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What about the losers from creative destruction? I got that question yesterday on Twitter, in the context of how the rise of Uber and other ride-sharing services affects the existing owners of taxicab medallions. As is seen in the above chart, these supply-limited medallions have been an excellent investment. Over the past 80 years, Stewart Dompe and Adam Smith note in a must-read new Mercatus report, “taxi medallions have generated annualized 15.5 percent rate of return. Put another way, the value of a medallion doubled, on average, every four and a half years.”
And now this rent-seeking racket of artificial scarcity is under threat. Sure, all pretty good news for low-paid drivers and service-starved consumers, but what about the medallion owners who paid such big bucks? Don’t they have a valid property right that is being made worthless by government regulators? Not long ago on the EconTalk podcast, host Russ Roberts and Duke University economist Mike Munger explored this very issue:
Munger: … But I think the cost advantage is really a problem, because it actually raises a lot of questions about the nature of due process. Suppose that we don’t take any action and the value of these medallions falls to zero. Are we obliged to offer compensation, because we in effect made a regulatory decision that is a taking? This property right, this medallion, had significant value. We made a choice, without due process, that said we are going to reduce the value of this medallion to zero. Are we obliged to compensate?
Roberts: Who is ‘we’?
Munger: The state. Just like we would if we were taking your land under eminent domain to build a road.
Roberts: Yeah, I’m just giving you a heard time. Um, I don’t think that would win. But I’ll be interested.
Munger: It would not. And one of the reasons I wanted to bring it up was my good friend Peter Van Doren had an article at Cato this past week that’s a really terrific discussion of that, and in fact gives good reasons why “we”–in quotes–would not be obliged. Because it’s something different.
This is a sort of political property right that we all recognize is contingent on policy. It changes all the time. And it’s a restriction on competition. Now, the thing that kind of bothers me is you could say all property is. So I have 35 acres of pine forest south of Pittsboro, North Carolina. And suppose I were down there one day, and I heard some chain saws, and I walked back 300 or 400 yards into the woods, and I saw some guys with chain saws cutting down my trees? I’d say, What are you guys doing? They said, We’ve had a tremendous cost to manage; because we can just take these trees and sell them, we can really undercut you! And I’d say, It’s my land! He said: ‘You need to read Rousseau: The fruits of the earth belong to all and the earth to no one. So, we can just take this. And that piece of paper that you say has property–well, the state’s going to change that. As soon as they realize that you took this land from the Indians; it’s unjust. It’s not a real property right.’ This is the same argument that people make about taxing medallions: It was unjust, it was a restriction on competition; it’s not a real property right. Once we start saying property rights aren’t real, I’m not sure I have my pine forest any more, either.
Roberts: Well, it is certainly true that if you paid a million dollars six months ago and now you find that asset isn’t paying out–first of all you can’t resell it for a million, and secondly, it’s not the cash flow that you anticipated from it. Using the medallion isn’t coming through. That’s a real unpleasant surprise. You definitely lost money.
Mumger: Isn’t it a violation of due process? Because did we make a promise? The reason that you need this medallion is we are going to force anyone who provides transportation services to have a medallion. No one else can provide this. And so when you pay for it, you can in good faith think we’re going to protect your property right. And that’s why you pay for it.
Roberts: Yeah, it’s an interesting question. It’s a dangerous slope. Because what it does, of course, is set in stone all rent-seeking victories. It’s very depressing.
Munger: I think the answer is [that] there is a difference between private property and kind of reifying rent-seeking victories. … But if it’s clearly just a restriction on competition and entry into an industry where there would be big benefits, then we shouldn’t compensate. … But in the pine forest it makes sense. We don’t want it to be a commons. We don’t want everyone coming in and overfishing, overharvesting; and so it’s a solution to an externalities problem. Whereas the medallion–maybe it’s a solution to an externalities problem. That’s the argument we make–is we don’t want too much congestion. But if you look, there probably are not enough taxis in New York, particularly at peak times. And so I think the congestion story doesn’t hold up as well.
