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Negative productivity agents
Michael Cembalest, J.P. Morgan Asset & Wealth Management
This presentation is a companion piece to the December 10, 2018 Eye on the Market. Negativeproductivity agents refer to structural impediments to growth and productivity, which are distinctfrom cyclical factors affecting growth during the business cycle. Demographics play a large rolein determining long-term economic growth rates, but that’s not the whole story. Policymakershave a large impact as well, by creating incentives for or obstacles to future growth, and in theways that they balance competing priorities. This presentation outlines some of the headwindsto future US growth and productivity, with the goal of making these choices clearer.
INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR
OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED
Wherever the next US productivity wave comes from…
1
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Productivity, 5yr change
1950's: transportation(air travel, interstate highway system)Civilian infrastructureUrbanization
1990's: Information technology, DARPA, Small Business Innovation
Act, Nanotechnology Initiative
1930's: Electrification of farms; chemicals, fertilizers and antibiotics; Internal combustion engines
Source: CBO, Federal Reserve Bank of San Francisco. Q1 2018.
…it will have to overcome several “negative productivity agents”
War and its opportunity costs pp. 3-7Infrastructure/Energy pp. 8-23Immigration pp. 24-31Land use regulation pp. 32-39State licensing requirements pp. 40-45Behaviors (gun violence, obesity, opioids and incarceration) pp. 46-59Racial inequality pp. 60-66Education pp. 67-76Healthcare pp. 77-91Commercial litigation pp. 92-101Other regulatory issues pp. 102-115Political polarization and GDP growth pp. 116-117End notes and disclaimer pp. 118-120
2
WAR and its OPPORTUNITY COSTSWith the benefit of hindsight, some US wars eventually improved US security andprosperity, while others worsened it. What we do know is this: fighting and preparingfor wars is expensive, and siphons funds away from other initiatives related toinfrastructure, education and job creation. There are substantial unansweredquestions about Department of Defense spending, which failed its first audit in 2018.The Iraq War is one example. In 2014, we outlined a range of government projectsthat all could have been paid for instead: subsidies for electrifying half of the USpassenger car fleet, burying the most hurricane-exposed US power lines, funding 5high speed train networks, sea barriers in key coastal cities, Universal pre-K, theconstruction of high voltage power lines to facilitate greater use of wind and solarpower, and greater rural broadband access.
3
Infrastructure and education: the opportunity costs of war
WAR
4
PEV subsidy for 50% of passenger car fleet
Bury key resid. power lines (10% of total)
5 high-speed train systems
Protection against 1m rise in sea level
Universal Pre-K (30yrs)HVDC transmission grid
Mine clean-up, broadband access to all US households
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
Cost of Iraq War Fixing America'sinfrastructure
College education Various
Iraq war costs shown above include $1 trillion in appropriated military spending costs through continuing operations, defense budget increases and VA budget increases, and $1 trillion in long-term veteran medical and disability payments, which typically peak 30 years after a conflict. Cost estimates exclude expenditures by veterans’ families to pay for injured relatives, and $400 - $500 billion in additional interest costs on Federal debt incurred to finance the war.Source: Brown University Watson Institute for International and Public Affairs; Neta Crawford, Boston University (cost of Iraq War); College Board; US Dept. of Education; Edison Electric Institute; American Society of Civil Engineers; Earthworks; Hall Energy Consulting; Next Big Future; Northwestern University; FCC; Vrije Universiteit; US Dept. of Transportation; National Affairs; US Dept. of the Interior; Scientific American; US Dept. of Energy; EIA; JPMAM. 2014.
The staggering financial opportunity cost of the Iraq War2014 USD trillions
Civil aviation and airtraffic control DamsRoadsBridgesElectricity gridDrinking and waste water facilitiesLeveesRailsSchoolsPublic Mass TransitHazardous wasteWaterways
Includes personnel, weapons, medical and disability care for soldiers during and after the war, related homeland security costs and interest costs
Tuition, full room & board for every college-bound high school graduate needing any financial aid, 2003-2021 (four-year public university)
The cost of preparing for wars:US military spending cost overruns compared to other country entire defense budgets
WAR
$0B
$100B
$200B
$300B
$400B
$500B
US defensebudget cost
overruns
EU defensebudget
China's defensebudget
France's defensebudget
UK's defensebudget
Source: Deloitte, SIPRI Military Expenditure Database. Data from 2015.
5
The early 2000’s: large cost overruns on defense projects
WAR
6
EELV
MQ-8 Fire Scout
WGS
UH-60M Black Hawk
AEHF
F-35
JTNChem Demil-ACWA
E-2D AHE
MQ-9 Reaper
JTRS HMS
LHA 6
JPALS Inc 1A
IAMD
Stryker
Joint MRAP
-50%
0%
50%
100%
150%
200%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
ActiveCompleted
Source: "Performance of the Defense Acquisition System", Department of Defense, 2016.
Defense project cost overrunsCumulative cost overrun vs baseline, %
GMLRS 750%
MH-605 849%
RQ-4A/B Global Hawk + 250%
In 2018, the Pentagon failed its first audit
• A Michigan State economist found $21 trillion in accounting discrepancies at the DefenseDepartment and Housing/Urban Development for 1998-2015. US Army had $6.5 trillionof these “journal voucher adjustments” in 2015 (the Army’s budget is $122 billion)• From the US GAO: Vouchers are accounting adjustments made when balances
between systems cannot be reconciled. Journal vouchers are often unsupported,meaning they lack supporting documentation to justify the adjustment or are not tied tospecific accounting transactions. For an auditor, journal vouchers are red flags fortransactions not being captured, reported, or summarized correctly
• “Taken together these reports point to a failure to comply with basic constitutional andlegislative requirements for spending and disclosure. We urge the House and SenateBudget Committee to initiate immediate investigations of unaccounted federalexpenditures as well as the source of their payment.” Mark Skidmore (MSU) andLawrence Kotlikoff (Boston University)
• Extent of any unauthorized spending is still unclear• In the wake of these revelations, the Department of Defense announced that it would
conduct its first audit, which it subsequently failed in 2018• Only 5 of 21 divisions received passing grades
7
WAR
Sources: Forbes, December 8, 2017; Michigan State University Today, December 11, 2017; Washington Post, November 21, 2018
8
INFRASTRUCTURE/ENERGYCost estimates for fixing US infrastructure range from $2.0 to $2.5 trillion. The mostpressing needs: roads, bridges, the electricity grid, schools, waterways, airports,wastewater, rail and flood protection. The opportunity cost of not fixing it: $4 trillionin GDP by the year 2025, according to the American Society of Civil Engineers.Around 75% of infrastructure spending comes from state and local governments,and 25% comes from the Federal government. Competing priorities is a growingchallenge: state spending on infrastructure has reached the lowest level in 50 years,in part due to unfunded public sector pension and retiree healthcare obligations.There are competing priorities at the Federal level as well: by 2030, 100% ofFederal revenues are projected to be consumed by entitlements and othermandatory payments, and interest on the Federal debt.
The infrastructure funding gap: $2.0 trillion
INFRASTRUCTURE
Consequences, as per ASCE: US Nominal GDP will be $4 trillion less than it otherwise would be by 2025, and 2.5 mm fewer jobs will be created
Surf
ace
tran
spor
tatio
n
Elec
tric
ity
Scho
ols
Wat
erw
ays/
port
s/da
ms
Airp
orts
Rai
l
Was
tew
ater
Publ
ic p
arks
Haz
ardo
us &
sol
id w
aste
$0
$250
$500
$750
$1,000
$1,250
$1,500
$1,750
$2,000
$2,250Funding gapEstimated funding
Source: American Society of Civil Engineers 2017 Infrastructure Report.
Public infrastructure needs, 2016-20252015 US$, billions
9
Bridges: 188 million trips daily occur across structurally deficient bridges
8%
12%
13%
12%15%
39%
0-9 years
10-19 years
20-29 years
30-39 years
40-49 years
50+ years
America's bridges by age
Source: ASCE 2017 Infrastructure Report Card. 2017.
INFRASTRUCTURE
10
Highway congestion costs billion of dollars in lost time, lost fuel and lost hours
INFRASTRUCTURE
Source: American Society of Civil Engineers 2017 Infrastructure Report Card.
$40
$60
$80
$100
$120
$140
$160
'84 '88 '92 '96 '00 '04 '08 '12
Cost of lost time and wasted fuel per year2014 US$, billions
2.02.53.03.54.04.55.05.56.06.57.0
'84 '88 '92 '96 '00 '04 '08 '12
Traffic delay in hours per yearBillions
0.5
1.0
1.5
2.0
2.5
3.0
3.5
'84 '88 '92 '96 '00 '04 '08 '12
Fuel wasted per yearGallons, billions
20
25
30
35
40
45
'84 '88 '92 '96 '00 '04 '08 '12
Traffic delay per commuter per yearHours
11
The US ranks behind many developed and developing countries in high speed rail
INFRASTRUCTURE
Source: Environmental and Energy Study Institute, International Union of Railways. 2018.
12
Country Length of lines in operation (km) Lines under construction (km)China 26,869 10,738Spain 3,100 1,800Japan 3,041 402France 3,220 125Germany 3,038 330Sweden 1,706 11United Kingdom 1,377 230South Korea 1,104 376Italy 999 116Turkey 802 1,208Russia 845 0Finland 609 0Uzbekistan 600 0Austria 352 208Taiwan 354 0Belgium 326 0Poland 224 0Netherlands 175 0Switzerland 144 15Luxembourg 142 0Norway 64 54United States 54 192
High speed rail
Aging power generation capacity, particularly in the Northeast
INFRASTRUCTURE
13
Source: Joshua Rhodes, University of Texas Energy Institute. 2017.
The US ranks lower than most OECD countries on grid reliability
INFRASTRUCTURE
Sw
itzSi
nga
Hon
gKD
enm
aN
ethe
Fran
cLu
xem
Finl
aJa
pan
Icel
aU
KC
anad
Aus
tiSw
ede
UA
EN
ewZe
Cze
chB
elgi
Qat
arK
orea
Slo
veIs
rae
Irela
Spai
nU
SA
Por
tuO
man
5.8
6.0
6.2
6.4
6.6
6.8
7.0
Source: World Economic Forum. 2018.
Quality of electricity supply (7 = best)
14
US lags China in high voltage direct current lines (HVDC) required to transmit large volumes of wind, hydro and solar power
INFRASTRUCTURE
One reason for slower US adoption of HVDC: US projects require complex approvals across multiplestates. Prime example is the 1 GW Northern Pass line connecting Hydro-Quebec to New England, whichwas supported by Massachusetts regulators. However, a New Hampshire siting committee rejected theproposal by 7-0, since it worried that the 192-mile system would disrupt streets and harm tourism.Concessions by developers to bury 52 miles of the route and set aside 5,000 acres of preservation havebeen insufficient to change the outcome. If so, natural gas and coal will be used instead.
15
Policy approach
Kilometers of HVDC per gigawatt of electricity generation
China Confucian 18.0 - 20.0
US Judeo-Christian 3.2 - 7.0
Scope: In-country high voltage direct current line projects > 400kVSource: JPMAM, Global Transmission Research. 2018.
