negative productivity agents - j.p. morgan · negative productivity agents michael cembalest, j.p....
TRANSCRIPT
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. Negative
productivity agents refer to structural impediments to growth and productivity, which are distinct
from cyclical factors affecting growth during the business cycle. Demographics play a large role
in determining long-term economic growth rates, but that’s not the whole story. Policymakers
have a large impact as well, by creating incentives for or obstacles to future growth, and in the
ways that they balance competing priorities. This presentation outlines some of the headwinds
to future US growth and productivity, with the goal of making these choices clearer.
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
Hundre
ds
Where will the next productivity wave come from?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. 3-7
Infrastructure/Energy pp. 8-23
Immigration pp. 24-31
Land use regulation pp. 32-39
State licensing requirements pp. 40-45
Behaviors (gun violence, obesity, opioids and incarceration) pp. 46-59
Racial inequality pp. 60-66
Education pp. 67-76
Healthcare pp. 77-91
Commercial litigation pp. 92-101
Other regulatory issues pp. 102-115
Political polarization and GDP growth pp. 116-117
End notes and disclaimer pp. 118-120
2
WAR and its OPPORTUNITY COSTSWith the benefit of hindsight, some US wars eventually improved US security and
prosperity, while others worsened it. What we do know is this: fighting and preparing
for wars is expensive, and siphons funds away from other initiatives related to
infrastructure, education and job creation. There are substantial unanswered
questions 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 projects
that all could have been paid for instead: subsidies for electrifying half of the US
passenger car fleet, burying the most hurricane-exposed US power lines, funding 5
high speed train networks, sea barriers in key coastal cities, Universal pre-K, the
construction of high voltage power lines to facilitate greater use of wind and solar
power, 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
Hundre
ds Active
Completed
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 Defense
Department and Housing/Urban Development for 1998-2015. US Army had $6.5 trillion
of 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 to
specific accounting transactions. For an auditor, journal vouchers are red flags for
transactions not being captured, reported, or summarized correctly
• “Taken together these reports point to a failure to comply with basic constitutional and
legislative requirements for spending and disclosure. We urge the House and Senate
Budget Committee to initiate immediate investigations of unaccounted federal
expenditures as well as the source of their payment.” Mark Skidmore (MSU) and
Lawrence 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 most
pressing needs: roads, bridges, the electricity grid, schools, waterways, airports,
wastewater, rail and flood protection. The opportunity cost of not fixing it: $4 trillion
in 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 growing
challenge: 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% of
Federal revenues are projected to be consumed by entitlements and other
mandatory 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
Su
rface t
ran
sp
ort
ati
on
Ele
ctr
icit
y
Sch
oo
ls
Wate
rways/p
ort
s/d
am
s
Air
po
rts
Rail
Waste
wate
r
Pu
blic p
ark
s
Hazard
ou
s &
so
lid
waste
$0
$250
$500
$750
$1,000
$1,250
$1,500
$1,750
$2,000
$2,250Funding gap
Estimated funding
Source: American Society of Civil Engineers 2017 Infrastructure Report.
Public infrastructure needs, 2016-20252015 US$, 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
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
'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 10,738
Spain 3,100 1,800
Japan 3,041 402
France 3,220 125
Germany 3,038 330
Sweden 1,706 11
United Kingdom 1,377 230
South Korea 1,104 376
Italy 999 116
Turkey 802 1,208
Russia 845 0
Finland 609 0
Uzbekistan 600 0
Austria 352 208
Taiwan 354 0
Belgium 326 0
Poland 224 0
Netherlands 175 0
Switzerland 144 15
Luxembourg 142 0
Norway 64 54
United 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
itz
Sin
ga
Ho
ng
K
De
nm
a
Ne
the
Fra
nc
Lu
xe
m
Fin
la
Ja
pa
n
Ice
la
UK
Ca
na
d
Au
sti
Sw
ed
e
UA
E
Ne
wZ
e
Cze
ch
Be
lgi
Qa
tar
Ko
rea
Slo
ve
Isra
e
Ire
la
Sp
ain
US
A
Po
rtu
Om
an
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 multiple
states. Prime example is the 1 GW Northern Pass line connecting Hydro-Quebec to New England, which
was supported by Massachusetts regulators. However, a New Hampshire siting committee rejected the
proposal 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 have
been 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 > 400kV
Source: JPMAM, Global Transmission Research. 2018.