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A great summary from Scott Winship on how tough or easy it is these days to climb the opportunity ladder:
A just-released paper examined, better than any previous study, mobility across multiple countries using administrative data for each and the same methods and income concepts. That paper reported — for the U.S., Sweden, and Canada — the probability that a man raised by a father in the bottom fifth of earnings has earnings that exceed the bottom fifth of grown sons. The figures were 68 percent in the U.S. and Sweden and 69 percent in Canada. The essentially identical rates of upward mobility — also reflected in other measures in the paper — contradict the prior consensus that the U.S. features lower upward mobility than other nations, a conclusion that now appears compromised by data inconsistencies or driven by family structure differences that affect household income.
Upward mobility rates in the U.S. differ notably by race. Among whites, 74 percent of sons raised in the bottom make it out, compared with just 49 percent of African American sons. Even among whites, however, upward mobility is arguably insufficient. Just 37 percent of sons raised in the bottom fifth end up in the top three fifths, while equality of outcomes would put that figure at 60 percent. Among black sons, the figure is just 29 percent.
And while upward mobility probably has not declined in recent decades, neither has it increased. My own estimates, for example, indicate that 63 percent of sons born in the late 1940s and raised in the bottom quarter of family income made it out of the bottom quarter of earnings in early adulthood. For sons born in the early 1980s, the figure was 60 percent.
Of course, it is impossible to directly observe barriers to opportunity since we can neither observe the potential outcomes of children under different circumstances nor identify how their preferences form and evolve. Relative mobility rates cannot even be taken as prima facie evidence of unequal opportunity. However, we do know that there are large test score gaps when children enter school, which do not diminish much, if at all, over the course of primary and secondary schooling. We also know that college graduation rates are six times higher for children born in upper-income families than for those in lower-income families. Even children with test scores in the top quartile in eighth grade have dramatically different probabilities of getting a bachelor’s degree depending on whether they come from advantaged or disadvantaged families.
And let me add that even if mobility is stable — to me, another discouraging sign of American economic stasis — higher inequality increases the economic penalty for an inability to move up the ladder. Anyway, rather than a neat 10-point agenda for increasing mobility, Winship recommends lots of policy experiments in key areas such as education, marriage, and safety-net programs. Terribly reasonable stuff. But my key takeaway is that faster GDP growth is necessary but not sufficient in helping enhance opportunity to create the meaningful lives we wish to live.
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Here is a needed addendum to my post earlier on how policymakers must focus on key middle-class, cost-of-living issues such as healthcare and higher education. I should have also mentioned housing, however. And has it happens, my pal Ryan Avent has an essay on this topic over at Cato Institute’s new online forum on economic growth.
It’s pretty logical: People should go where the jobs are if they are living where the jobs are not. In particular, they should move to places where high levels of productivity and innovation result in strong wage growth. But that is not happening. A lot more Americans are moving to lower-productivity Dallas or Houston than higher-productivity San Francisco. Of course, housing is five times more expensive in the Bay Area as Houston has built five times as much housing since 2000.
Here is Avent:
If one had a magic wand to wave and wanted to boost growth, magically neutralizing opposition to new development in the most productive cities would be one’s best bet. In the absence of a magic wand, solving the problem probably requires a two-pronged approach. On the one hand, it must be made easier for big cities to invest in big infrastructure projects, like the ones that allowed them to get so large in the first place. That means simplifying the regulations that constrain such investments and raise their costs. It means designing project bidding in ways that encourage competition and create the incentives for efficient, on-time construction. It means reforming the federal government rules that channel infrastructure money toward places that don’t need it, and, yes, it means using the federal government’s ability to borrow at remarkably low interest rates to make an economically justified investment in America’s future.
But infrastructure alone will not solve the problem. Instead, metropolitan areas may need institutional reforms that better balance the economic interests of the metropolitan area (and the country as a whole) with the interests and preferences of those living in neighborhoods that are likely to be affected by new development. When land-use decisions are made at a hyper-local level — giving local councilmembers or commissions extensive influence over which projects are approved, or focusing negotiation between residents and developers at the street level rather than the metropolitan level — the result will typically be far too little development. Those living immediately around a project enjoy some of its benefits but bear nearly all of its costs, in terms of disruption and congestion; they are therefore highly motivated to block projects and can succeed when local institutions enable them.