Infrastructure needs include coastal flood protectionShoreline counties account for 2/3 of all jobs and $3.4 trillion in wages
• US Global Change Research Program: 2 meters of sea level rise could put at least 6,000 squaremiles and $1 trillion (in 2014$) of property and structures at risk.
• Each year, more than 1.2 mm people (the equivalent of nearly one San Diego) move to the coast,the Great Lakes or open-ocean coastal watershed counties and parishes of the US
• 164 mm Americans (>50% of the population) now live in these densely populated areas and helpgenerate 58% of US GDP. Economic activity in shoreline counties account for 66 mm jobs and$3.4 trillion in wages
• Low-lying water-dependent onshore gas and oil facilities, ports, thermal power plants andwastewater management/drainage systems are difficult and expensive to relocate
16
0%
10%
20%
30%
40%
50%
60%
Employment GDP Population Land Area
Coastal Zone counties Shore-adjacent counties
Source: Middlebury, Nat'l Ocean Econ Program. 2016. Data as of 2014.
Coastal regions' share of US economy %
INFRASTRUCTURE
FDR
Driv
e
Met
No.
Hud
son
LaG
uard
ia A
irpor
t
A/C
/M/N
/R tr
ains
Hol
land
Tun
nel
Ver
raza
no B
ridge
Bkl
n B
atte
ry T
unne
l
LIR
R E
ast R
iver
Wes
t St
4, 5
and
6 tr
ains
Thro
gs N
eck
Brid
ge
Pen
n S
tatio
n
New
ark
Airp
ort
Linc
oln
Tunn
el
Que
ens
Mid
tow
n Tu
nnel
Gra
nd C
entra
l Sta
tion
JFK
Airp
ort
Trib
oro
Brid
ge
0
2
4
6
8
10
12
14
16
0
1
2
3
4
5
Source: US Army Corps of Engineers, FEMA, Nat'l Weather Service. 2000.
Critical storm surge elevations by location (at which New York City systems become inoperable)Meters above sea level Feet above sea level
Infrastructure needs of the future will probably require substantialinvestment in de-carbonization of industry and transportation
• Even if fossil fuels used to generate electricity were cut in half, the impact on overall emissionswould not be nearly as large given the much greater amount of fossil fuels used by industry, intransportation and in commercial/residential structures for heating purposes
• Industrial processes use fossil fuels for smelting of iron ore and creation of construction materials(cement, bricks, tiles, glass, etc), and as raw materials for petrochemicals, plastics and food
17
INFRASTRUCTURE
Fossil fuels: electricity27%
Fossil fuels: industry
35%
Fossil fuels: transport20%
Fossil fuels: buildings9%
Renewables7%
Nuclear2%
Global energy use
Source: EIA, IEA, JPMAM. 2017.
Other infrastructure challenges and opportunities
INFRASTRUCTURE
• Average age of 90,000 US dams is 56 years. Over 15,000 dams are deemed to behigh-hazard sites
• 240,000 water main breaks per year, wasting over 2 trillion gallons of treateddrinking water
• NextGen Air Traffic Control system could reduce fuel consumption by 1.46 billiongallons and reduce aircraft delays by 40%
• 25,000 miles of inland waterways deliver more than 600 million tons of cargo eachyear, about 14% of all domestic freight. Most locks and dams on the system arebeyond their 50-year design life, and nearly half of vessels experience delays
• The US has a $836 bn backlog of highway and bridge capital needs. The FederalHighway Administration estimates that every $1 spent on such improvementsreturns $5.20 by reducing vehicle maintenance, delays, fuel consumption,emissions, and improving safety
18
Source: “2017 Infrastructure report card: A comprehensive assessment of America’s infrastructure”, American Society of CivilEngineers. 2017
State and local entities are paramount given their weight in total infrastructure spending
INFRASTRUCTURE
US$ billions % of totalFederal State & local State & local
Highways $46 $119 72%Water utilities $4 $105 96%Mass transit and rail $16 $53 77%Aviation $16 $20 55%Water resources $10 $18 66%Water transportation $4 $6 60%Total $96 $321 77%Source: "Public spending on transportation and water infrastructure, 1956-2014 ", Congressional Budget Off ice, 2015. Data is for 2014.
19
Post-war low in infrastructure spending at the state and local level
INFRASTRUCTURE
20
1.75%
2.00%
2.25%
2.50%
2.75%
3.00%
'50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15
Source: Bureau of Economic Analysis. 2017.
State and local infrastructure spending Capital spending as % of GDP
State and local infrastructure spending crowded out by unfunded pensions and retiree healthcare costs in some states
INFRASTRUCTURE
21
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
IL NJ HI
CT
KY MA
MD PA DE
WV
CA AK SC GA TX RI
MT AL VT CO
ME
MO NY
WA LA NH
NM MS
NC NV VA OR AR KS IN MI
WI
UT
MN FL OK AZ TN IA OH
WY ID SD NE
ND
What states would have to pay assuming a 6% plan return and 30 year level dollar amortization
What states are currently paying
Source: J.P. Morgan Asset Management, State Annual Financial Reports, Moody's. FY 2017.
The cost of unfunded pensions and retiree healthcare as a % of state revenues% of state revenues required to pay the sum of interest on net direct debt, the state's share of unfunded pension and retiree healthcare liabilities, and defined contribution plan payments
Please refer to a special Eye on the Market edition, “The State of the States, 2018” for more information onthis chart and the associated analysis.
Evidence that rising pension costs are crowding out public services
A 2017 paper from UC Berkeley analyzed pension expenditures and discretionaryspending by 219 municipal governments from 2005 - 2014: Pension expenditures increased in 85% of the cities by the following amounts:
Median increase of 45% Average increase of 70% Top quartile increase of 100%
A 10% increase in per-employee pension expenditures was associated with a0.73% drop in city employment in the following year
Pension-induced employment reductions are most pronounced for non-publicsafety employees
Rising pension costs are also associated with reduced spending onconstruction and equipment
22
INFRASTRUCTURE
Source: “Pensions in the trenches: are rising city pension costs crowding out public services?”, Anzia (Berkeley). 2017.
Federal infrastructure spending under pressure from crossover point (when 100% of Federal tax revenue is consumed by interest and entitlements)
INFRASTRUCTURE
2%4%6%8%
10%12%14%16%18%20%
'70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20 '25Source: CBO, Budget and Econ Outlook, JPMAM. April 2018.
Crossover point is coming% of GDP
Revenues
Non-defense discretionaryspending
Entitlements, other mandatory outlays & interest
Budget Control Act of 2011
23
24
IMMIGRATIONAs US birth rates slow, immigration is projected by the US Census to be a vitalcontributor to future growth and productivity. Most studies find net benefits fromimmigration: increased growth and productivity, and limited crowding-out ofemployment or hours worked by natives. However, some studies show competitionpressures on teenagers and native populations with high skill overlap, as well aswith African Americans. Furthermore, the net fiscal impact of immigration is positivefor college-level immigrants (which now make up more than 50% of annualimmigration), but negative for lower skilled immigrants with less education.The “perception gap”, which measures the actual level of immigration vs how muchcitizens believe it to be, is much wider in the US than in other countries. The level ofundocumented workers has declined since 2007, from 32% to 27% of the totalimmigrant population.
Immigration is a critical component of future US population and productivity growth given slowing organic birth rates
IMMIGRATION
25
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
'62-'67 '90-'94 '95-'99 '00-'04 '05-'09 '10-'14 '15-'19 '20-'24 '25-'29
Sources of US population growthUS annual population growth, 5-year average, %
'14 Census projections
Immigration
Organic
Source: Census Bureau, JPMAM. 2014.
While US citizens are highly sensitive to immigration issues, the number and percentage of undocumented workers has leveled off
IMMIGRATION
26
0
5
10
15
20
25
30
35
40
45
2000 2002 2004 2006 2008 2010 2012 2014Source: Pew Research Center estimates from the Census Bureau and the American Community Survey. December 2014.
Estimates of unauthorized immigrant population relative to total foreign-born population, Millions
Total foreign-born population
Unauthorized immigrant population:Peaked at 32% of total in 2007, now 27%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
US Portugal UK Italy France Spain Nether. Germany Sweden
Perceived Actual
Source: DB, OECD. 2011.
Actual and perceived number of immigrants% of total population
Immigration: productivity benefits are clear, but employment consequences can be significant for competing populations
• “The Effect of Immigration on Productivity: Evidence from US States,”Giovanni Peri, National Bureau of Economic Research, 2009
• No evidence that immigrants crowded-out employment and hoursworked by natives
• Robust evidence that they increased total factor productivity• Results are the same across various different environments (e.g.,
geography, level of R&D spending, computer adoption, internationalcompetition, sector composition)
• An increase in employment in a US state of 1% due to immigrantsproduced an increase in income per worker of 0.5% in that state
• Other immigration studies do show negative wage and employmentimpacts on teenagers, African Americans and individuals with skill overlapwith immigrant population
• See next page for 2 examples• This is a controversial topic; the conclusions of these papers speak for
themselves
IMMIGRATION
27
Immigration: consequences for domestic populations can be substantial
• African American wages and immigration, 1980 - 2000• A 10% immigrant-induced increase in the supply of a particular skill group
reduced African-American wages by 4%, lowered the employment rate of African-American men by 3.5%, and increased the incarceration rate of African-Americans by almost 1%
• Immigration was not the only factor driving down African-American employment,which fell by ~18% from 1980-2000. Other factors include changes in labormarket dynamics, economic opportunities and high school dropout rates
• Immigration and youth labor markets, 1980 - 2010• An 10% increase in less educated immigrants reduced hours worked by native
teens by 3%, compared to just 1% for native adults• Reasons: a) greater overlap between jobs that youth and less educated adult
immigrants compete for, b) youth labor supply is more responsive to immigration-induced wage changes, and c) native youth often opt to stay in school longer dueto competition for jobs
IMMIGRATION
28
Sources:“Immigration and African-American employment opportunities: the response of wages, employment, and incarceration to labor supplyshocks,” Borjas et al (Harvard, University of Chicago), NBER, 2006“The Impact of Low-Skilled immigration on the youth labor market,” Christopher L Smith, Federal Reserve Board of Governors, Journalof Labor Economics, 2012
Educational attainment at entry is important given the net fiscal impact of immigrants and their descendants
IMMIGRATION
29
-200K
-100K
0K
100K
200K
300K
400K
500K
Less thanhighschool
High school Some college BA More than BA
Descendants
First-generationimmigrants
Source: National Academy of Sciences. 2016.
Long-term fiscal impact of immigration by education level2012$ per capita
Gradually improving education levels among US immigrant population
IMMIGRATION
30
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1970 1980 1990 2000 2012
Graduateeducation
Bachelor'sdegree
Some college
High schooldiploma/GED
Less than highschool
Source: "The Economic and Fiscal Consequences of Immigration," Francine D. Blau (Cornell), The National Academies of Sciences, Engineering, and Medicine, 2016.
Rising educational attainment of immigrants % of total, trailing 5 years
Trump administration taking steps to slow down H-1B visa process, but history suggests it won’t help US native workers very much
IMMIGRATION
0
5,000
10,000
15,000
20,000
25,000
Sep-14 Sep-15 Sep-16 Sep-17
Source: United States Citizenship and Immigration Services. 2018.
