Subsidise fruit not fries: addressing food insecurity in America

1 in 6 American families are food insecure. Put simply, they are going hungry.

The Federal government has relied on food assistance programs to meet the needs of the poorest families. Last year, it spent $80 billion on its Supplemental Nutritional Assistance Program alone. But budgets have been cut, reducing the amount of money in people's pockets. Reliance on non-profit food banks has increased sharply but they are unable to provide nutritionally-balanced food, like fruit and vegetables, because they are perishable.

In addition, hunger is no longer confined to the poorest or those who are unemployed. Two-thirds of food-insecure families with children have at least one adult in work. The problem, once again, is that wages have failed to keep up with the rising cost of living. After rent, bills and other necessities have been paid, there is often little left over for food.

The consequences of food insecurity are greatest for children, because health problems that set in early on are difficult to reverse. In areas where money is tight, the demand for luxuries falls, reducing the supply of supermarkets and increasing the prevalence of cheap fast-food restaurants. For this reason and others, hungry children are at a higher risk of obesity. Over a lifetime, child obesity costs $19,000 per child in medical costs ($14 billion for all current 10 year olds). Worse, many will have shorter lives than their parents.

Obesity, caused by food insecurity, has the potential to reduce the capacity of the future US workforce exactly at the time when a larger, more skilled workforce is required to support an ageing population. This is a multi-faceted problem, that captures costs, family income, lifestyle and parental education. But here are just two solutions that would tackle it at source.

To deal with rising costs, subsidise the production of fruit and vegetables. Currently, agricultural subsidies for US corn production end up inadvertently reducing the price of corn-based products like fizzy drinks or corn-fed meat, which results in cheap meat and snacks in our shops. So an adjustment to expenditure (not new money) could change consumption behaviour.

To deal with falling real incomes, raise wages. Company profitability would be supported because the workforce can afford a healthier lifestyle and are less likely to take sick days. Government finances would be boosted because higher wages lead to higher tax contributions and falling levels of income support. And tomorrow's growth is secured because higher take-home pay increases investment into children, reducing the future burden, and increasing the future capacity, of tomorrow's workforce.

Brazil's World Cup still half empty

Source:  Fédération Internationale de Football Association

As many on social media have pointed out, the World Cup 2014 emblem looked like a man hanging his head in shame (Figure 1).*

Not the shame that came from losing 7-1 to Germany (though that was pretty painful). The shame that came from knowing that hosting the World Cup reportedly cost the country $4.2 billion but more than half of Brazilians believed it would hurt the economy. That 50 per cent of Brazilians thought now was a bad time to find employment despite the government saying that the World Cup would create 710,000 jobs. That the number of poor people living in Brazil could have filled its World Cup stadiums 30 times over.**

After the dust settles, and the spotlight dims, the facts will re-emerge. The International Monetary Fund forecasts that the Brazilian economy will grow by 1.8 per cent this year, compared to a 10-year average of 3.5 per cent, because of weakness in manufacturing, consumer spending and export performance. Others are more bearish still. The central bank has raised interest rates in recent months, because of above-target inflation, leading to worries that economic growth will be choked off. Social discontent led to a number of high-profile protests in the months leading up to the World Cup.   

Brazil appears to have lost grip on the solid macroeconomic framework it established over the last decade. This platform generated high single-digit growth rates, funded active redistribution policies and contributed to a rapid fall in inequality. Between 2004 and 2012, poverty rates more than halved from 22 per cent to 9 per cent. Conditional cash transfer programs that provided monetary rewards in exchange for attendance at school and health centres improved outcomes for those on the lowest incomes. Between 1999 and 2009, the increase in per capita income of the poorest 10 per cent was nearly four times that of the richest 10 per cent. Out of a general rise in income, grew a substantial middle class.

This middle class is now demanding action. Brazil needs to take this opportunity to re-establish its credibility and tackle the hard problems that are preventing it from achieving sustainable and inclusive growth. It needs to push forward on much-needed reforms to infrastructure that would reduce local bottlenecks and improve the quality, not just quantity, of public education and healthcare. It needs to tackle wasteful corruption, which is estimated to cost between 1.4 and 2.3 per cent of GDP a year, and enables favours to the 'haves' at the expense of the 'have-nots'.         

Brazil will play host to the Olympics in Summer 2016. It is likely that between now and then we will see more protests from a discontented population. But, if the country undertakes substantive reform, we may also see a very different country when the spotlight returns.

* The green hands form the shape of a head, which is held in the yellow hand
** Author's calculation based on data from the World Bank and the Stadium Guide

Righting a Wrong on the Fourth of July. Period.

On this Fourth of July, when the country celebrates its right to "life, liberty and the pursuit of happiness", have we got the role of government in securing these rights... wrong?

Source: National Archives via The New York Times

"...We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed..."