Infrastructure needs include coastal flood protection
Shoreline 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 square
miles 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 help
generate 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 and
wastewater 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
FD
R D
rive
Met
No. H
udson
LaG
uard
ia A
irport
A/C
/M/N
/R tra
ins
Holla
nd T
unnel
Verr
azano B
ridge
Bkln
Batt
ery
Tunnel
LIR
R E
ast R
iver
West S
t
4, 5 a
nd 6
tra
ins
Thro
gs N
eck B
ridge
Penn S
tation
New
ark
Airport
Lin
coln
Tunnel
Queens M
idto
wn T
unnel
Gra
nd C
entr
al S
tation
JF
K A
irport
Triboro
Bridge
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 substantial
investment in de-carbonization of industry and transportation
• Even if fossil fuels used to generate electricity were cut in half, the impact on overall emissions
would not be nearly as large given the much greater amount of fossil fuels used by industry, in
transportation 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 be
high-hazard sites
• 240,000 water main breaks per year, wasting over 2 trillion gallons of treated
drinking water
• NextGen Air Traffic Control system could reduce fuel consumption by 1.46 billion
gallons and reduce aircraft delays by 40%
• 25,000 miles of inland waterways deliver more than 600 million tons of cargo each
year, about 14% of all domestic freight. Most locks and dams on the system are
beyond 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 Federal
Highway Administration estimates that every $1 spent on such improvements
returns $5.20 by reducing vehicle maintenance, delays, fuel consumption,
emissions, and improving safety
18
Source: “2017 Infrastructure report card: A comprehensive assessment of America’s infrastructure”, American Society of Civil
Engineers. 2017
State and local entities are paramount given their weight in total
infrastructure spending
INFRASTRUCTURE
US$ billions % of total
Federal 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 Office, 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 on
this 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 discretionary
spending 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 a
0.73% drop in city employment in the following year
Pension-induced employment reductions are most pronounced for non-public
safety employees
Rising pension costs are also associated with reduced spending on
construction 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 '25
Source: 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 vital
contributor to future growth and productivity. Most studies find net benefits from
immigration: increased growth and productivity, and limited crowding-out of
employment or hours worked by natives. However, some studies show competition
pressures on teenagers and native populations with high skill overlap, as well as
with African Americans. Furthermore, the net fiscal impact of immigration is positive
for college-level immigrants (which now make up more than 50% of annual
immigration), but negative for lower skilled immigrants with less education.
The “perception gap”, which measures the actual level of immigration vs how much
citizens believe it to be, is much wider in the US than in other countries. The level of
undocumented workers has declined since 2007, from 32% to 27% of the total
immigrant 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
Hu
nd
red
s
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 2014
Source: 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 hours
worked 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, international
competition, sector composition)
• An increase in employment in a US state of 1% due to immigrants
produced an increase in income per worker of 0.5% in that state
• Other immigration studies do show negative wage and employment
impacts on teenagers, African Americans and individuals with skill overlap
with 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 labor
market 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 due
to competition for jobs
IMMIGRATION
28
Sources:
“Immigration and African-American employment opportunities: the response of wages, employment, and incarceration to labor supply
shocks,” 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, Journal
of 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 a
result, US firms hired 20%-50% fewer new H-1B workers than they might have had the prior cap
remained. 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 it
undermines market forces that would otherwise determine how much housing to
build, where to build, and what type to build. Regulations lead to a mismatch
between housing that households want, what they can afford, and what is available.