Increasing scrutiny on foreign workers Requests for extra information in H-1B visa process
On visas and US employment. The H-1B visa cap was cut in 2004 from 195,000 to 65,000. As aresult, US firms hired 20%-50% fewer new H-1B workers than they might have had the prior capremained. However, the reduced pool of foreign workers did not lead firms to hire more Americans,suggesting low substitutability between native-born and H-1B workers in the same skill groups.
Source: “The Effect of the H-1B Quota on Employment and Selection of Foreign-Born Labor”,Mayda et al (Georgetown, UC Davis), NBER, October 2017
31
32
LAND USE REGULATIONLand use regulations allow incumbent homeowners to influence what can be built,and what cannot. Economists have analyzed this topic for decades, and find that itundermines market forces that would otherwise determine how much housing tobuild, where to build, and what type to build. Regulations lead to a mismatchbetween housing that households want, what they can afford, and what is available.Many studies now find that these land use regulations are associated with lessincome convergence between rich and poor, less labor mobility, lower employmentgrowth, lower housing affordability, a slower pace of new business creation andoverall losses in aggregate output.
Land use regulations and the negative impact on income convergence, employment, growth and output
LAND USE REGULATION
• Land use regulations undermine market forces that would otherwise determine howmuch housing to build, where to build, and what type to build, leading to amismatch between housing that households want, what they can afford, and whatis available
• Many studies now find that land use regulations are associated with less incomeconvergence between rich and poor, less labor mobility, lower employmentgrowth, lower housing affordability, a slower pace of new business creationand overall losses in aggregate output
• 10% output loss in 2009 due to the cumulative impact of land use and zoningrestrictions since 1964 (in other words, GDP would have been 10% higher)
• 100 years of rapid income convergence between poor and rich states cameto an end with the inception of the land use regulation era in the 1980s, giventhe negative impact it had on labor mobility
33
Source: “Barriers to Shared Growth: The Case of Land Use Regulation and Economic Rents”, Furman, Council of Economic Advisers address to The Urban Institute, November 20, 2015
More land use regulation leads to lower levels of housing affordability
LAND USE REGULATION
34
Prov
Bost
Phil
Seat
SF
Denv
NassFt La
Phoe
NY
Rive
Newa
Spri
Harr
LA
Hart
SDOC
Minn
DC
Port
Milw
Akro
AlleChic
Atla
SLC
G Rap
Clev
Roch
Tamp
HousSan A
DallOKC
Dayt
Cinc
STL
Indi
KC
0
50
100
150
200
250
300
350
-1 -0.5 0 0.5 1 1.5 2
Source: "Barriers to shared growth: the case of land use regulation and economic rents", Council of Economic Advisors, 2015.
Zoning rules and housing affordabilityNAR Housing Affordability Index, 2013 (higher value = more affordable)
Wharton Residential Land Use Regulatory Index (higher value = more regulation)
More regulation, lower affordability
Rise in land use lawsuits that began in the 1980’s is closely tied to a decline in inter-state and intra-state migration…
LAND USEREGULATION
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
'48 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08 '13
Source: "Barriers to shared growth: the case of land use regulation and economic rents", Council of Economic Advisors. 2015.
Migration rates by typeMigration rate, % (both axes)
Inter-state
Inter-county,same state
Intra-county
35
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1940 1950 1960 1970 1980 1990 2000 2010
Source: "Why has regional income convergence declined," Ganong and Shaog (Univ. of Chicago, Harvard), 2017.
Rising number of land use casesState Supreme and Appellate court cases per million people
…which coincided with a decline in income convergence in states with higher levels of land use regulation/zoning rules
LAND USE REGULATION
36
Note: in the chart, a higher value indicates more income convergence between rich and poor
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
1960-69 1970-79 1980-89 1990-99 2000-10 1960-69 1970-79 1980-89 1990-99 2000-10
Source: "Barriers to shared growth: the case of land use regulation and economic rents", Council of Ecnomic Advisors, 2015.
Income convergence declining in high land use states% of income gap closed each year
States with less land use regulation States with more land use regulation
Migration now makes more economic sense for skilled households than for unskilled households given the high cost of housing
LAND USE REGULATION
37
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
1940 1950 1960 1970 1980 1990 2000 2010
Skilled households
Unskilled households
Source: "Why has regional income convergence in the US declined?", Ganong and Shoag (Univ. of Chicago, Harvard), 2017.
Benefits of migration much greater for skilled households given the high cost of housingChange in migrant income from moving to a state with average incomes that are $1 higher, net of the cost of housing
A shifting relative preference for multi-family units and an aging population makes the problem worse, since MF units are more often targets of land use regulation
LAND USE REGULATION
38
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: US Census Bureau. Q2 2018.
Single and multi-family housing startsThousands of units, SAAR
Single-family
Multi-family
One last comment: progressive voters don’t always support progressivehousing policies
LAND USE REGULATION
39
A NIMBY example from California:• Using voter registration records, researchers looked at the connection
between the liberal share of a city’s population and the growth in the city’shousing permits
• Results: a 10% increase in a city’s liberal voting share is associatedwith a 32% reduction in housing permitting growth
• The results account for differences in city demographics such as incomegrowth, racial composition, distance to the Central Business District,education levels, etc
Source: “Do liberal cities limit new housing development? Evidence from California”, Kahn, UCLA, Journal ofUrban Economics, 2010
40
STATE LICENSING REQUIREMENTSThe rise in state-level licensing requirements can lead to higher wages for thoseable to obtain a license, but can also lead to inefficiency and unfairness: reducedjob opportunities, depressed wages for excluded workers, reduced worker mobilityacross state lines, increased costs for consumers and lower overall output.Most licensing requirements are not established by elected officials accountable tovoters, but by a board of incumbent practitioners whose primary job is to provideservices in the same market they regulate. These conclusions were reinforced byan in-depth 2015 White House Report on the subject.A first step in remediating some of the anti-competitive issues: the creation of atask force at the Federal Trade Commission which can bring enforcement actionsagainst local regulatory bodies.
State licensing becoming more prevalent
STATELICENSING
0%
4%
8%
12%
16%
20%
24%
28%
1950s 1960s 1970s 1980s 1990s 2000 2008 2015
Source: "New Data Show that Roughly One-Quarter of U.S. Workers Hold an Occupational License", Furman and Giuliano, Obama White House Archives. 2016.
Share of workers with an occupational licensePercent of the workforce
41
On state licensing
STATELICENSING
42
• Licensing: not just required for EMT workers, teachers, school bus drivers andmidwives.
• Licensed industries in some states also include auctioneers, florists, TV tubesalesmen, manicurists, talent agents, ballroom dancing teachers, hair-braiders,interior designers, shampooers, home entertainment installers, internet cafes,music therapists, taxidermists and bartenders
• Little evidence of harm in states not licensing these services• Booming business: expediters (often former city officials) who charge
entrepreneurs for navigating the permitting process; in Chicago, now even theexpediters are licensed
• In cities like Milwaukee and Chicago, “aldermanic privilege” allows aldermen tohold up or deny permits in their districts, and to extract concessions from applicants
• US Circuit Court of Appeals: “While baseball may be the national pastime of thecitizenry, dishing out special economic benefits to certain in-state industriesremains the favored pastime of state and local governments” [10th Circuit JudgeTacha, Powers v. Harris, 2004]
Adverse consequences of rising state-level licensing requirements
STATELICENSING
43
• Self-interested incumbents establish rules that make it harder for new entrants• In many instances, the governing entity is not an independent group of
elected officials accountable to the public, but a board of practitionerswhose primary job is to provide services in the same market they regulate
• 2015 White House Report:• “In a number of studies, licensing did not increase the quality of goods and
services, suggesting that consumers are sometimes paying higher priceswithout getting improved goods or services”
• “The practice of licensing can impose substantial costs on job seekers,consumers, and the economy more generally”
• “Estimates find that unlicensed workers earn 10-15% lower wages thanlicensed workers with similar levels of education, training, and experience.Licensing laws also lead to higher prices for goods and services, withresearch showing effects on prices of between 3% and 16%
• Inconsistencies: over 1,100 occupations are regulated in at least onestate, but fewer than 60 are regulated in all 50 states
Source: White House Report entitled “Occupational Licensing: a Framework for Policymakers”, Department of the Treasury, Office for Economic Policy, Council of Economic Advisors, Department of Labor; 2015
Adverse consequences of rising state-level licensing requirements (continued)
STATELICENSING
44
• Results: higher prices, reduced number of practitioners, reduced output, fewer jobs• Estimated impact: $200 billion per year in lost output, and 2.7 million fewer jobs• Between 1990 and 2000, licensed occupations experienced 20% slower
employment growth than in states where those occupations were unlicensed• Benefits from reduced licensing:
• Uber, which would be prohibited under a legacy taxi medallion system,generated an estimated US consumer surplus of $6.8 billion in 2015
• Increased mobility for accountants lowered the cost of CPA services in stateswith fewer CPAs without observed declines in service quality [new provisionsallow out-of-state CPAs to enter markets other than their home states withoutthe need to notify boards, obtain reciprocal licenses or pay related fees]
• In 2017, the US Federal Trade Commission established the Economic Liberty TaskForce to work on the issue of overly restrictive state-level licensing requirements
• The FTC has the ability to bring enforcement actions against local regulatoryboards, and participate as an amicus in antitrust actions at the local level
Sources: “A Proposal to Encourage States to Rationalize Occupational Licensing Practices”, Kleiner et al (U of Minnesota, Princeton, NBER) , 2011“Using Big Data to Estimate Consumer Surplus: The Case of Uber”, Cohen et al, NBER Working Paper, Sept. 2016“Labor Market Effects of Spatial Licensing Requirements: Evidence from CPA Mobility”, Cascino et al (London School of Economics), 2018
One example: working from home
STATELICENSING
45
• Working from home: a very common way to start a new business with low up-front costs
• However, cities like Los Angeles ban some home-based businessesaltogether, while Miami and DC permit only certain categories. In parts ofPhiladelphia, home occupations are entirely prohibited without a difficult-to-obtain zoning variance
• In Los Angeles, setting up a home office in a garage is banned; garages maybe used only for “incidental storage” for the business. Milwaukee limits suchstorage to 50% of a garage and requires that only 25% of a home may bededicated to a business
• Cities also prescribe how many people may work in a home (only two in Miamiand no more than one non-resident in Chicago, Los Angeles and D.C.), andhow many customers a business may serve in a day (in Chicago, no morethan two at once and 10 in a day). Los Angeles limits home-based businessesto just two deliveries or pick-ups per day
Source: “License to Work: A National Study of Burdens from Occupational Licensing”, Carpenter et al, Institute for Justice, 2012
46
BEHAVIORSThe US leads the world in gun violence, obesity, opioid use andincarceration. The related economic costs are in the hundreds of billions ofdollars in terms of lost output, emergency services, medical care and lostincome.
US gun violence is a substantial drag on productivity and output
47
Cost of gun violence includes emergency services, police investigations, long term medical andmental-health care, court and prison costs (direct costs); and lost income, losses to employers,and impact on quality of life (indirect costs).