New research by Danielle Allen (Princeton) on the Declaration of Independence has called into question the accepted emphasis on individual rights. She argues that an errant period was added in hand-made copies (Figure 1, highlighted). This meant that the second sentence in the Declaration (quoted) became entirely about the individual. By referring back to the original document, where the period is apparently missing, and individual and government are in the same sentence, "the logic... moves from the value of individual rights to the importance of government as a tool for protecting those rights".*

This re-interpretation of the government's role is philosophical. But consider the facts. Last year, the government provided an estimated $212 billion in welfare payments to support the poor and vulnerable. But substantially more - $335 billion - was donated by the public to US non-profits, the majority of whom exist to support education, human services and health.  

A population served predominantly by non-profits is one that has been let down by the mainstream system and fallen into the gap between the government and private sectors. Today, 1 in 7 people live in poverty. A more accurate measure shows it could be higher still. Non-profits report rising demand for services, particularly those that serve the most vulnerable. It would appear that not everyone has the right, or the opportunity**, to pursue happiness.

On the one hand, non-profits operating at the coal face are in a better position to understand local issues. On the other hand, they often deal with the consequences, rather than causes, of disadvantage. When they advocate for change, it is to the government. Only the government has the incentive, scale and investment horizon to deal with these underlying causes: more jobs; higher wages; affordable housing; higher-quality education. In the extreme, when government has done its job, charity should cease to exist. On the day that America reflects upon its "unalienable rights", for many, that concept is indeed alien.

* As quoted in the New York Times
** Or the capability, to use Amartya Sen's language

The Forgot-Teen Generation

There is widespread evidence that poor children in the US do not have a fair start in life. By age 2, there is a 6 month gap between children of low and high socioeconomic status in processing skills that are important for language development. By age 4, children in very poor families will have heard 30 million fewer words than their better-off peers. These differences persist. Variations in high school test scores between low and high-income children can be predicted from elementary school performance. As a result, many campaigns have focused on the importance of early years intervention in improving a child's life chances.

In addition, academic research into the high returns to investing in young children has influenced a policy shift.  James Heckman, a Nobel-prize winning economist, has argued that if the foundations of cognitive and non-cognitive development are not set early on, there will be nothing to build upon in teenage years.  He points to the seminal Perry pre-school project, an early intervention program designed to improve the outcomes of disadvantaged African-American youth in the 1960s.  The return to intervening at such a young age is estimated to be between 7 and 10 per cent, calculated as the sum of private gains (e.g. staying on in education and earning a higher wage) and social gains (e.g. costs saved from reduced crime rates).  President Obama has therefore emphasised the importance of early intervention in reducing inequality.

But there is a danger that such rhetoric leads to older children being forgotten. This blog does not dispute the evidence that early years intervention is important. But the US is not at the point at which all children start school equal. Furthermore, some schools are failing to help them catch up. An emphasis on mainstream standardised testing is detrimental to those who are not used to such discipline. Disadvantaged students are more likely to be disengaged, and have less drive, motivation and self-belief, leading to higher drop-out rates.
   
In addition, things are getting worse for older children, who neither appear as cute as babies nor as vulnerable as the elderly in advocacy campaigns. As mentioned in last week's blog, if you are a high-school drop out, your chance of being employed is at its lowest level since records began (in 1970). The likelihood that you are out of the workforce altogether is at its highest level for over a decade. Worse, the US schooling system is not even equipping its average student with the skills necessary to succeed in today's information economy. In a wider test of attributes of 15 year olds - the Programme for International Student Assessment - the US ranked 27th out of 34 countries. US students are, it would appear, unable to "think outside the box".
    
What we need to do is borrow the early years philosophy - which focuses on cognitive development - and apply it to young people, disadvantaged or otherwise.  The standardised testing approach leaves little room for the development of critical thinking and challenge. Finland, by contrast has all but eradicated standardised tests, opting for a more equitable and relaxed school experience. If we made school more enjoyable and inclusive then, in theory, students from every background could flourish, not just those who benefited from early years intervention. By doing so, we can increase the likelihood that all students finish high school more equally than they started.

The $haring eCONomy

The sharing economy can be considered as both a response, and a possible solution, to rising inequality. The distribution of ownership of assets may be unequal. But the distribution of access can be made more equal. It also allows for new employment opportunities in the form of the micro-entrepreneur. Your Uber driver. Your Airbnb host. Your TaskRabbit handyman. All products of a new economic paradigm.

There is emerging evidence of its positive economic impact. In a global study, Airbnb found that one-half of hosts were of low to moderate income and that hosting enabled them to earn sufficient money to stay in their own homes. In San Francisco, Airbnb guests stayed for approximately 2 days more than hotel guests and spent 25 per cent more on their trip, much of it in areas not typically frequented by tourists. Uber drivers talk about putting themselves through higher education or saving to start a business of their own. In the future, a city full of such drivers might eliminate the need for cars entirely. Abandoned car lots could be turned into much-needed affordable housing or open space in over-populated cities.