Many studies now find that these land use regulations are associated with less
income convergence between rich and poor, less labor mobility, lower employment
growth, lower housing affordability, a slower pace of new business creation and
overall 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 how
much housing to build, where to build, and what type to build, leading to a
mismatch between housing that households want, what they can afford, and what
is available
• Many studies now find that land use regulations are associated with less income
convergence between rich and poor, less labor mobility, lower employment
growth, lower housing affordability, a slower pace of new business creation
and overall losses in aggregate output
• 10% output loss in 2009 due to the cumulative impact of land use and zoning
restrictions since 1964 (in other words, GDP would have been 10% higher)
• 100 years of rapid income convergence between poor and rich states came
to an end with the inception of the land use regulation era in the 1980s, given
the 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
Dall
OKC
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 progressive
housing 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’s
housing permits
• Results: a 10% increase in a city’s liberal voting share is associated
with a 32% reduction in housing permitting growth
• The results account for differences in city demographics such as income
growth, 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 of
Urban Economics, 2010
40
STATE LICENSING REQUIREMENTSThe rise in state-level licensing requirements can lead to higher wages for those
able to obtain a license, but can also lead to inefficiency and unfairness: reduced
job opportunities, depressed wages for excluded workers, reduced worker mobility
across state lines, increased costs for consumers and lower overall output.
Most licensing requirements are not established by elected officials accountable to
voters, but by a board of incumbent practitioners whose primary job is to provide
services in the same market they regulate. These conclusions were reinforced by
an in-depth 2015 White House Report on the subject.
A first step in remediating some of the anti-competitive issues: the creation of a
task force at the Federal Trade Commission which can bring enforcement actions
against 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 and
midwives.
• Licensed industries in some states also include auctioneers, florists, TV tube
salesmen, 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 the
expediters are licensed
• In cities like Milwaukee and Chicago, “aldermanic privilege” allows aldermen to
hold 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 the
citizenry, dishing out special economic benefits to certain in-state industries
remains the favored pastime of state and local governments” [10th Circuit Judge
Tacha, 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 practitioners
whose 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 prices
without 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 than
licensed workers with similar levels of education, training, and experience.
Licensing laws also lead to higher prices for goods and services, with
research showing effects on prices of between 3% and 16%
• Inconsistencies: over 1,100 occupations are regulated in at least one
state, 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 states
with fewer CPAs without observed declines in service quality [new provisions
allow out-of-state CPAs to enter markets other than their home states without
the need to notify boards, obtain reciprocal licenses or pay related fees]
• In 2017, the US Federal Trade Commission established the Economic Liberty Task
Force to work on the issue of overly restrictive state-level licensing requirements
• The FTC has the ability to bring enforcement actions against local regulatory
boards, 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 businesses
altogether, while Miami and DC permit only certain categories. In parts of
Philadelphia, 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 may
be used only for “incidental storage” for the business. Milwaukee limits such
storage to 50% of a garage and requires that only 25% of a home may be
dedicated to a business
• Cities also prescribe how many people may work in a home (only two in Miami
and no more than one non-resident in Chicago, Los Angeles and D.C.), and
how many customers a business may serve in a day (in Chicago, no more
than two at once and 10 in a day). Los Angeles limits home-based businesses
to 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 and
incarceration. The related economic costs are in the hundreds of billions of
dollars in terms of lost output, emergency services, medical care and lost
income.