BEHAVIORS
Cost of obesity
Cost of gun
violence
Medicaid spending
Cost of smoking
$0
$50
$100
$150
$200
$250
$300
Source: Pacific Institute for Research and Evaluation, Mother Jones. 2015.
Select annual costs to US taxpayersUS$, billions
More guns = More gun deaths, both in the US and outside it
48
• United States has 4% of the world’s population, 22% of civilian-owned guns andthe highest rate of gun deaths in the developed world
• States and countries with greater gun ownership experience more gun deaths
Sources: UNODC, Small Arms Survey, Center for Disease Control, VOX, 2018
BEHAVIORS
RI
DE
NJ
NY
NH
CT MA
CA
NEMD
OH ME
DCILWA
VTVA
ORPA
MI
NC
MO
OK
AZUT
GA
IN
FL
KSCO
TXSD
WI
IA MN
NV
TNMS
LA
SC
KY
ND
NM
AL
MTWY
AR
AK
IDWV
HI
0
5
10
15
20
25
0% 10% 20% 30% 40% 50% 60% 70%
Gun ownership vs gun deaths by stateGun deaths per 100,000 residents
Gun ownership (% of adults)
Jpn Chi QatSinSkoUK
NetSpaHun CypAus Ger
Ire IceLatSweGreDen
Lit CZNor
Isr
Bel
Slo NZEstFra
CroSwiFin
Can
Arg
USA
0
1
2
3
4
5
6
7
8
9
10
0 20 40 60 80 100
Gun ownership vs gun deaths by countryGun related deaths per 100,000 people
Guns per 100 people
Policy proposals to deal with guns are hampered by the political divide
49
BEHAVIORS
Partisan gaps on gun control issues
Republican Democrat DifferenceGun control policiesPreventing the mentally ill from purchasing guns 89 89 0Barring gun purchases by people on no-fly or watch lists 82 85 -3Backgroung checks for private sales and at gun shows 77 90 -13Banning assualt style weapons 54 80 -26Creating a federal database to track gun sales 56 84 -28Banning high capacity magazines 47 79 -32Gun friendly policiesAllowing concealed carry in more places 72 26 46Allowing teachers and officials to carry guns in K-12 schools 69 26 43Shortening waiting periods for buying guns legally 51 25 26Allowing concealed carry without a permit 30 10 20Source: Pew Research Center. 2017.
Percent who strongly or somewhat favor
Obesity
50
• Increased obesity has led to a rise in diabetes, heart disease, asthma and otherchronic, expensive conditions
• % of obese US adults today is more than double what it was 30 years ago• CDC reports that from 1995-97 to 2005-07, the number of new diabetes
cases in America almost doubled• Individuals with diabetes spend on average 4x more on health care than
individuals not suffering from diabetes• While not all diabetic patients are obese, more obese patients eventually
become diabetic as well• If the US reduced obesity levels back to 1980 levels, it could save $1 trillion
dollars over the next 25 years in Medicare alone• CBO estimates that obesity is responsible for 4% -12% of the growth in
healthcare costs
Sources: “The Value of Elderly Disease Prevention”, Goldman et al (RAND, NBER, Harvard), Forum for Health Economics & Policy, 2006“Technological Change and the Growth of Health Care Spending,” Congressional Budget Office, 2008
BEHAVIORS
The US has the highest obesity rates in the developed world
51
BEHAVIORS
Uni
ted
Stat
esM
exic
oN
ew Z
eala
ndH
unga
ryA
ustr
alia
Uni
ted
Kin
gdom
Can
ada
Chi
leFi
nlan
dG
erm
any
Irela
ndLu
xem
bour
gTu
rkey
Latv
iaC
zech
Rep
.O
ECD
Slov
enia
Icel
and
Bel
gium
Esto
nia
Isra
elG
reec
eSp
ain
Pola
ndPo
rtug
alSl
ovak
Rep
.Fr
ance
Den
mar
kA
ustr
iaN
ethe
rland
sSw
eden
Nor
way
Switz
erla
ndIta
lyK
orea
Japa
n
0%
5%
10%
15%
20%
25%
30%
35%
40%
Source: 2017 OECD Obesity Update.
Adult obesity rates by country
Percentages are even higher when including “overweight” along with “obese”
52
BEHAVIORS
24%
30%
36%
42%
48%
54%
60%
66%
72%
'72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12
Source: 2017 OECD Obesity Update.
Adult obesity/overweight rates by country
USAMexico
EnglandHungary
CanadaSpainFranceItalySwitzerland
Korea
Obesity rates have clear negative productivity impacts across occupations
53
BEHAVIORS
0%
5%
10%
15%
20%
25%
30%
35%
40%
Education Healthcare Manufacturing Hospitality Construction
Normal Overweight Obese Class I Obese Class II Obese Class III
Source: "Impact of Obesity on Work Productivity in Different US Occupations," Kudel et al., American College of Occupational and Environmental Medicine, 2017.
Work productivity impairment from obesity
Opioids: use and consequences
• US opioid prescriptions grew more than three-fold from 76 million in 1991 to almost245 million in 2014, roughly equivalent to one opioid prescription per adult
• Prescription growth has been accompanied by adverse outcomes including higherrates of opioid overdose, abuse, addiction, diversion, emergency room visits andneonatal abstinence syndrome
• Almost 30% of opioid prescriptions lack any medical explanation to justify the script• Using state-level data, researchers found substantial adverse impacts on
employment from increased opioid usage
Source: "Documented Pain Diagnoses in Adults Prescribed Opioids", Sherry et al (RAND, Harvard), Annals of Internal Medicine, 2018.
54
BEHAVIORS
Percentage point impact due to an increase in prescription opioids per capita by
1 gram .1 gram 10%Employment-to-population ratio -13.5% -1.35% -0.70%Labor force participation rate -12.7% -1.27% -0.66%Unemployment rate 3.2% 0.32% 0.17%
Source: "Prescription opioids and labor market pains ", University of Tennessee, 2018.
US: 4.5% of the world’s population, 30% of opioid consumption, including 99% of hydrocodone use
Uni
ted
Sta
tes
Can
ada
Ger
man
yA
ustri
aD
enm
ark
Sw
itzer
land
Bel
gium
Aus
tralia
Net
herla
nds
UK
Isra
elS
pain
Nor
way
Irela
ndLu
xem
bour
gN
ew Z
eala
ndS
wed
enIc
elan
dFr
ance
Gre
ece
Slo
veni
aIta
lyFi
nlan
dP
ortu
gal
Slo
vaki
a
05,000
10,00015,00020,00025,00030,00035,00040,00045,00050,000
Source: United Nations International Narcotics Control Board. 2018.
Opioid use by countryStandard daily opioid doses per million people
55
BEHAVIORS
Opioid use and labor market participation by state: a clear pattern
AL
AK
AZ
AR
CA CO
CT
DE
DC
FL
GA
HI
ID
IL
IN
IA
KS
KY LA
ME
MD
MA
MI
MN
MS
MO
MTNE
NV
NH
NJ
NM
NY
NC
ND
OH
OK
OR
PA
RI
SC
SD
TN
TX
UT
VT
VAWA
WV
WI
WY
20
30
40
50
60
70
80
90
100
110
120
130
50 55 60 65 70 75Participation rate (%)
Source: Center for Disease Control and Prevention, Bureau of Labor Statistics. 2016.
Labor market participation negatively correlated to opioid useOpioid prescriptions per 100 persons
56
BEHAVIORS
Annual cost of opioid use: $78 billion dollars, which is larger than the annual GDP of 13 states
$78 bn in annual opioid costs at the national level is higher than the entire annual GDP of each of the following US states:
Hawaii, West Virginia, New Hampshire, Delaware, Idaho, Alaska, Maine, Rhode Island, North Dakota, South Dakota, Montana, Wyoming, Vermont
Aggregate costs$bn
Percent of aggregate costs
Health Care $26.1 33.2% Private Insurance $14.0 17.9% Medicare $2.6 3.3% Medicaid $5.5 7.0% Uninsured/Other $4.0 5.0% Substance Abuse Treatment $2.8 3.6% Federal $0.7 0.9% State and Local $1.8 2.3% Private $0.3 0.4% Criminal Justice $7.7 9.7% Police protection $2.8 3.6% Legal and adjudication $1.3 1.6% Correctional facilities $3.2 4.1% Property lost due to crime $0.3 0.4% Lost Productivity $20.4 26.0% Reduced productive time/increased disability $16.3 20.7% Production lost for incarcerated individuals $4.2 5.3%Total Nonfatal Costs $57.0 72.6%
Lost Productivity $21.4 27.3% Health Care $0.1 0.1%Total Fatal Costs $21.5 27.4%Total of Nonfatal and Fatal $78.5 100.0%
Breakdown of annual opioid costs
NONFATAL COSTS
FATAL COSTS
Source: "The Economic Burden of Prescription Opioid Overdose, Abuse and Dependence in the United States", Florence et al, CDC, 2013.
57
BEHAVIORS
Opioids and incarceration negatively affect US labor force participation
87%
88%
89%
90%
91%
92%
93%
Advancedeconomies ex-US,
average
Due to opioids Due toincarcerations
Due to otherfactors
US
Source: GS Investment Research; "Where have all the workers gone?", Krueger, Brookings, 2017; "The criminal and labor market impacts of incarceration", Mueller-Smith, University of Michigan, 2015. 2018.
The impact of opioids and incarceration on labor force gapLabor force participation rate, prime-age men, %
58
BEHAVIORS
US has the world’s highest incarceration rate, particularly for a developed country
59
BEHAVIORS
USAElSal
TurkmThail Cuba
Rwand
Russi
Belar
Brazi Taiwa
Israe
Czech Singa
SaudiSlova
Austa
UK
Spain
Portu Canad
HongK Franc UAE
Austi
Italy
Greec
Belgi
IrelaGermaNorwa
Denma
Nethe
Swede Finla
Japan 0
100
200
300
400
500
600
700
$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000
Source: World Prison Brief, IMF. 2017.Per capita GDP
Incarceration rates and national incomeAdult incarceration rate per 100,000 people
60
RACIAL INEQUALITYThere are measurable and unmeasurable economic costs resulting from asociety where racial issues still impact consumer-to-business interactions(wages, autos, home sales, lending), the criminal justice system, hiring, jobopportunities, investing and medical care. There are persistent wage gaps thatcannot be explained by differences in age, education, job type, or location.The economic benefits from reducing inequality are large. One study showed apotential 10% jump in US GDP from closing the wage gap between white andnon-white private sector employees. In a separate study, researchers found thatup to one-fifth of labor force productivity growth between 1960 and 2008 camefrom making it easier for women and minorities to get better jobs.
Almost half of the 28% African American male wage gap vs Whites cannot be explained by differences in age, education, job type, or location
RACIAL INEQUALITY
61
-5%
0%
5%
10%
15%
20%
25%
30%
'80 '85 '90 '95 '00 '05 '10 '15
Unexplained
Part-time
State
Industry &Occupation
Education
Age
Source: "Disappointing facts about the black-white wage gap," Daly et. al (Federal Reserve Bank of San Francisco), September 2017.
