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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