US gun violence is a substantial drag on productivity and output
47
Cost of gun violence includes emergency services, police investigations, long term medical and
mental-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 and
the 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
VT
VA
ORPA
MI
NC
MO
OK
AZ
UT
GA
IN
FL
KSCO
TXSD
WI
IA MN
NV
TNMS
LA
SC
KY
ND
NM
AL
MT
WY
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 ChiQatSin
SkoUK
Net
SpaHun CypAus Ger
Ire IceLatSweGreDen
Lit CZNor
Isr
Bel
Slo NZEstFra
CroSwi
Fin
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 Difference
Gun control policies
Preventing the mentally ill from purchasing guns 89 89 0
Barring gun purchases by people on no-fly or watch lists 82 85 -3
Backgroung checks for private sales and at gun shows 77 90 -13
Banning assualt style weapons 54 80 -26
Creating a federal database to track gun sales 56 84 -28
Banning high capacity magazines 47 79 -32
Gun friendly policies
Allowing concealed carry in more places 72 26 46
Allowing teachers and officials to carry guns in K-12 schools 69 26 43
Shortening waiting periods for buying guns legally 51 25 26
Allowing concealed carry without a permit 30 10 20
Source: 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 other
chronic, 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
Un
ite
d S
tate
sM
ex
ico
New
Ze
ala
nd
Hu
ng
ary
Au
str
ali
aU
nit
ed
Kin
gd
om
Can
ad
aC
hil
eF
inla
nd
Ge
rma
ny
Ire
lan
dL
ux
em
bo
urg
Tu
rke
yL
atv
iaC
ze
ch
Rep
.O
EC
DS
love
nia
Ice
lan
dB
elg
ium
Es
ton
iaIs
rae
lG
ree
ce
Sp
ain
Po
lan
dP
ort
ug
al
Slo
va
k R
ep
.F
ran
ce
Den
ma
rkA
us
tria
Ne
the
rla
nd
sS
we
de
nN
orw
ay
Sw
itze
rla
nd
Ita
lyK
ore
aJ
ap
an
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
USA
Mexico
EnglandHungary
Canada
Spain
FranceItalySwitzerland
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 almost
245 million in 2014, roughly equivalent to one opioid prescription per adult
• Prescription growth has been accompanied by adverse outcomes including higher
rates of opioid overdose, abuse, addiction, diversion, emergency room visits and
neonatal 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
Un
ite
d S
tate
s
Canada
Germ
any
Austr
ia
Denm
ark
Sw
itzerla
nd
Be
lgiu
m
Austr
alia
Neth
erla
nds
UK
Isra
el
Spain
Norw
ay
Irela
nd
Luxem
bourg
New
Ze
ala
nd
Sw
eden
Icela
nd
Fra
nce
Gre
ece
Slo
venia
Italy
Fin
land
Port
ugal
Slo
vakia
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
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
CACO
CT
DE
DC
FL
GA
HI
ID
IL
IN
IA
KS
KYLA
ME
MD
MA
MI
MN
MS
MO
MT
NE
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 75
Participation 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
Turkm
ThailCuba
RwandRussi
Belar
Brazi
Taiwa
Israe
Czech Singa
Saudi
Slova
Austa
UK
Spain
Portu
Canad
HongK
Franc UAE
Austi
Italy
Greec
Belgi
Irela
GermaNorwa
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 a
society where racial issues still impact consumer-to-business interactions
(wages, autos, home sales, lending), the criminal justice system, hiring, job
opportunities, investing and medical care. There are persistent wage gaps that
cannot be explained by differences in age, education, job type, or location.
The economic benefits from reducing inequality are large. One study showed a
potential 10% jump in US GDP from closing the wage gap between white and
non-white private sector employees. In a separate study, researchers found that
up to one-fifth of labor force productivity growth between 1960 and 2008 came
from 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+
1979-1991
1992-2004
2005-2016
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 testers
Differences 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 résumés
Racial 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 the
same company, even before the 2008 Financial Crisis.