At a macro level, the payoff could be pretty big. Housing mismatch may be costing Americans a trillion dollars a year. It also makes sense to make it easier for the jobless to move to economically stronger cities through relocation vouchers, not mention better public transit — whether buses or congestion-priced highways — to connect workers to jobs within urban areas.
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The more I review various immigration reform plans, the more I think this rather libertarian one by the late Gary Becker makes more sense. From Guy Sorman in City Journal:
Immigrants know that they will find a better life in the United States. Most will work hard at achieving that better life, Becker believed, because the American welfare state today doesn’t provide all that much support for those unwilling to work (unlike in Western Europe, where many immigrants live permanently on welfare). A Mexican or Chinese immigrant working in America will usually multiply his income by five or even ten times over what it would be in his country of origin. Given that reality, Becker thought, such immigrants, legal or illegal, would be willing to pay for such an opportunity—just as students and their families pay for college, perceiving it, rightly, as an investment that will bring greater earning power. “Visa seekers,” he wrote, “are comparable to college degree seekers”: they’re entrepreneurs, investing in human capital. Thus, Becker proposed, all visas should come with a price tag attached, set by the market. For American taxpayers, Becker claimed, the benefits of such a visa-for-money system would be substantial. Border control would cost less, for starters, since some immigrants who are tempted to sneak into America illegally (which costs them time and money) could now buy their way in legally. And immigrants ready to pay for visas would have an even stronger incentive to work to recoup their investment.
In a Beckerian system, wouldn’t wealthy immigrants be favored over the deserving poor? This is already the case, he replied: the rich can often obtain U.S. residency permits if they invest in the country. Becker wanted to extend the market for visas, now enjoyed by the wealthy, to the hardworking poor. If they didn’t have the money up front, aspirational immigrants should be able to borrow it, just as American students and their families do. In Becker’s view, the only losers in an open market for visas would be the often unsavory “coyotes” paid to transport Latin American migrants across the Texas border.
A visa market would remain imperfect, Becker admitted; he wasn’t a free-market fundamentalist (a breed that exists more in the liberal imagination than on the University of Chicago campus). Not all foreign workers purchasing a visa would earn back their investments. Some might fail completely, costing American society more than what they generate. Such realities illustrate the limitations of economics as a discipline: the individual’s personal fate is hidden in the data and models that the economist proposes. On average, though, Becker predicted, his visa plan would work far better than the dysfunctional current immigration system.
Of course, politics would still have a role, most obviously in setting the price. And I am sure that before long politicians would attempt to carve out exceptions or create multi-level pricing schemes. What’s more, the immigration reform mostly likely to happen is the one that most resembles the existing system, not something totally different. But at least the Becker plan is an attempt to look and economic costs and benefits and inject some economic rationality into our immigration system. A 2010 piece from The Economist offers a few downsides to the idea versus a “points” system like the one used in Canada.
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We should want the US economy to be as innovative as possible. For instance: Innovative new companies provide new goods, services, and high-paying jobs. Innovation also helps raise living standards by making good and services more affordable. As Scott Andes of Brookings notes in a blog post:
Computers, information technology services, and appliances are all cheaper today than 25 years ago, while the price of automobiles has grown by less than a percentage point annually. Today it takes fewer hours of work for a middle income wage earner to afford a car than at any time in history. These price declines constitute unequivocal wins for the American middle and working classes.
But as the above chart from Andes shows, the cost of some key services — including health and education — have outpaced incomes. And this reflects a lack of innovation and productivity and competition. Many Republicans fret about inflation. But it’s the wrong kind of inflation that they are worrying about. The problem isn’t the government central bank’s “money printing,” but the government’s distortion and inefficient provision of important services. And it is addressing these cost-of-living issues that is at the core of the conservative reform movement. As Ramesh Ponnuru wrote just after the 2012 election:
The Republican story about how societies prosper — not just the Romney story — dwelt on the heroic entrepreneur stifled by taxes and regulations: an important story with which most people do not identify. The ordinary person does not see himself as a great innovator. He, or she, is trying to make a living and support or maybe start a family. A conservative reform of our health-care system and tax code, among other institutions, might help with these goals. About this person, however, Republicans have had little to say. ..