Components of male black-white earnings gap
Over one-third of the 18% African American female wage gap vs Whites cannot be explained by differences in age, education, job type, or location
RACIAL INEQUALITY
62
-5%
0%
5%
10%
15%
20%
'80 '85 '90 '95 '00 '05 '10 '15
Unexplained
Part-time
State
Industry &Occupation
Education
Age
Source: "Disappointing facts about the black-white wage gap," Daly et. al (Federal Reserve Bank of San Francisco), September 2017.
Components of female black-white earnings gap
Black-White earnings gap has been getting worse (not better) over time, irrespective of gender or level of education
RACIAL INEQUALITY
63
0%
5%
10%
15%
20%
25%
MaleHigh school
MaleBachelor's+
FemaleHigh school
FemaleBachelor's+
1979-19911992-20042005-2016
Source: "Disappointing facts about the black-white wage gap," Daly et. al (Federal Reserve Bank of San Francisco), September 2017.
Black-white earnings gap by educational attainment
Discrimination in auto loans and residential mortgage loan origination
RACIAL INEQUALITY
64
National Fair Housing Alliance sent white and non-white testers to car dealerships in Virginia to inquire about purchasing the same vehicle. Non-white testers had higher stated incomes, higher credit scores and/or lower debt-to-income ratios. Results:• 62.5% of the time, non-white testers received more costly pricing options• Non-white testers would have paid an average of $2,600 more over the life of the
loan than less-qualified white testers• 75% of the time, white testers were offered more financing options• Dealers offered to help bring down rates and prices using incentives and rebates
for white testers more often than for non-white testersDifferences in mortgage loan originator (MLO) responses by race:• Non-response rates are higher for non-white inquiries• Loan originators offer more details about loans and are more likely to send follow-
up correspondence to white inquirers• The effect of being African American on MLO response is equivalent to the effect
of having a credit score that is 71 points lower
Sources:“Discrimination when buying a car", Rice et al, National Fair Housing Alliance, 2018“Discrimination in mortgage lending: Evidence from a correspondence experiment", Hanson et al, Journal of Urban Economics, 2015
Discrimination in hiring and criminal justice
RACIAL INEQUALITY
65
Discrimination in hiring, from Proceedings of the National Academy of Sciences:• Summary of 24 field experiments, which included data from 54,000 applications
across more than 25,000 positions• Since 1990 white applicants received 36% more callbacks than black applicants
and 24% more callbacks than Latino applicants with identical résumésRacial disparities in sentencing by judges:• Sentences imposed on black males in the federal system are nearly 20% longer
than those imposed on white males convicted of similar crimes• Black and Latino offenders sentenced in state and federal courts face
significantly greater odds of incarceration than similarly situated white offenders and receive longer sentences than their white counterparts in some jurisdictions
• Black male federal defendants receive longer sentences than whites arrested for the same offenses and with comparable criminal histories
• Race plays a major role in the determination of homicide cases death sentences
Sources: “Meta-analysis of field experiments show no change in racial discrimination in hiring over time", Quillian et al (Northwestern), Proceedings of the National Academy of Sciences, 2017“Racial disparities in sentencing", Turner & Dakwar, American Civil Liberties Union, 2014
Discrimination in the investing/online world
RACIAL INEQUALITY
66
The cost of bond issues for black colleges:• Historically black colleges and universities pay higher underwriting fees to issue
tax-exempt bonds, compared to similar non-HBCUs• Credit quality plays little role. For example, identical differences are observed
between HBCU and non-HBCUs: 1) with AAA ratings, and/or 2) insured by thesame company, even before the 2008 Financial Crisis.
• HBCU-issued bonds are also more expensive to trade in secondary markets, andwhen they do, sit in dealer inventory longer
Racial bias in online platforms:• Black-identified fundraisers have roughly half the success rate as white fundraisers
on Kickstarter and Prosper• Black sellers/renters command lower prices on eBay and AirBnB• Black riders experience longer wait times and more cancellations on Uber• Black advertisers receive lower response rates for roommates on Craigslist
Sources:“What's in a (School) Name? Racial Discrimination in Higher Education Bond Markets”, Dougal et al (Duke, Notre Dame, University ofWashington), Journal of Financial Economics, June 2018“The Consequences of Authenticity: Quantifying Racial Signals and their Effects on Crowdfunding Success”, Rhue & Clark (Wake Forest, University of Maryland), July 2018
67
EDUCATIONEducation affects growth and productivity, and is now understood to have played amajor role in the late 19th and early 20th centuries when the US became the world’sdominant superpower, surpassing countries in Europe. However, these educationalgains slowed during the post-war era. The US now lags behind half of all developedcountries in science and reading, and behind three quarters of developed countries inmath. US companies cite education as being their largest problem in filling vacantpositions. The onset of the vehicle automation era, which is expected to displace largenumbers of workers with less education, is another looming challenge. The OECDestimates a 0.75% increase in annual long-term US GDP growth from bringing allstudents to a minimum level of proficiency.One observed obstacle: more spending does not universally translate into bettereducational outcomes, according to analyses across countries and within the US itself.
US companies cite lack of education and experience as their #1 problemin filling vacant positions
EDUCATION
68
0% 10% 20% 30% 40% 50% 60% 70%
Lack of job-specific skills,education, or experience
Too few applicants
Lack of soft skills
Competition from other employers
Difficulty passing backgroundcheck, credit check, or drug test
Lack of basic math,reading or writing skills
Non-bachelor's
Bachelor's +
Source: "How do firms respond to hiring difficulties?", Terry & Zeeuw, Federal Reserve Bank of Atlanta, March 2018.
Reasons for hiring difficulties
US test scores: middle of the pack on reading and science, lagging in math
EDUCATION
69
350
400
450
500
550
600
1234567891011121314151617181920212223242526272829303132333435363738394041424344
Source: OECD. 2018.
US scholastic performance compared to other developed and developing nationsPISA test subject score by country; dots indicate US. N=44 countries
Science - USMath - US
Reading - US
44 = lowest, 1 = highest
Measuring the benefits of “bringing up the rear”: the increase in annual real GDP growth from all students reaching a minimum educational standard
ME
XTU
RG
RE
PO
RIT
ALU
XU
SA
SP
AO
EC
DP
OL
GE
RN
OR
HU
NS
LOB
EL
BE
LD
EN
AU
TS
WE
SW
IS
WI
CZR
IRE
UK
NZL
AU
SN
ET
JAP
CA
NK
O FIN
0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%
Source: OECD, 2010. Minimum level of proficiency defined as PISA test score of 400 (max score: 1000; OECD average: 500).
The benefits of bringing all students to a minimum level of proficiencyIncrease in long-run real GDP growth rate
EDUCATION
0.75% per year is substantial given CBO forecasts of 1.5%-1.7% for US real GDP growth for 2021-2028
70
Source: “The high cost of low educational performance: the long run economic impact of improving PISA outcomes”, OECD, 2010
Improving education is critical given the risk of job automation: while the US ranks below other countries on this scale, 40% is still a lot of displaced workers
EDUCATION
Slo
vak
Rep
.Li
thua
nia
Gre
ece
Turk
eyC
hile
Ger
man
yS
pain
Slo
veni
aJa
pan
Pol
and
Cyp
rus
Italy
Fran
ceC
zech
Rep
.R
ussi
aA
ustri
aK
orea
Esto
nia
Isra
elBe
lgiu
mSi
ngap
ore
Irela
ndC
anad
aD
enm
ark
Net
herla
nds
Sw
eden
Engl
and
Nor
ther
n Ire
land
US
Finl
and
Nor
way
New
Zea
land
0%
10%
20%
30%
40%
50%
60%
70%
Source: "Automation, skills use and training", Nedelkoska and Quintini, OECD. 2018.
Probability of job automation for median worker
71
It’s not just a question of money: countries that spend more on education do not always generate higher reading scores
EDUCATION
72
Thailand
Slovak Rep.
Estonia
Czech Republic
New Zealand
Greece
Israel
Portugal
Germany
Korea
Australia
Finland
France
Spain
Ireland ItalySlovenia
JapanCanada
NetherlandsBelgium
Sweden
UKDenmark
IcelandNorway
Switzerland
United States
LuxembourgAustria
420
440
460
480
500
520
540
$20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000
Source: "Does money buy strong performance in PISA?", OECD. 2012.
No clear relationship between education spending and reading scores PISA reading score
Cumulative expenditure on education per student
It’s not just money: similar conclusions were reached in a 2018 study from Harvard Law School
EDUCATION
73
• Math scores have improved modestly since 1978, while reading scores are stagnant• Federal, state and local spending per pupil on education more than doubled in real
terms over the same period• Net result: productivity of educational spending has fallen over the last 40 years.
Furthermore, increased funding has not served to raise minority outcomes or toreduce racial inequality in test scores
• The authors conclude that it might be time to embrace alternatives that emulateprivate sector, competitive organizations alongside traditional public schools
Source: “Educational Test Scores, Education Spending, and Productivity in Public Education”, Garen & Bray (U Kentucky, Harvard), 2018.
'70 '75 '80 '85 '90 '95 '00 '05 '10
Math scores per real dollar of spending
Grade 8
Grade 4
'70 '75 '80 '85 '90 '95 '00 '05 '10
Reading scores per real dollar of spending
Grade 8
Grade 4
Public charter schools show higher return on investment than traditional public schools, but mostly due to lower spending
EDUCATION
74
• From 1991 to 2014, charter school legislated was passed in 42 states, with totalstudent enrollment of ~2.7 million
• A 2018 study looked at 8 inner-city charter school systems, comparing studentoutcomes and education spending with public schools in the same city
• Public Charter Schools delivered substantially better results, with average testscores per dollar that were ~35% higher
• To be clear, almost the entire benefit in the study was due to lower spendingby charter schools rather than achieving higher student test scores
Source: “Bigger Bang, Fewer Bucks? The Productivity of Public Charter Schools in Eight U.S. Cities”, DeAngelis et al, 2018
0 5 10 15 20 25 30 35
Indianapolis
San Antonio
Denver
Wash DC
Boston
NYC
Atlanta
Houston
CharterPublic
Reading scores per dollar of spending
0 5 10 15 20 25 30 35
Indianapolis
San Antonio
Denver
Wash DC
Boston
NYC
Atlanta
Houston
CharterPublic
Math scores per dollar of spending
A related issue: the growth in administrators has far outstripped the number of teachers
EDUCATION
0%
30%
60%
90%
120%
150%
'70 '75 '80 '85 '90 '95 '00 '05 '10Source: “How escalating education spending is killing crucial reform,” Burke, Heritage Foundation, 2012. Note: staff growth calculation incorporates all public primary and secondary school systems.
Non-teaching staff crowding out teaching staff Cumulative growth since 1970
Non-teaching staff (administrators, guidance counselors, librarians)
Teaching staff
75
Related topic: 15 year old girls demonstrate substantially better reading skills than boys across countries; no clear gender gap in math or science
EDUCATION
Source: World Bank. 2018. Size of dot indicates population of country.