• HBCU-issued bonds are also more expensive to trade in secondary markets, and
when 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 of
Washington), 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 a
major role in the late 19th and early 20th centuries when the US became the world’s
dominant superpower, surpassing countries in Europe. However, these educational
gains slowed during the post-war era. The US now lags behind half of all developed
countries in science and reading, and behind three quarters of developed countries in
math. US companies cite education as being their largest problem in filling vacant
positions. The onset of the vehicle automation era, which is expected to displace large
numbers of workers with less education, is another looming challenge. The OECD
estimates a 0.75% increase in annual long-term US GDP growth from bringing all
students to a minimum level of proficiency.
One observed obstacle: more spending does not universally translate into better
educational outcomes, according to analyses across countries and within the US itself.
US companies cite lack of education and experience as their #1 problem
in 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 - US
Math - 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
X
TU
R
GR
E
PO
R
ITA
LU
X
US
A
SP
A
OE
CD
PO
L
GE
R
NO
R
HU
N
SLO
BE
L
BE
L
DE
N
AU
T
SW
E
SW
I
SW
I
CZ
R
IRE
UK
NZ
L
AU
S
NE
T
JA
P
CA
N
KO
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
va
k R
ep
.L
ith
ua
nia
Gre
ece
Tu
rke
yC
hile
Germ
an
yS
pa
inS
love
nia
Ja
pa
nP
ola
nd
Cyp
rus
Ita
lyF
ran
ce
Cze
ch
Re
p.
Ru
ssia
Au
str
iaK
ore
aE
sto
nia
Isra
el
Be
lgiu
mS
ing
ap
ore
Ire
lan
dC
an
ad
aD
en
ma
rkN
eth
erl
an
ds
Sw
ed
en
En
gla
nd
No
rth
ern
Ire
lan
dU
SF
inla
nd
No
rwa
yN
ew
Ze
ala
nd
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 Italy
Slovenia
Japan
Canada
Netherlands
BelgiumSweden
UKDenmark
Iceland
NorwaySwitzerland
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 to
reduce racial inequality in test scores
• The authors conclude that it might be time to embrace alternatives that emulate
private 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 total
student enrollment of ~2.7 million
• A 2018 study looked at 8 inner-city charter school systems, comparing student
outcomes and education spending with public schools in the same city
• Public Charter Schools delivered substantially better results, with average test
scores per dollar that were ~35% higher
• To be clear, almost the entire benefit in the study was due to lower spending
by 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
Charter
Public
Reading scores per dollar of spending
0 5 10 15 20 25 30 35
Indianapolis
San Antonio
Denver
Wash DC
Boston
NYC
Atlanta
Houston
Charter
Public
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 '10
Source: “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 scores
Countries below the diagonal line: boys scores exceed girls scores
76
77
HEALTHCAREThe US spends more than other developed countries on healthcare, particularly
when looking at private expenditures. Reasons include a greater number of
prescribed services and exams, higher medical procedure prices and doctor
salaries, and greater technological innovation in US healthcare.
While a single payer system is gaining support in recent polls, cost estimates are
high and subject to considerable uncertainty. Furthermore, there’s evidence that
many poll respondents don’t understand single payer implications for their choice of
doctor or their existing insurance.
A single payer program entails risk for the US economy in 2 ways. First, it would
change how healthcare is financed, with greater reliance on income taxes and
higher budget deficits relative to premiums and cost-sharing, which could result in
reduced employment and lower output. Second, higher patient utilization could offset
the 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 2020
Source: 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 Actual
Medicare hospital insurance 1965 9.0 67.0 7.4 to 1
Medicare (entire program) 1967 12.0 110.0 9.2 to 1
Medicare ESRD program 1972 0.1 0.2 2.3 to 1
Medicaid DSH program 1987 1.0 17.0 17 to 1
Medicare home care benefit 1988 4.0 10.0 2.5 to 1
Medicare catastrophic coverage* 1988 5.7 11.8 2.1 to 1
Massachusetts Health Reform 2006 0.7 0.9 1.2 to 1
Source: 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
Norw
ay
Sw
itze
rla
nd
Nete
rla
nd
s
Lu
xe
mb
ou
rg
Den
ma
rk
Can
ad
a
Au
str
ia
Ge
rma
ny
Fra
nce
Be
lgiu
m
Sw
ed
en
Ire
lan
d
Au
str
alia
UK
Ice
lan
d
OE
CD
Fin
lan
d
Sp
ain
Ja
pa
n
New
Ze
ala
nd
Ita
ly
Gre
ece
Po
rtu
ga
l
Slo
ve
nia
Isra
el
Slo
va
k R
ep
.