The perception that the Republican party serves the interests only of the rich underlies all the demographic weaknesses that get discussed in narrower terms. Hispanics do not vote for the Democrats solely because of immigration. Many of them are poor and lack health insurance, and they hear nothing from the Republicans but a lot from the Democrats about bettering their situation. Young people, too, are economically insecure, especially these days. If Republicans found a way to apply conservative principles in ways that offered tangible benefits to most voters and then talked about this agenda in those terms, they would improve their standing among all of these groups while also increasing their appeal to white working-class voters.
I guess I view it this way: A smart, center-right policy agenda would include a focus on a) revitalizing US entrepreneurship, b) modernizing the safety net to make it more affordable long-term and more pro-work, and c) dealing with the cost, availability, and quality of education (K-12 and college) and healthcare. What am I missing here?
Where are all the workers? | What if the rest of the U.S. economy starts to look like manufacturing?
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There is a famous economic fallacy that posits the amount of work to be done is fixed or static. So if machines do more, human do less. Classic zero-sum thinking that has been disproved in the many decades since the start of the Industrial Revolution. In 1900, 40% of American workers were farmers. Now it’s less than 2% thanks to better techniques and technology. But we found other things for those folks to do. They went to work in factories. As the above chart shows, however, manufacturing is also becoming ever-more productive with fewer workers. What if the employment-output charts of an increasing number of non-manufacturing sectors start looking the same thanks to automation? Andrew McAfee:
Because of advances in sensors, software, chips, and the other components of robots, and because of lots of innovating and tinkering with them, the industries that deal with physical products — distribution, transportation, wholesaling, and so on — are about to become a lot more productive. My guess is that their output-vs.-employment graphs are going to start to look a lot like the manufacturing one above.
And because of similarly impressive advances in artificial intelligence, machine learning, crowdsourcing, and exploitation of Big Data, the same will in the near future be true of industries that deal with virtual products like knowledge, information, media, decisions, and communication. In many cases, their employment will start to trend downward even as their output rises over time.
I don’t know of any economic law that prevents this from happening. Yes, I’m aware of the “lump of labor fallacy.” But I think the more up-to-date fallacy is the assumption that a growing industry means that there will be more work for people to do, rather than for ever-more capable machines to do. The graph above shows that this has clearly not been the case for US manufacturing over the past 30 years. In an era of astonishing technological progress, why won’t the same be true for other industries in the US and elsewhere? If you have some faith that employment must keep rising as output does, please leave a comment and explain where it comes from. Because the evidence, both past and present, is making me a skeptic.
Indeed, there was another kind of worker a hundred years ago that didn’t adapt so well to technological progress. There used to be millions of horses plowing fields, transporting goods, and carrying passengers. But as economist Gregory Clark has noted, ” … the arrival of the internal combustion engine in the late nineteenth century rapidly displaced these [equine] workers … There was always a wage at which all these horses could have remained employed. But that wage was so low that it did not pay for their feed.”
And the horses were not able to upgrade their skills set to command a higher wage. People are more adaptable, of course. But how many will be able to upgrade their skills, both cognitive and non-cognitive, to take advantage of the high-wage, tech-driven jobs of the future? One possible scenario is the one painted by Tyler Cowen where a small slice of workers have great-paying, high-skill jobs, a much bigger bit has high-touch jobs where wages are stagnant, and many fewer people work at all. The exact ratio, I suppose, will depend on how many new innovative firms the economy can create, how well we reform education, and whether we choose to subsidize work at the low or move further toward a basic income model.
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Do you see a positive correlation between more patents and more innovation in the above chart? I sure don’t. The CBO, in its fascinating new report on innovation, offers a number of reasons why the current US patent system is anti-growth and has “weakened the linkage between patenting and innovation”:
— Too many low-quality patents result in “patent thickets” that can slow the introduction of new tech by “making it time-consuming and costly to obtain licenses for all of the necessary patents.” This is particularly tough on startups.
— The US patent office is too slow with decision making at 29 months today vs. 19 months in 1992 “and the number of pending patent applications increasing from approximately 270,000 to over 1.1 million.”
— Increased patent trolling. Patent infringement lawsuits have more than doubled since 2007 “with lawsuits involving software-related patents (including patents on business methods) accounting for almost nine-tenths of that increase.