BoysBoys
Average reading score by genderGirls
Average math score by genderGirls
Countries above the diagonal line: girls scores exceed boys scoresCountries below the diagonal line: boys scores exceed girls scores
76
77
HEALTHCAREThe US spends more than other developed countries on healthcare, particularlywhen looking at private expenditures. Reasons include a greater number ofprescribed services and exams, higher medical procedure prices and doctorsalaries, and greater technological innovation in US healthcare.While a single payer system is gaining support in recent polls, cost estimates arehigh and subject to considerable uncertainty. Furthermore, there’s evidence thatmany poll respondents don’t understand single payer implications for their choice ofdoctor or their existing insurance.A single payer program entails risk for the US economy in 2 ways. First, it wouldchange how healthcare is financed, with greater reliance on income taxes andhigher budget deficits relative to premiums and cost-sharing, which could result inreduced employment and lower output. Second, higher patient utilization could offsetthe benefit from lower reimbursement rates, drug prices and admin costs.
Healthcare spending projected to reach 20% of GDP by 2026
HEALTHCARE
78
4%
6%
8%
10%
12%
14%
16%
18%
20%
1960 1970 1980 1990 2000 2010 2020Source: Centers for Medicare and Medicaid Services. 2016. Dotted line indicates projections.
Rising healthcare costsUS healthcare expenditures as % of GDP
Healthcare usually costs way more than initial program estimates
Initial estimates vs. actual costs of healthcare
Benefit Inception Estimated ActualMedicare hospital insurance 1965 9.0 67.0 7.4 to 1Medicare (entire program) 1967 12.0 110.0 9.2 to 1Medicare ESRD program 1972 0.1 0.2 2.3 to 1Medicaid DSH program 1987 1.0 17.0 17 to 1Medicare home care benefit 1988 4.0 10.0 2.5 to 1Medicare catastrophic coverage* 1988 5.7 11.8 2.1 to 1Massachusetts Health Reform 2006 0.7 0.9 1.2 to 1Source: US Congress Joint Economic Committee. July 2009. * = multi-year estimate
Actual to estimated cost ratio
Annualized Cost (USD billions)
HEALTHCARE
79
The US healthcare spending gap
HEALTHCARE
US
Nor
way
Switz
erla
ndN
eter
land
sLu
xem
bour
gD
enm
ark
Can
ada
Aus
tria
Ger
man
yFr
ance
Belg
ium
Swed
enIre
land
Aus
tralia
UK
Icel
and
OEC
DFi
nlan
dSp
ain
Japa
nN
ew Z
eala
ndIta
lyG
reec
ePo
rtuga
lSl
oven
iaIs
rael
Slov
ak R
ep.
Kor
eaC
zech
Rep
.H
unga
ryPo
land
Esto
nia
Chi
leM
exic
oTu
rkey
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000Private expenditure on health
Public expenditure on health
Source: OECD Health Data. 2012.
US spends 2.5x the OECD average on healthcareTotal health expenditure per capita, US$ (PPP)
80
Every category of spending is higher in the US, particularly outpatient care
HEALTHCARE
Uni
ted
Sta
tes
Sw
itzer
land
Can
ada
Ger
man
y
Fran
ce
Japa
n
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000OtherPublic health & adminPharmaceuticals & medical goodsAmbulatory (outpatient) health careHospitals/nursing homes
Source: OECD Health Data. 2012.
US health spending greater for all categories of careHealth spending per capita, US$ (PPP)
81
Greater number of services and exams are one reason for higher US spending…
HEALTHCARE
82
United States Units
Rank compared with OECD countries OECD average
MRI units 31.6 per mm pop 2nd 12.5MRI exams 97.7 per k pop 2nd 46.3CT scanners 40.7 per mm pop 3rd 22.6CT exams 265.0 per k pop 3rd 123.8Tonsillectomy 254.4 per 100k pop 1st 130.1Coronary bypass 79.0 per 100k pop 3rd 47.3Knee replacements 226.0 per 100k pop 1st 121.6Caesarean sections 32.9 per 100 live births 6th 26.1Source: OECD Health Data. 2012.
…higher medical procedure prices and higher doctor salaries are part of the explanation as well
HEALTHCARE
US
Ger
man
y
Switz
erla
nd
$0
$50,000
$100,000
$150,000
$200,000
$250,000
Source: "Health care spending in the United States and Other High-Income Countries", Papanicolas et al, Journal of the American Medical Association. 2018.
General physician pay, 2016
83
Procedures AUS CAN DEU FIN FRA SWE USAUSA
premium vs average
Appendectomy 5,044 5,044 2,943 3,739 4,558 4,961 7,962 82%Normal delivery 2,984 2,800 1,789 1,521 2,894 2,591 4,451 83%Caesarean section 7,092 4,820 3,732 4,808 5,820 6,375 7,449 37%Coronary angioplasty 7,131 9,277 3,347 5,574 7,027 9,296 14,378 107%Coronary artery bypass graft 21,698 22,694 14,067 23,468 23,126 21,218 34,358 63%Hip replacement 15,918 11,983 8,899 10,834 11,162 11,568 17,406 48%Knee replacement 14,608 9,910 10,011 9,931 12,424 10,348 14,946 33%Source: "Comparing price levels of hospital services across countries", Koechlin et al, OECD Health Working Papers, 2010. Values are 2007 US$.
The debate on technological innovation and rising healthcare costs
HEALTHCARE
84
Congressional Budget Office:Technological progress contributes at least 50% to the growth in health care costs:“An effective long-term strategy for controlling health care spending will probablyhave to address the health care system’s way of incorporating new technologiesinto practice. Future increases in spending could be moderated if costly newmedical devices were adopted more selectively in the future than they have been inthe past and if diffusion of existing costly services were slowed.”Congressional Budget Office: “Technological Change and the Growth of HealthCare Spending”, 2008
More recent papers derive lower estimates for the contribution of technologicalprogress to health care cost growth: maximum of 30%, and probably muchlower, after taking into account the following trends over the last 30 years: anincrease in obesity and other chronic diseases, the increase in life expectancies,the reduction in patient cost-sharing, and the increase in defensive medicine givenrising malpractice costs.“The Contribution of Innovation to Health Care Costs”, Abrantes-Metz, NYU, 2012
The passage of the ACA was the most partisan major bill in 100 years
National Environmental Policy ActFederal Aid Highway ActTax Reform ActNational Prohibition ActEqual Employment Opportunity Commission ActSocial Security AmendmentsThe Voting Rights ActCivil Rights ActThe Social Security ActBudget Control ActAmerican Taxpayer Relief ActNational Labor Relations ActEconomic Recovery Tax ActBalanced Budget and Emergency Deficit Control ActSocial Security AmendmentsBipartisan Budget AgreementPersonal Responsibility and Work Opportunity Reconciliation ActSecurities Exchange ActFederal Reserve ActTariff ActEconomic Growth and Tax Relief Reconciliation ActRevenue ActDodd-Frank Wall Street Reform and Consumer Protection ActPatient Protection and Affordable Care Act
0% 20% 40% 60% 80% 100%
196919561986191919721983196519641935201120121935198119851965201319961934191319302001191320102010
Republicans
Democrats
Supported by:
Partisanship gap of major domestic legislationAverage Senate/House "Yea" vote differentials
Source: J.P. Morgan Asset Management, Library of Congress, GovTrack. July 2018.
HEALTHCARE
85
ACA: reducing the number of uninsured via $1 trillion of new taxes
HEALTHCARE
86
The ACA raises $1.1 trillion in income taxes, capital gains taxes, Cadillac plan taxes, medicaldevice taxes and individual mandate penalties over 10 years. Triangulating available data, thedecline in the uninsured population appears more tilted towards expanded Medicaid coveragethan through higher enrollment in Federal and state healthcare exchanges.
5%
10%
15%
20%
25%
'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15
Source: CEA, Census, CDC, Haver, JPMAM. 2017.
Share of US population without health insurance
First ACA open enrollment
period starts
Creation of Medicare and Medicaid
Does patient cost-sharing help constrain spending?
HEALTHCARE
87
• Cost-sharing: deductibles, coinsurance rates, copayments and reference pricing• Landmark RAND Health Insurance Experiment: some patients were assigned into
a “free care” program with no cost-sharing, while others were assigned to one ofseveral programs with increasing levels of cost sharing, up to where the patientbore 95% of out of pocket costs (capped at 5% to 15% of household income)
• Results: “Higher co-insurance rates with an out-of-pocket limit, cansignificantly reduce health care use without sacrificing health outcomes forthe typical person.”
• 2010 study on Health Savings Accounts: Each additional dollar increase in thedeductible is associated with a 55-cent decrease in total spending
• 2017 study: a large, self-insured firm with highly-paid employees changed from afree care model to a high-deductible health plan. When exposed to more out-of-pocket risk, employees reduced overall spending by about 12.5%
Sources:“The RAND Health Insurance Experiment, Three Decades Later”, Aron-Dine et al (MIT, Stanford), Journal of Econ Perspectives, 2013“The Role of Consumer Copayments for Health Care: Lessons from the Rand Insurance Experiment”, Gruber, Kaiser Foundation, 2006“What Works and What Doesn’t in Patient Exposure to Health Care Costs”, Laurion & Robertson, University of Arizona, 2018
Single Payer: not projected to materially reduce healthcare spending, raises questions about hospital/physician solvency
HEALTHCARE
88
Sources:“The Costs of a National Single-Payer Healthcare System”, Blahous, Mercatus Center at George Mason University, July 2018“Medicare for All: Taxes and Tradeoffs”, Graboyes, Mercatus Center at George Mason University, August 2018
• Senator Sanders’ Medicare for All Act (M4A): “no cost-sharing, including deductibles,coinsurance, copayments, or similar charges, shall be imposed on an individual”
• New healthcare demand, additional categories of benefits and fewer uninsuredcould offset nearly all potential savings associated with lower provider paymentsand lower drug costs
• M4A assumes provider payments that are 40% lower than private insurance payments• Hospitals currently offset losses on Medicare and Medicaid patients with higher
reimbursement rates on privately insured patients• Half of all hospitals already projected to have already negative margins by 2040
• M4A prescription drug savings estimates may be too high: generic prices are 75-90%lower than brand-name drugs, but already make up 85% of all prescription drugs sold
• Aggregate health expenditures are projected to remain virtually unchanged underM4A: national healthcare costs could decrease by less than 2%, while total healthexpenditures decrease by just 4%, even after assuming large admin cost savings
• US healthcare spending gap vs the rest of the world would be unchanged
Single Payer: how would financing approaches affect future growth, given the reduced reliance on premiums and cost-sharing?