Ko
rea
Cze
ch
Rep
.
Hun
ga
ry
Po
lan
d
Esto
nia
Chile
Me
xic
o
Tu
rke
y
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
United S
tate
s
Sw
itzerla
nd
Canada
Germ
any
Fra
nce
Japan
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000Other
Public health & admin
Pharmaceuticals & medical goods
Ambulatory (outpatient) health care
Hospitals/nursing homes
Source: OECD Health Data. 2012.
US health spending greater for all categories of careHealth spending per capita, US$ (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 12.5
MRI exams 97.7 per k pop 2nd 46.3
CT scanners 40.7 per mm pop 3rd 22.6
CT exams 265.0 per k pop 3rd 123.8
Tonsillectomy 254.4 per 100k pop 1st 130.1
Coronary bypass 79.0 per 100k pop 3rd 47.3
Knee replacements 226.0 per 100k pop 1st 121.6
Caesarean sections 32.9 per 100 live births 6th 26.1
Source: OECD Health Data. 2012.
…higher medical procedure prices and higher doctor salaries
are part of the explanation as well
HEALTHCARE
US
Ge
rma
ny
Sw
itze
rla
nd
$0
$50,000
$100,000
$150,000
$200,000
$250,000
Source: "Health care spending in the United States and Other High-Income Countries", Papanicolas et al, Journal of the American Medical Association. 2018.
General physician pay, 2016
83
Procedures AUS CAN DEU FIN FRA SWE USA
USA
premium vs
average
Appendectomy 5,044 5,044 2,943 3,739 4,558 4,961 7,962 82%
Normal delivery 2,984 2,800 1,789 1,521 2,894 2,591 4,451 83%
Caesarean section 7,092 4,820 3,732 4,808 5,820 6,375 7,449 37%
Coronary angioplasty 7,131 9,277 3,347 5,574 7,027 9,296 14,378 107%
Coronary artery bypass graft 21,698 22,694 14,067 23,468 23,126 21,218 34,358 63%
Hip replacement 15,918 11,983 8,899 10,834 11,162 11,568 17,406 48%
Knee replacement 14,608 9,910 10,011 9,931 12,424 10,348 14,946 33%
Source: "Comparing price levels of hospital services across countries", Koechlin et al, OECD Health Working Papers,
2010. Values are 2007 US$.
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 probably
have to address the health care system’s way of incorporating new technologies
into practice. Future increases in spending could be moderated if costly new
medical devices were adopted more selectively in the future than they have been in
the past and if diffusion of existing costly services were slowed.”
Congressional Budget Office: “Technological Change and the Growth of Health
Care Spending”, 2008
More recent papers derive lower estimates for the contribution of technological
progress to health care cost growth: maximum of 30%, and probably much
lower, after taking into account the following trends over the last 30 years: an
increase in obesity and other chronic diseases, the increase in life expectancies,
the reduction in patient cost-sharing, and the increase in defensive medicine given
rising 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, medical
device taxes and individual mandate penalties over 10 years. Triangulating available data, the
decline in the uninsured population appears more tilted towards expanded Medicaid coverage
than 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 of
several programs with increasing levels of cost sharing, up to where the patient
bore 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, can
significantly reduce health care use without sacrificing health outcomes for
the typical person.”