Possible solutions include more funding for the USPTO and making it harder for plaintiffs to prevail in patent infringement lawsuits. More interesting is changing how patents are awarded. Perhaps not all inventions should be treated equally. CBO:
Although patent protection is widely understood to provide an important incentive for the development of new drugs—which is typically very costly—the contribution of patents to innovation in software or business methods is often questioned because the costs of developing such new products and processes may be modest. One possible change to patent law that could reduce the cost and frequency of litigation would be to limit patent protections for inventions that were relatively inexpensive to develop. For example, patents on software and business methods could expire sooner than is the case today (which, with renewals, is after 20 years), reducing the incentive to obtain those patents. Another change that could address patent quality, the processing burden on the USPTO, and the cost and frequency of litigation would be to limit the ability to obtain a patent on certain inventions.
This is similar to what economist Alex Tabarrok has suggested regarding one-size-fits-all patenting:
Why does every innovation deserve or require the same 20-year patent? Why do we have a system which gives a one billion dollar pharmaceutical–where there’s $1 billion in research and development costs–we give that a 20-year patent and one-click shopping gets the same 20-year patent? That makes no sense whatsoever. So, what I suggest is a more flexible system. I’d like to have a 20-year patent, maybe a 15-year patent, maybe a 3-year patent. Something like that. And then we could say: You want to apply for a 3-year patent? We are going to get this through the system quickly; we won’t look at it so much. Hurdle to make the case for it smaller. Exactly. You want a 20-year patent, though: You’d better show us that you really are deserving and put some costs in there.
Nobel Prize-winning economist Edmund Phelps in his book “Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change” also takes on patents:
But now the economy is clogged with patents. In the high-tech industries, there is such a dark thicket of patents in force that a creator of a new method might well require as many lawyers as engineers to proceed … Copyright has only recently seen controversy. … The passage by Congress in 1998 of the Sonny Bono Act lengthening copyright protection by 20 years — to author’s life plus 70 years — prevents wider use of Walt Disney’s creations and prevent wider use of performances copyrighted by the record companies. The length of the copyright term may be be deterring new innovation that would have had to draw on products at Disney and EMI. Members of Congress have a private interest in lengthening copyright and patent protections since they can expect to share in the big gains of the few without paying for the small costs borne by the rest of society.
One hold up for this flexible patenting idea: it may violate intellectual property treaties the US has signed with other countries. Indeed. tougher IP rules in the proposed Trans-Pacific Partnership treaty have come under some criticism.
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The above chart from a new CBO report breaks down potential GDP growth (actual GDP growth of late has been far slower) into its key drivers: you have one part labor, one part capital, and one part innovation. And the chart clearly shows why it will be difficult for the US economy to grow in the future as fast as it has in the past. From the report:
The growth in the supply of workers in the economy is expected to be about as slow during the next 10 years as it was in the past decade, owing both to the retirement of baby boomers and to a relatively stable labor force participation rate among working-age women after sharp increases in some previous decades. For that reason, innovation that makes those workers more productive—for instance, by improving the equipment they use and by enabling their work to be organized more efficiently—will continue to be important.
We could boost labor force growth through more immigration or higher fertility rates. But it seems likely that greater innovation will have to do the heavy lifting. So how can we make the US economy more inventive and innovative? Well, there are some tailwinds. A wealthier world means a better educated one and more minds devoted to scientific and technological advancement. The OECD recently noted that China is headed to overtake the EU and US in science and technology spending. And while I think the US should spend more on research — federal spending for R&D has generally declined since the 1960s — an open, dynamic economy will efficiently use good ideas from wherever they originate.
As economist Amar Bhide notes in the The Venturesome Economy, “The United States is not locked into a ‘winner take all’ race for scientific and technological leadership, and the growth of research capabilities in China and India—and thus their share of cutting-edge research—does not reduce U.S. prosperity. Indeed my analysis suggests that advances abroad will improve living standards in the U.S.”
We also have ever-better better tools for conducting research, such as superfast computers to DNA sequencing machines. “If tools and instruments are a key to further scientific progress, it is hard not to be impressed by the possibilities of the 21st century,” writes economist Joel Kotkin.