HEALTHCARE
89
Source: Marc Goldwein, Committee for a Responsible Federal Budget (CRFB), 2018
• Current $4.5 trillion healthcare system projected to be financed in 2022 by:• Out-of-pocket payments by patients (10%)• Premiums paid by individuals and employers to insurers (32%)• Medicare, financed by payroll taxes and premiums paid by patients (22%)• Medicaid, financed by federal and state taxpayers (17%)• Variety of public and private payers (18%)
• M4A will look different, and may require higher taxes on wages, salaries, interest,dividends, cap gains, and profits; and also rely on larger fiscal deficits
• How incremental costs of Sanders 2016 plan was financed, as interpreted bythe CRFB: 60% fiscal deficits, 25% payroll tax, 15% high wage income taxes
• Switch from premiums/cost-sharing to income taxes/deficits could createdisincentives to work compared to the current system, and reduce overall output
• “Depending on the details, the economic loss could easily exceed $2 trillionover a decade”, which is the amount of projected M4A savings (CRFB)
Single Payer: other considerations
HEALTHCARE
90
• Single Payer favored by a slim majority of Americans in 2018 Kaiser tracking poll• Many poll respondents believed they would not have to change doctors and could
keep current insurance, both of which are untrue under Single Payer system• The federal government which stumbled in rolling out the ACA which directly covers
less than 4% of the population would have to successfully engineer a transition formore than 300 million people to a wholly government-run system
• Cost uncertainty on Bernie Sanders plan: 4 prior Chairs of the Council of EconomicAdvisers for Presidents Obama and Clinton wrote an open letter citing the “extremeclaims” of Sanders’ plan, one that “cannot be supported by economic evidence”, andwhose projections “exceed even the most grandiose predictions by Republicans aboutthe impact of their proposals”. They concluded that Sanders’ plan was so off-base thatit “undermined the credibility of the progressive economic agenda”
Sources:“Which Road to Universal Coverage?”, H. Aaron, New England Journal of Medicine, December 2017“Open Letter to Senator Sanders”, Former CEA Chairs Goolsbee, Krueger, Tyson and Romer, February 2016
Public Option
HEALTHCARE
91
• Government insurance as an option alongside private insurance• Provides a cap on out-of-pocket spending and premiums, based on income
• Competition between government and private sector already exists: Medicare Advantage(MA), which competes with private managed care plans
• MA plans typically offer lower co-pays and broader coverage, including hearing,vision, prescription drugs and wellness benefits, than traditional Medicare
• MA plans typically have a more limited network of providers and, unlike intraditional Medicare, beneficiaries typically need referrals to see specialists
• While costs of traditional Medicare increased by 5% per enrollee between 2009and 2014, total costs per enrollee for MA declined by 0.7%
• Why more public options could work: in states like California, there has been a lot ofhorizontal consolidation among insurers and providers, and vertical integration ofproviders with insurers, limiting competition in the state. Furthermore, antitrust law hasbeen ineffective at maintaining competition in provider networks. A public option couldrestore competition in highly consolidated provider and insurer markets
• What would have to change: gov’t willingness to use its bargaining power. Currentlaw prohibits Medicare from negotiating drug prices on behalf of its beneficiaries
92
LITIGATIONThe US has more lawyers and higher corporate litigation costs than other developedcountries. These figures include commercial insurance liability premiums, arbitrationpayments and pre-litigation settlements. Some of these costs result from litigationabuses that undermine economic growth: class action lawsuits which are typicallydismissed and which target the most innovative firms, the rapid growth of third partylitigation financing, and the rise of patent trolls.
US: over-lawyered
LITIGATION
93
Australia Canada France Japan UK USALawsuits filed (per 100K people) 1,542 1,450 2,416 1,768 3,681 5,806Judges (per 100K people) 4 3 12 3 2 11Lawyers (per 100K people) 357 26 72 23 251 391Source: "Comparative Litigation Rates," Ramseyer and Rasmusen, Harvard, 2010.
US has the highest observed corporate litigation costs
LITIGATION
• Figures reflect the cost of general commercialinsurance liability premiums, and are a proxy forclaims resolved through litigation, arbitration andpre-litigation settlements
• Figures reflect the cost of general commercialinsurance liability premiums (including medicalmalpractice), and are a proxy for claims resolvedthrough litigation, arbitration and pre-litigationsettlements plus legal costs
Uni
ted
Sta
tes
Can
ada
Uni
ted
Kin
gdom
Irela
nd
Italy
Ger
man
y
Spa
in
Eur
ozon
e
Fran
ce
Den
mar
k
Por
tuga
l
Bel
gium
Net
herla
nds
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
Source: "International Comparisons of Litigation Costs," U.S. Chamber Institute for Legal Reform, 2013.
Litigation costs by country: Sample 1% of GDP
Uni
ted
Sta
tes
Italy
Ger
man
y
Spa
in
Bel
gium
Japa
n
Sw
itzer
land
Fran
ce
Uni
ted
Kin
gdom
Pol
and
Den
mar
k
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Source: "U.S. Tort Costs and Cross Border Perspectives: 2005 Update,"Towers Perrin Tillinghast, 2006.
Litigation costs by country: Sample 2% of GDP
94
Litigation abuses that undermine economic growth: Meritless securities class action lawsuits
LITIGATION
• In recent years, over 96% of publicly announced mergers have attracted ashareholder lawsuit, with many mergers attracting suits in multiple jurisdictions
• 2017 was the most active year with respect to securities class action lawsuits since1995 (passage of the Private Securities Litigation Reform Act). Total filings hitunprecedented levels despite the lack of financial market distress
• Low quality securities class action lawsuits disproportionally target innovative firms,using newly granted patents as a measure of innovation
• Significant economy-wide costs: financial capital, reputational capital,managerial time
• These trends are even more concerning when considering that:• Legal scholars define a “meritless” class action lawsuit as one that is
eventually dismissed• 80% of M&A class action filings from 2009 to 2016 were meritless• Merger litigation typically settled without material benefits to shareholders but
with significant fees paid to the lead plaintiffs’ attorneys filing the case
95
Sources: “The Shifting Tides of Merger Litigation”, Cain et al, University of Pennsylvania Law School, 2018“Securities Class Action Filings: 2017 Year in Review”, Cornerstone Research, 2017“Litigating Innovation: Evidence from Securities Class Action Lawsuits”, Kempf & Spalt (U Chicago School of Business, Tilburg), 2018
Litigation abuses that undermine economic growth: Rising securities class action lawsuits, 80% of which were dismissed
LITIGATION
050
100150200250300350400450
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
M&A filingsChinese reverse merger filingsCredit crisis filingsAll other filings
Source: Stanford Law School Securities Class Action Clearinghouse, Cornerstone Research. 2017.
Class action filings by typeAnnual number of class action filings
96
Meritless class action lawsuits usually target the most innovative firms…
LITIGATION
97
Meritless class action lawsuits are defined as those that are eventually dismissed.Innovation value based on the economic value of patents granted.
0%
1%
2%
3%
4%
5% High innovation firms No innovation firms
Meritless class action lawsuit filings by innovation levelProbability of being targeted with meritless lawsuit, %
Source: "Litigating Innovation: Evidence from Securities Class Action Lawsuits", University of Chicago Booth School of Business. 2018.
…and the greater degree of innovation, the more likely the class action lawsuit
LITIGATION
98
Meritless class action lawsuits are defined as those that are eventually dismissed.Innovation value based on the economic value of patents granted.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
-0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3
Probability of a meritless class action lawsuit filing in the following year vs innovation success
Innovation successSource: "Litigating Innovation: Evidence from Securities Class Action Lawsuits", University of Chicago Booth School of Business. 2018.
Litigation abuses that undermine economic growth: Patent trolls
LITIGATION
99
• Extensive patent demand activity occurs around the time of company IPOs. Themajority of this activity originates from “non-practicing entities” (i.e., patent trolls)
• Patent troll = core business of litigating patents rather than makingproducts
• Plaintiff strategy: force the IPO company to minimize its risks and settle• Impact is pronounced for early-stage info tech companies
• 90% of technology venture capitalists have received patent troll demandsagainst at least one company in their portfolio
• Patent lawsuits rose from 2,500 in 2007 to 5,000 in 2012• Patent trolls rose from 20% of the total in 2007 to 60% of the total in 2012
• Direct aggregate cost of patent trolls: $29 billion in 2012, up fourfold from 2007• Only 20% of payments to patent trolls are estimated to flow back to innovation
and invention• “America Invents Act of 2011” reduced some patent troll abuses, but is now
being challenged in the Supreme Court
Sources: “Patent Demand and Initial Public Offerings”, Feldman & Frondorf, Inst. for Innovation Law, U of California Hastings College of Law, 2015 “The Direct Costs from NPE Disputes”, Bessen & Meurer, Cornell Law Review, 2014
Litigation abuses that undermine economic growth: Third Party Litigation Financing
LITIGATION
5%
10%
15%
20%
25%
30%
35%
40%
2013 2014 2015 2016 2017
Source: "The Growing Acceptance of Litigation Finance", Evans and Klevens, Law.com Daily Report. 2017.
Rising use of litigation funding in U.S. law firmsPercent of law firms using litigation financing
100
Litigation abuses that undermine economic growth: Third Party Litigation Financing (TPLF)
LITIGATION
• TPLF tips scales in favor of plaintiffs, is typically undisclosed to defendants, andthreatens the compensatory and deterrent functions of the legal system whileincreasing inefficiency
• TPLF funders have little incentive to fund plaintiffs facing substantial barriers tojustice, and tend to invest in cases where the risk is the lowest and the possiblereturn is the highest
• TPLF allows plaintiffs to offload risk, which increases the amount of litigation,causes more frivolous lawsuits, prolongs lawsuits and results in largeraverage settlement amounts given returns demanded by third party funders(a), all of which are amplified in situations with treble damages (b)
• 2017 estimate: $100 billion of liquidity available to litigation financing firms• Median annual cost to consumers using TPLF firms: 44% of the amount funded after
accounting for fees, defaults and haircuts
Sources: “Ideal vs Reality in Third Party Litigation Financing”, J. Shepherd, Journal of Law Economics and Policy, 2011“Tilted Scales of Justice? The Consequences of Third-Party Financing of American Litigation”, Richey, Emory Law Journal, 2013 “An Empirical Investigation of Third Party Consumer Litigation Funding”, Avraham and Sebok, Cornell Law Review, 2018
(a) A 2012 study from Australia confirms these trends as a consequence of litigation financing growth(b) Third party litigation funders Juridica Investments and Burford Capital tend to concentrate on anti-trust andpatent infringement cases which involve treble damage statutes
101
102
OTHER REGULATORY ISSUESA growing and productive economy strikes the right balance between regulation andgrowth incentives for the private sector, particularly since the latter accounts for 88%of all employment. There are many examples of regulation achieving critical gainsregarding the soundness of the financial sector, the environment, anti-trustenforcement and intellectual property. However, the question of when too muchregulation begins to negatively impact growth is not widely studied; what we doknow is that regulation tends to disproportionately affect smaller firms.Cross-country data from the World Economic Forum shows a sharp decline in theease of starting a new business in the US from 2008 to 2016, a trend which may berelated to the rise in regulation across multiple sectors which took place during thattime frame. The issue for regulators: where to draw the line, which gets complicatedin a system where government agencies promulgate 30 times as many rules as thelegislature itself.
Regulations make critical contributions to public welfare
OTHERREGULATION
• Regulations were catalysts for reduced human exposure to sulfur dioxide, nitrogenoxide, carbon monoxide and lead
• Even with Federal oversight, the latest assessments indicate that 40%-80% of USrivers, lakes, estuaries and streams are still polluted
103
0.00.20.40.60.81.01.21.41.61.82.0
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Source: US Environmental Protection Agency. 2017.