In addition, and perhaps more importantly, the sharing economy builds social capital. In an era of growing individualism, these companies are bringing people closer together again, driven by values such as collaboration, trust, empowerment and community.* Companies like Airbnb and Uber have created a platform based on these values. Feedback on performance creates transparency and accountability.** Ties are formed between previously unknown individuals. Consumers are confident enough to enter into financial transactions with people that they may never even meet.

In doing so, traditional marketplaces and ways of thinking are disrupted. This is music to the ears of the "Millennial" generation - those that think power is concentrated in the hands of the few, that existing companies cannot be trusted, who look for job opportunities that may pay less but are rooted in social justice. 

But let's be clear that what we are seeing is the growth of a new type of "big business", based on renting, not sharing. In a recent round of fundraising, Uber secured $1.2 billion of new capital, valuing it at around $17 billion. Power is shifting to those that can harness new marketplaces. This includes existing players. In 2013, Avis Budget, one of the largest car rental firms, bought Zipcar, a car-sharing company. In addition, one-half of Airbnb hosts are not of low to moderate income. These are not the people who have been negatively affected by rising inequality.

Meanwhile, the emergence of the micro-entrepreneur reflects the concurrent increase in young people ill-equipped to join the mainstream workforce. If you are a high-school drop out, your chance of being employed is at its lowest level since records began (in 1970). The likelihood that you are out of the workforce altogether is at its highest level for over a decade.  So the migration to sharing-economy employment makes sense. But employees of such firms do not have access to the standard benefit structure offered by mainstream employers, such as healthcare, pensions and human capital investment. This is designed to improve the well-being and productivity of the workforce, producing private and social gains. In that respect at least, sharing is not caring.

* For a thoughtful discussion of the origins of sharing norms, see Deaton (2013) on hunter-gatherer societies. At that time, individuals had no way of storing leftovers from a hunt. Instead, they shared their spoils with their neighbours, in the hope that next month, their neighbours would reciprocate. "Our current deep-seated concerns with fairness, as well as our outrage when our norms of fairness are violated, are quite possibly rooted in the absence of storage options for prehistoric hunters" (pp76).

** Accountability is a big thing. Uber provides credits almost instantly if something goes wrong with your journey. Airbnb promises to cover any damage caused by unruly guests and guarantees alternative accommodation if you turn up to a castle and it turns out to be a caravan.

Machine Age II: Dawn of the unemployed

US retailers donate excess clothing (made cheaply in Asia and shipped back) to homeless charities to help down-and-out Americans. There is no denying the generosity of such an act. But what is this chain of events telling us? That emerging economies have "taken our jobs"? Or that the US has failed to adapt to a changing world economy and create new job opportunities?

Over the past 20 years, some middle-skilled jobs did migrate to countries that were able to provide labour at a lower cost than at home. At the last count, China accounted for 40 per cent of all clothing imports into the US. Such a shift was unsurprising. Making clothes required some skill but relied on repetition across dozens of lines. A Chinese middle-skilled labourer was in all ways identical to a US labourer except one - cost. Wages paid to Chinese workers were lower than their US counterparts.* In order to increase profits, firms chose to locate production in an area with the cheapest operating costs. Thanks to globalisation, which reduced geographical barriers between countries, it no longer mattered where in the world that was.

But other middle-skilled jobs have disappeared because of technological progress - particularly in IT - that automates tasks and renders the job obsolete. Sales assistants at grocery stores have been replaced by self-checkout kiosks. Secretarial pools have been replaced by computers. The speed of such change feels rapid. The US Bureau of Labor Statistics predicts that it will continue to be so - some of the fastest falls in occupations between now and 2020 will be in middle-skilled occupations.

Source: Tuzemen and Willis (2013)

The gap left behind in the US labour market has not been filled by equivalent jobs. Instead, there has been a rise in the share of high-skilled jobs - professional and managerial roles - that computers cannot yet perform because of the cognitive and non-cognitive skills they require. This is known as skills-bias technical change** because securing these jobs requires advanced qualifications and so favours those who have - or can obtain - such skills. Between 1983 and 2012, the share of high-skilled jobs in the US labour market increased from 26 per cent to 37 per cent (Figure 1). These skills earn a premium in the form of higher wages.

There has also been an increase in the share of low-skilled jobs (Figure 1). These tasks are manual and service orientated (think cleaners, waiters, security staff) and today cannot be automated or relocated offshore. But because these jobs require fewer skills, they are open to more people, including those who would have previously taken on middle-skilled jobs. Competition has increased, reducing the wage premium (see last week's blog for a discussion of trends in low wages). Inevitably, this will lead to some people being out of work. Worse, it might lead to people dropping out of the workforce altogether. Indeed, the participation rate - the fraction of people aged 16 and over actively looking for work - fell to 63 per cent in May from a high of 66 per cent prior to the last recession.  

