially free.” may have benefited from more elabora-
times too narrow, from Nordhaus’s Nordhaus is highly critical of tion in one specific area: the method-
perspective, to properly account for the Green New Deal resolution ology used by economists to estimate
the spillover effects — known as exter- proposed by Rep. Alexandria Ocasio- the marginal external cost of carbon
nalities — that private activity can Cortez (D.-N.Y.) and Sen Edward emissions — and hence the appropri-
have on the public. Markey (D.-Mass.) in February 2019, ate rate for a global carbon tax. This is
For Nordhaus, private markets are largely due to its lack of ground- a crucial estimate for policy purposes,
key to the efficient provision of private ing in cost-benefit analysis and its and Nordhaus’ prominent role in devel-
goods, but government intervention absence of market-based approaches. oping the models underlying it puts
is needed to correct for externalities. He regards its goals as arbitrary him in a great position to discuss
This means that society needs robust and unrealistic — particularly the their mechanisms. But that omission
markets for private goods, supported proposal to attain zero net global is understandable in a book aimed
by laws to enforce and protect greenhouse gas emissions by 2050. primarily at nonspecialists. EF
Share this article: https://bit.ly/spirit-green-book econ focus • fourth quarter • 2021 35
OPINION
b y k a r t i k at h r e ya
Where Did the Workers Go?
F
or many observers, the most exceptional aspect retirements has accounted for as much as half of the decline
of the COVID-19 economic recovery has been the in labor force participation. Part of this may have come
unprecedented number of unfilled jobs openings. The from pandemic-related health concerns of older workers.
U.S. job vacancy rate reached an all-time high of Also, some early retirements may have been a side effect
7 percent in July 2021, which amounted to over of policies implemented by Congress and the Fed: Large
11 million job vacancies. Since then, businesses have fiscal transfers and accommodative monetary policy likely
continued to report difficulty filling openings, partic- supported high asset prices, particularly in stocks and
ularly for low-wage positions, according to business homes, and these financial “windfalls” may have increased
managers responding to Richmond Fed surveys. the relative attractiveness of retirement for many people.
It is hardly unusual for the job vacancy rate to increase Another factor that may well be important, though
as the unemployment rate declines during an economic research has not been able to measure it precisely, is that
recovery. Indeed, the inverse movement of the parents of younger children may be less will-
two rates — depicted by what economists call ing to accept job offers because they need to
the Beveridge curve — is a regular feature of
Perhaps many take care of children who are engaged in remote
economic expansions. But the abnormally high jobs that involve schooling or homebound due to illness or health
increase in the vacancy rate during the current customer service protocols. That said, one recent study found
recovery has raised questions, perhaps most of that employment declines during the crisis were
all about whether there is a mismatch between
have become only modestly greater for women with children
the skills employers seek and those possessed by more stressful younger than 13 than for those without children
unemployed workers. and dangerous under 13 — a finding that does not seem to be
Many explanations for the phenomenon have without a consistent with the idea of homeschooling as an
been offered. One of the most common is that important driver of job vacancies.
expanded unemployment insurance (UI) benefits countervailing Still another interpretation of the perceived
have created a major work disincentive. Recent increase in pay. labor shortage relates directly to the pandemic:
research doesn’t support this idea, however. Perhaps many jobs that involve customer
Peter Ganong of the University of Chicago and service have become more stressful and danger-
several co-authors estimated that increasing UI benefits ous without a countervailing increase in pay. If so, high job
had only a relatively small effect on the U.S. job-finding vacancies may at least partially reflect an unwillingness of
rate. Taking a different approach, Arindrajit Dube of the employers to adapt to changed supply-demand conditions by
University of Massachusetts Amherst compared states that raising wages to market clearing rates.
cut benefits by differing amounts in mid-2020; he found that Whatever the explanation, there are underlying demo-
the size of benefit reductions seemed to have little effect on graphic factors that may cause the trend to persist. It is
job gains. Lastly, a recent study by economists at the San plausible that the United States is approaching an era of
Francisco Fed estimated that increasing UI benefits by $600 slower labor force growth due to declining birth rates, retir-
per week had only a moderate effect on job finding. ing baby boomers, and more severe immigration restric-
While these results suggest only modest economy-wide tions. That may sound like good news for U.S. workers, but
effects of increased UI benefits, they do not rule out it isn’t necessarily. While most economic models do predict
substantial effects in certain low-wage sectors, such as food that wages will increase in response to a decline in the
service. The San Francisco Fed study calculated that while supply of labor relative to capital, it is not clear whether
most unemployed U.S. workers would be willing to accept a decline in the rate of growth of the labor supply would
job offers at their previous wages, workers in the lowest- cause such a relative supply shift. Such a decline is likely to
paid occupations would be roughly indifferent between diminish the return to capital and, with it, investment —
accepting such a job and remaining unemployed. Indeed, in possibly leaving wages unaffected or even depressed. The
July 2021, the job vacancy and unemployment rates in the answer hinges on the economy’s investment response and,
BLS’s “accommodation and food services” industry — 11.3 ultimately, on productivity growth, for which ideas and
percent and 9.2 percent, respectively — stood well above the innovation — from people — are the only source. EF
corresponding economy-wide figures.
A few other explanations are on the table. For instance, Kartik Athreya is executive vice president and director of
some analysts have estimated that a surge in early research at the Federal Reserve Bank of Richmond.
36 econ focus • fourth quarter • 2021 Share this article: https://bit.ly/job-vacancy-rate
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ENTREPRENEURSHIP IN RURAL DEVELOPMENT
Can local entrepreneurship move the needle on economic growth in rural
communities? There’s evidence in the literature that suggests it can. The
pandemic-era trend of tech workers moving away from big cities may help.
On the other hand, rural entrepreneurs face headwinds in raising capital.
California’s Santa Clara Valley transformed in the 1960s and 1970s from
agricultural country to affluent Silicon Valley — could it happen again in
another rural area today?
RURAL NURSING SHORTAGE
Rural hospitals have long faced a shortage of nurses. That problem has been
worsened by a nationwide surge in demand for health care workers during the
COVID-19 pandemic. How can rural hospitals compete with larger urban health
care centers to attract the nurses they need?
COMMUNITY REINVESTMENT ACT
Federal bank regulators are considering changes to the way they implement
the Community Reinvestment Act, or CRA, which was enacted in 1977 to
encourage banks to meet the credit needs of low- and moderate-income
communities. Consumer advocates have called for an expansion of CRA
authority to cover nonbank mortgage companies. Many bankers, on the other
hand, have advocated streamlining the CRA process, which they argue is
ineffective and costly.
AT THE MALL: AN ECONOMIC HISTORY
Shopping centers got their start in Baltimore in 1907 with the opening of
the Roland Park Business Block, an English Tudor-style complex of six shops.
Starting in the 1950s, the modern shopping mall emerged, pioneered by the
prolific Vienna-born mall architect Victor Gruen. Malls became gathering
places of suburban America. More recently, however, the emergence of online
retail and now the pandemic have thrown their future into question.
WORKFORCE HOUSING
The affordability of rural housing often gets less attention than that of urban
housing. Even though housing costs tend to be lower in rural areas than
urban areas, almost half of rural low-income households in the Fifth District
(those earning less than 80 percent of the area median income) spend more
than 30 percent of their income on housing. What are the factors behind the
availability of affordable workforce housing in rural parts of the Fifth District?
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