A history of national ambient lead levelsLead concentration, micrograms per cubic meter
Lead regulations:● 1971: Lead-based Poisoning Prevention Act● 1976: Consumer Product Safety Commission ban on lead paint● 1990: Ban on lead in gasoline
0102030405060708090
100
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: US Environmental Protection Agency. December 2016.
A history of air pollutants and federal legislationIndex of tons of matter emitted, 1970 = 100
Nitrogen oxide
Sulfur dioxide
Carbon monoxide
Clean Air Act Amendments
Clean Air Interstate Rule
Energy Policy and Conservation Act
Clean Air Act
Regulations make critical contributions to public welfare
OTHERREGULATION
• Since the mid 1990’s, there have been substantial declines in the rate of many food-borne illnesses in the US. These declines have been attributed by the CDC to morefrequent inspections and greater regulation of contaminants
104
3.8 0.3 0.9 0.3 13.6 0.4
-60%-40%-20%
0%20%40%60%80%
100%120%
Shigella Yersinia E.Coli Listeria Campylobacter VibrioSource: CDC Morbidity and Mortality Weekly Report. June 2011. Six pathogens shown account for more than 50% of foodborne illness.
US foodborne illness rateschange in illness rate, 1996-2010
As per the CDC, reasons for the declines include:* More inspections of beef processing plants* Prohibition of ground beef contaminants* Improvements in FDA Food Model Code* Reduced allowable contamination of broiler chickens at processing plants
incidence per 100k people in 2010
Regulations make critical contributions to public welfare
OTHERREGULATION
• On the financial sector, the quotes below from Chairman/CEO Jamie Dimon reinforcethe notion that regulation can contribute to greater stability and safety
105
“From my point of view, the American financial system - including banks andinvestment banks - is far safer because of capital and liquidity requirements. Despiteall the turbulence so far this year, I don’t think anyone’s questioning our system. Andthat, obviously, is a good thing.”Jamie Dimon Bloomberg interview, March 1, 2016
“Some people speak of regulation like it is a simple, binary tradeoff – a strongersystem or slower growth or vice versa. We believe that many times you can come upwith regulations that do both – create a stronger system and enhance growth.”Jamie Dimon J.P. Morgan Shareholder letter, 2015
Regulations make critical contributions to public welfare
OTHERREGULATION
106
55%
60%
65%
70%
75%
80%
0%
1%
2%
3%
4%
5%
6%
'90 '95 '00 '05 '10 '15
Source: Federal Reserve. October 2018.
US commercial banks: deposits and interbank loans% of assets (both axes)
Deposit
Interbankloans
0%
20%
40%
60%
80%
100%
120%
'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15Source: "Money, Banking, and Financial Markets", Cecchetti & Schoenholtz, 2017, JPMAM.
US: shadow banking and traditional banking Liabilities as % of GDP
Commercial Banking
Shadow Banking BHC/ Broker Dealer
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
US Europe
2007 2017
Source: Federal Reserve Bank of New York, Bloomberg. Q2 2017.
Rising capital ratios since crisisRisk-weighted capital ratio
30%
35%
40%
45%
50%
US Europe
2007 2017
Source: FDIC, Goldman Sachs, JP Morgan. Q2 2017.
Improving liquidity ratios since crisisLiquid assets as % of short term liabilities
70%
80%
90%
100%
110%
120%
130%
140%
150%
'95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17Source: Fed, ECB. Q4 2017.
Bank loan-to-deposit ratios
US banks
Eurozone banks
0.0
0.5
1.0
1.5
2.0
2.5
'02 '04 '06 '08 '10 '12 '14 '16 '18
Money Market ReformLehman Crash
Source: JPMAM. Feb 7, 2018. *Includes institutional and retail funds.
A shift to lower risk money market fundsUS$ trillions, assets under management*
Prime
Government
The question: how much regulation is too much?
OTHERREGULATION
107
Source: “Red tape rising 2016: Obama regs top $100 billion annually”, Gattuso and Katz (Heritage Foundation), 2016
-10 -5 0 5 10 15 20 25 30 35 40
All otherFederal Deposit Insurance Corporation
Department of Homeland SecurityConsumer Financial Protection Bureau
Department of the TreasuryDepartment of Labor
Department of TransportationFederal Reserve Board
Commodity Futures Trading CommissionDepartment of Health and Human Services
Department of EnergyEnvironmental Protection Agency
Securities and Exchange Commission
Source: Government Accountability Office (Federal Rules Database), Heritage Foundation. 2015.
Regulations by sector since 2009Number of rules with an annual economic impact of $100 million or more
Regulatory reductions Regulatory additions
The impact of regulation: ease of starting a new business decline in the US after 2008
OTHERREGULATION
40
50
60
70
80
90
100
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
Source: World Bank Doing Business, JPMAM. 2018. N = 189.
"Ease of starting a new business": in the US, getting less easy, US percentile rank relative to world and OECD
US vs. World
US vs. OECD
Easier
Harder
108
The pace of regulation
OTHERREGULATION
109
0
50
100
150
200
250
300
350
400
450
500
0 1 2 3 4 5 6 7 8Years in office
President Obama
President Clinton
President Bush
President Trump
Source: George Washington University Regulatory Studies Center. Jan 2018.
Cumulative number of economically significant regulations published during equivalent periods in office
40
50
60
70
80
90
100
'75 '78 '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '17
Source: Federal Register. 2017.
# of new pages in the Federal Register of regulationsThousands of new pages per calendar year
The cost of regulation
-$50
$0
$50
$100
$150
$200
$250
$300
-$5
$0
$5
$10
$15
$20
$25
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15Source: US Office of Management and Budget. 2016.
Cost of new federal regulationsUSD billion in 2015 dollars (both axes)
Annual cost of new regs
Cumulative annual cost of new regs
OTHERREGULATION
110
In practice, regulatory cost/benefit analyses are rare
OTHERREGULATION
111
Source: “Government report on benefits and costs of federal regulations fails to capture full impact of rules”, Williams and Broughel(Mercatus Center at George Mason University), 2013
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Federal rules finalizedfrom 2003 to 2012
Economicallysignificant rules
reviewed by OIRA
Rules reported on byOIRA with benefit and
cost information
Office of Information and Regulatory Affairs (OIRA) only reports cost/benefits on a small fraction of regulations, #
Source: Mercatus Center at George Mason University. April 2013.
1153,203
Higher labor productivity growth observed in less regulated industries
OTHERREGULATION
112
Source: “Regulation and productivity”, Davies (Mercatus Center at George Mason University), 2014
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Least regulated industries Most regulated industries
Source: Mercatus Center at George Mason University. 2014.
Regulation and labor productivity growthAnnual growth in output per person
Regulation tends to disproportionately impact smaller firms
OTHERREGULATION
113
• Small firms most affected by regulation• A 10% increase in regulatory restrictions on a particular industry is associated
with a reduction in the total number of small firms within that industry by about0.5%, while having no impact on the number of large firms
50
60
70
80
90
100
110
120
130
1998 2000 2002 2004 2006 2008 2010 2012 2014
Regulatory burden by firm sizeIndex of weighted regulatory burden, 1998 small firm burden = 100
Source: "Regulation, Entrepreneurship, and Firm Size", Chambers et al, Mercatus Working Paper, 2018.
0-4
5-9
No. of employees
10-1920-99100-499
500+
The market serves as a useful barometer of bad private sector ideas
OTHERREGULATION
114
• More than half of all companies in the S&P 500 were removed from the indexsince 1980 due to failure and distress (i.e., excluding mergers and acquisitions)
0
50
100
150
200
250
300
350
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Source: FactSet, Bloomberg, Standard & Poor's, JPMAM. 2013.
Cumulative number of companies removed from the S&P 500 due to distress, Number of companies
What barometer can be used to evaluate the long term impact of public sector regulations?
OTHERREGULATION
115
Source: “Course of Empire”, Special Eye on the Market issue, JP Morgan Asset Management , Michael Cembalest, Nov. 2013
• Legislators and regulators should acknowledge unintended consequences andlessons learned from regulatory changes contributing to the financial crisis
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Radical transformation of GSE balance sheets following 1993 HUD lending guideline change preceded private sector subprime/Alt A expansionPercent of annual underwriting (except Fannie/Freddie share based on total outstanding balances)
Source: American Enterprise Institute. J.P. Morgan Asset Management. November 2013. * The measures shown reflect underwriting at what was known to be effectively subprime level lending at the time. DTI = Debt to Income. CLTV = Combined Loan to Value.
Freddie Mac/Fannie Mae underwriting that exceeded
traditional standards*
Private sector subprime and Alt A % of total origination
GSE Low & Moderate Income lending target
Fannie/Freddie share of total mortgage market
FHA LTV >=97%
2
3
45
1. Non-traditional Freddie Mac2. Freddie cash out CLTV > 75%
3. Fannie/Freddie DTI > 38%4. Fannie purchase loan CLTV > 90%
5. Fannie/Freddie DTI >= 42%
1
116
POLITICAL POLARIZATIONThe challenges cited above are complicated, require tough choices and will at timesrequire politicians to break with party discipline to solve. The problem is that rightnow, the political middle has essentially disappeared in the US Congress. The charton the next page shows in gray the percentage of moderates in the House ofRepresentatives, based on their voting records. There’s not many of them left.The other message from the chart: the US was more prosperous when there weremore moderates cooperating with each other. Yes, the post-war growth declineprimarily reflects falling birthrates and rising longevity [a]. But the collapse in thepolitical center may have played a substantial role as well, leading to one-sidedpolicymaking that gets implemented and repealed as the pendulum swings, andissues that are left unaddressed since political divisions are too wide.
[a] “Why Does Economic Growth Keep Slowing Down?”, Martin, Federal Reserve Bank of St. Louis, February 9, 2017
Political moderates and US growth
POLITICAL POLARIZATION
117
0%
10%
20%
30%
40%
50%
60%
1950 1960 1970 1980 1990 2000 2010Source: Conference Board; Congressional Budget Office; Voteview database (Lewis et al, UCLA); JPMAM calculations. House moderates defined as those with Nokken-Poole first dimension scores between -0.25 and +0.25. 2018.
Moderates in Congress and GDP growth since 1950
Subsequent 10-year cumulative real GDP growth
Percentage of Moderates in the House of Representatives
118
End notes
Understanding “the cost of a life”
Whenever social scientists measure the cost to society of people being injured in someway (poisoned by contaminants in the air, water and food supply; harmed in automobileaccidents; suffering from drug overdoses or gun violence), they often make assumptionsregarding the “value of a statistical life”.The EPA definition:“The Agency uses estimates of how much people are willing to pay for small reductions intheir risks of dying from adverse health conditions that may be caused by environmentalpollution. In the scientific literature, these estimates of willingness to pay for smallreductions in mortality risks are often referred to as the value of a statistical life. This isbecause these values are typically reported in units that match the aggregate dollaramount that a large group of people would be willing to pay for a reduction in theirindividual risks of dying in a year, such that we would expect one fewer death among thegroup during that year on average”.The gun violence study cited earlier uses a figure of $6.2 mm per life, compared to the EPAassumption of $7.9mm and the Department of Transportation assumption of $9.2mm.
119
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