But we also have to make sure the US economy is as open and dynamic as possible, with lots of innovative startups commercializing invention and constantly threatening incumbent players. Along these lines, it is worth checking out a new Cato Institute online collection of essay on how to boost economic growth.
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Again on the subject on the decline of US entrepreneurship — or at least the decline of US startups — over the past three decades, here is the latest research from Ian Hathaway and Robert Litan, as summarized by the great Ben Casselman at 538:
Hathaway and Litan look at more than three decades of data on business startups, expansions and failures from the Census Bureau’s Business Dynamics Statistics. They find a strong correlation between a region’s population growth and its startup rate. That makes intuitive sense: For example, Arizona, Florida and Utah experienced booming economies for much of the late 20thcentury that attracted new residents and new entrepreneurs. Overall population growth, however, has been gradually slowing over the past 20 years, possibly dragging the startup rate down with it.
The second big trend Hathaway and Litan look at is consolidation. Virtually every sector of the economy is more dominated by big companies today than it was 30 years ago. The authors find that regions that have seen more consolidation have also seen bigger declines in entrepreneurship. That, too, makes sense: For all the talk about disruption, it’s much harder to break into an industry that’s dominated by a handful of big, entrenched incumbents.
Hathaway and Litan conclude these two factors could be responsible for some three-fourths of the multi-decade decline, with bad policy such as regulation and taxes perhaps making up some bit of the rest. As far as a policy agenda goes, the researchers think it is “very likely that creating and expanding both entrepreneur and STEM education/green card visas in the future would increase startup rates. Teaching entrepreneurship in college and K-12 might also have some promise but needs more research and experimentation. Hathaway actually addressed the education issue in a recent podcast with me:
So Bill Aulet at MIT has written a great book on this called “Disciplined Entrepreneurship.” Some folks say you can’t teach entrepreneurship. I disagree with that. And I think Bill’s sort of one of the leaders in this space and has a lot to say on that. And my co-author Bob Litan has this great idea of instead of just teaching math and science where students aren’t that engaged, but actually incorporating how that scientific and that mathematical knowledge has been used in the course of business to create goods and services and, teaching the commercial side of this, providing a link to that from young ages so it’s sort of a part of that curriculum and that learning all along throughout the education process.
Beyond that, let me add this: Increased immigration overall and fertility rates would be one way to address the first startup inhibitor. As for the second, consolidation, that could be result of less competitive intensity in the economy and the rise of strong creative monopolies like Facebook and Apple due to network effects. As economist Mike Feroli of JP Morgan has argued, ” … the decline in start-up activity has been a disconcerting feature of this expansion. … This is especially the case since most measures of business profit margins look elevated, which should stimulate new business formation. … One hypothesis is that those elevated margins owe to natural monopoly profits, perhaps due to an increased prevalence of network effects. In this case, the incumbent profits are incontestable, and start-up activity shouldn’t be expected to increase.”
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It’s an underreported story — except on this blog — but the US budget deficit has come way down in recent years. The fiscal gap has narrowed from $1.4 trillion, or 9.8% of GDP, in fiscal 2009 to $483 billion, or 2.8% of GDP in fiscal 2014. The key drivers:an improving economy, 2013 tax hikes, and the spending cuts/caps of the 2011 Budget Control Act.
But enjoy it while it lasts. Trillion-dollar deficits are likely on their way back. Citi:
Despite recent reductions in the Federal deficit, we believe that FY2016 will be a turning point, after which the deficit (as a share of GDP) resumes its rise. Unless policymakers implement substantial measures now, a legacy of outsized mandatory spending on health care (Medicare and Medicaid) and retirement (Social Security) benefits, rising debt service and inefficient tax collection, along with demographic trends, will cause the Federal deficit and debt to balloon over the next decade. …
Outsized deficits and debts may reduce the pace of economic growth and lower the standard of living of many. Moreover, government resources that could be used for national priorities or mitigating shocks, might be crowded out by interest expenses generated from borrowing to finance fiscal obligations. Currently, such pressures have been muted because nominal and real interest rates on Federal debt are at record lows. But over time, debt service will mount amid more normalized interest rates. On balance, the large amount that the government will have to borrow to finance rising future mandated expenditures will raise US Treasury securities issuance well above historical norms.