Looking ahead, some think that the speed with which the US economy could be upended by technological change might be even faster than in previous years. The dawning of the so-called "second machine age" would eliminate the need for many more occupations, perhaps even some low-skilled ones. The idea that everyday tasks will be completed by a robot may be a bit far-fetched today. But 20 years ago, it would have seemed strange to think that we wouldn't talk to a cashier while they scanned our groceries or dictated a letter to a secretary to print, sign and send by post.

To keep pace with such change, and to prepare our future workforce, we must adapt our learning environment today. This includes investing in K-12 and higher education. But it also means embracing new forms of online learning, like mass open online courses, that open up high-quality education to the whole population. This will enable the future generation to have the right skills to participate in the "second machine age". Not doing so risks leaving an increasing share of the population behind. Who knows where their clothes will be made.

* Though given a rising middle class in China, labour costs are creeping up, which is leading to shifts in production to other parts of Asia.
** Link to earlier publicly-available version.

Inequality: seed of the crisis, thorn in the recovery

The US economic recovery is being built on fragile foundations. The average consumer might be spending more but the extra money isn't coming from substantial wage growth. Consumption is being financed by running down savings and building up debt. Savings ratios are back to levels last seen on the eve of the 2008 financial crisis. The consumer debt ratio - debt payments (excluding housing) as a proportion of disposable income - is on the rise (Figure 1).

Source:  Federal Reserve Board

This pattern is not new or sustainable. In the years prior to the financial crisis, wages of low-income households in the US failed to keep up with rising living costs. In order to maintain spending, these households took on more debt. Meanwhile, incomes at the top grew rapidly. Rising income inequality created political pressure to encourage borrowing (particularly in housing) to maintain demand in the economy. Such action built on the underlying "fault line" that inequality represented rather than resolving it (Rajan, 2010).  

Borrowers bet on higher wages being just around the corner, which would allow them to continue to service their debt. In 1989, the US household debt-to-income ratio was around 60 per cent for the top 10 per cent and around 80 per cent for all other groups. In 2007, the ratio was around 80 per cent for the top 10 per cent and 250 per cent for the bottom fifth. But wages failed to keep up with growing debt burdens. Default rates picked up, the inequality fault line was exposed and the financial crisis ensued.    

Today, for expenditure to be affordable, wages need to rise in line with living costs. One way to do this is to mandate for above-inflation increases in the minimum wage, so that low-paid workers can catch up. In February, President Obama signed an Executive Order increasing the minimum wage for federal contract employees to $10.10 an hour. He also called on Congress to pass a similar proposition for all Americans (the current federal minimum wage is $7.25). Some jurisdictions have implemented or announced their own above-average increases, for example, San Francisco ($10.74) and Seattle ($15). The Center for Economic Policy and Research has demonstrated that if the minimum wage had kept up with labour productivity since 1960, then it would have reached $21.72 by 2012.* 

A reasonable increase in the minimum wage would have a positive impact on the individual and economy. According to the Congressional Budget Office (CBO), an increase in the federal minimum wage to $10.10 by 2016 would lift 900,000 individuals out of poverty. But it is not just those in poverty that benefit. All low-income, and some middle-income, households stand to gain. The CBO reports that the cost of expected job losses that would arise from a higher minimum wage to $10.10 would be more than offset by overall gains.** An increase in consumption that follows from a rise in wages would stimulate business investment. An increase in tax contributions from better-paid workers would improve the state and federal balance sheet.   

But in the medium-term, increasing the wage packet of low-income households does not fully tackle the problem. As a result of technological progress and cheaper labour overseas, many middle-skilled jobs in the US have been eliminated (see "An earthquake on inequality is coming").  What remains are low-skilled and high-skilled jobs.  This makes it very difficult for those at the bottom to progress up the income ladder. What is required to bridge this gap is investment into training and job creation. This would enable low-income individuals to secure decent progression, pay and improve job quality. In turn, this would make it more likely that they are able to participate in the recovery, and not be left behind... again.

* This isn't necessarily an argument for increasing the minimum wage to $21.72. But it does demonstrate nicely that much of the gain produced by ordinary workers in recent years has been channeled away, towards senior executives and capital-owners, contributing to rising income inequality.

** Seattle has agreed to raise its minimum wage gradually to $15 by 2021.  As the population of low-paid workers is fairly small in the city, the benefits may outweigh costs arising from unemployment and higher operating expenses.  But further evidence is required before coming to a definitive conclusion.

This post was updated on 12 June, to clarify developments in low, middle and high-skilled jobs in the US.