• 2010 study on Health Savings Accounts: Each additional dollar increase in the
deductible is associated with a 55-cent decrease in total spending
• 2017 study: a large, self-insured firm with highly-paid employees changed from a
free 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 uninsured
could offset nearly all potential savings associated with lower provider payments
and 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 under
M4A: national healthcare costs could decrease by less than 2%, while total health
expenditures 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 by
the CRFB: 60% fiscal deficits, 25% payroll tax, 15% high wage income taxes
• Switch from premiums/cost-sharing to income taxes/deficits could create
disincentives to work compared to the current system, and reduce overall output
• “Depending on the details, the economic loss could easily exceed $2 trillion
over 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 for
more than 300 million people to a wholly government-run system
• Cost uncertainty on Bernie Sanders plan: 4 prior Chairs of the Council of Economic
Advisers for Presidents Obama and Clinton wrote an open letter citing the “extreme
claims” of Sanders’ plan, one that “cannot be supported by economic evidence”, and
whose projections “exceed even the most grandiose predictions by Republicans about
the impact of their proposals”. They concluded that Sanders’ plan was so off-base that
it “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 in
traditional Medicare, beneficiaries typically need referrals to see specialists
• While costs of traditional Medicare increased by 5% per enrollee between 2009
and 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 of
horizontal consolidation among insurers and providers, and vertical integration of
providers with insurers, limiting competition in the state. Furthermore, antitrust law has
been ineffective at maintaining competition in provider networks. A public option could
restore competition in highly consolidated provider and insurer markets
• What would have to change: gov’t willingness to use its bargaining power. Current
law prohibits Medicare from negotiating drug prices on behalf of its beneficiaries
92
LITIGATIONThe US has more lawyers and higher corporate litigation costs than other developed
countries. These figures include commercial insurance liability premiums, arbitration
payments and pre-litigation settlements. Some of these costs result from litigation
abuses that undermine economic growth: class action lawsuits which are typically
dismissed and which target the most innovative firms, the rapid growth of third party
litigation financing, and the rise of patent trolls.
US: over-lawyered
LITIGATION
93
Australia Canada France Japan UK USA
Lawsuits filed
(per 100K people) 1,542 1,450 2,416 1,768 3,681 5,806
Judges
(per 100K people) 4 3 12 3 2 11
Lawyers
(per 100K people) 357 26 72 23 251 391
Source: "Comparative Litigation Rates," Ramseyer and Rasmusen,
Harvard, 2010.
US has the highest observed corporate litigation costs
LITIGATION
• Figures reflect the cost of general commercial
insurance liability premiums, and are a proxy for
claims resolved through litigation, arbitration and
pre-litigation settlements
• Figures reflect the cost of general commercial
insurance liability premiums (including medical
malpractice), and are a proxy for claims resolved
through litigation, arbitration and pre-litigation
settlements plus legal costs
Un
ite
d S
tate
s
Ca
na
da
Un
ite
d K
ing
do
m
Ire
lan
d
Ita
ly
Ge
rma
ny
Sp
ain
Eu
rozo
ne
Fra
nce
De
nm
ark
Po
rtu
ga
l
Belg
ium
Ne
the
rla
nd
s0.0%
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
Unite
d S
tate
s
Ita
ly
Ge
rma
ny
Sp
ain
Belg
ium
Ja
pa
n
Sw
itze
rla
nd
Fra
nce
Unite
d K
ing
do
m
Po
lan
d
Den
ma
rk
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 a
shareholder lawsuit, with many mergers attracting suits in multiple jurisdictions
• 2017 was the most active year with respect to securities class action lawsuits since
1995 (passage of the Private Securities Litigation Reform Act). Total filings hit
unprecedented 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
0
50
100
150
200
250
300
350
400
450
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
M&A filings
Chinese reverse merger filings
Credit crisis filings
All 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 success
Source: "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. The
majority of this activity originates from “non-practicing entities” (i.e., patent trolls)
• Patent troll = core business of litigating patents rather than making
products
• 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 demands
against 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, and
threatens the compensatory and deterrent functions of the legal system while
increasing inefficiency
• TPLF funders have little incentive to fund plaintiffs facing substantial barriers to
justice, and tend to invest in cases where the risk is the lowest and the possible
return is the highest
• TPLF allows plaintiffs to offload risk, which increases the amount of litigation,
causes more frivolous lawsuits, prolongs lawsuits and results in larger
average 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 and
patent infringement cases which involve treble damage statutes
101
102
OTHER REGULATORY ISSUESA growing and productive economy strikes the right balance between regulation and
growth incentives for the private sector, particularly since the latter accounts for 88%
of all employment. There are many examples of regulation achieving critical gains
regarding the soundness of the financial sector, the environment, anti-trust
enforcement and intellectual property. However, the question of when too much
regulation begins to negatively impact growth is not widely studied; what we do
know is that regulation tends to disproportionately affect smaller firms.
Cross-country data from the World Economic Forum shows a sharp decline in the
ease of starting a new business in the US from 2008 to 2016, a trend which may be
related to the rise in regulation across multiple sectors which took place during that
time frame. The issue for regulators: where to draw the line, which gets complicated
in a system where government agencies promulgate 30 times as many rules as the
legislature itself.
Regulations make critical contributions to public welfare
OTHERREGULATION
• Regulations were catalysts for reduced human exposure to sulfur dioxide, nitrogen
oxide, carbon monoxide and lead
• Even with Federal oversight, the latest assessments indicate that 40%-80% of US
rivers, lakes, estuaries and streams are still polluted
103
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
'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
0
10
20
30
40
50
60
70
80
90
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 more
frequent 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 Vibrio
Source: 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 reinforce
the notion that regulation can contribute to greater stability and safety
105
“From my point of view, the American financial system - including banks and
investment banks - is far safer because of capital and liquidity requirements. Despite
all the turbulence so far this year, I don’t think anyone’s questioning our system. And
that, 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 stronger
system or slower growth or vice versa. We believe that many times you can come up
with 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 '15
Source: "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 '17
Hundre
ds
Source: 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 other
Federal Deposit Insurance Corporation
Department of Homeland Security
Consumer Financial Protection Bureau
Department of the Treasury
Department of Labor
Department of Transportation
Federal Reserve Board
Commodity Futures Trading Commission
Department of Health and Human Services
Department of Energy
Environmental 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 8
Years 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 '15
Source: 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 about
0.5%, 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 index
since 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 and
lessons 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
4
5
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 times
require politicians to break with party discipline to solve. The problem is that right
now, the political middle has essentially disappeared in the US Congress. The chart
on the next page shows in gray the percentage of moderates in the House of
Representatives, 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 were
more moderates cooperating with each other. Yes, the post-war growth decline
primarily reflects falling birthrates and rising longevity [a]. But the collapse in the
political center may have played a substantial role as well, leading to one-sided
policymaking that gets implemented and repealed as the pendulum swings, and
issues 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 2010
Source: 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 some
way (poisoned by contaminants in the air, water and food supply; harmed in automobile
accidents; suffering from drug overdoses or gun violence), they often make assumptions
regarding the “value of a statistical life”.
The EPA definition:
“The Agency uses estimates of how much people are willing to pay for small reductions in
their risks of dying from adverse health conditions that may be caused by environmental
pollution. In the scientific literature, these estimates of willingness to pay for small
reductions in mortality risks are often referred to as the value of a statistical life. This is
because these values are typically reported in units that match the aggregate dollar
amount that a large group of people would be willing to pay for a reduction in their
individual risks of dying in a year, such that we would expect one fewer death among the
group during that year on average”.
The gun violence study cited earlier uses a figure of $6.2 mm per life, compared to the EPA
assumption of $7.9mm and the Department of Transportation assumption of $9.2mm.
119
Important information
120
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