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FOURTH QUARTER 2017 FEDERALFEDERAL RESERVE RESERVE BANK BANK OF OF RICHMOND RICHMOND Medicine Markup Americans pay a lot for prescription drugs. Does that mean we pay too much? Apprentices Among Following in the Interview with the Robots Family Footsteps Jean Tirole VOLUME 22 NUMBER 4 FOURTH QUARTER 2017 Econ Focus is the economics magazine of the Federal Reserve Bank of Richmond. It covers economic issues affecting the Fifth Federal Reserve District and the nation and is published on a quarterly basis by the Bank’s Research Department. The Fifth District consists of the District of Columbia, Maryland, North Carolina, COVER STORY South Carolina, Virginia, 10 and most of West Virginia. Medicine Markup DIRECTOR OF RESEARCH Americans pay a lot for prescription drugs. Does that Kartik Athreya mean we pay too much? EDITORIAL ADVISER Aaron Steelman EDITOR Renee Haltom FEATURES 15 SENIOR EDITOR David A. Price Following in the Family Footsteps MANAGING EDITOR/DESIGN LEAD When children enter a parent’s profession, they probably aren’t Kathy Constant doing it blindly — they may have smart economic reasons STAFF WRITERS Helen Fessenden Jessie Romero 18 Tim Sablik EDITORIAL ASSOCIATE Learning in the Fast Lane Lisa Kenney BMW’s South Carolina plant is expanding its apprenticeship CONTRIBUTORS Anne Burnett program in an attempt to grow a tech-savvy workforce Ann Macheras Ray Owens Santiago Pinto Michael Stanley DEPARTMENTS DESIGN Janin/Cliff Design, Inc. 1 Message from the Interim President/The Richmond Fed and Urban Economics Published quarterly by 2 Upfront/Regional News at a Glance the Federal Reserve Bank 3 The Profession/Too Many Co-Authors? of Richmond P.O. Box 27622 4 Federal Reserve/Speeding Up Payments Richmond, VA 23261 www.richmondfed.org 7 Around the Fed/Student Debt vs. Homeownership www.twitter.com/ 8 Jargon Alert/Price Gouging RichFedResearch 9 Research Spotlight/Health Care: An Ounce of Prevention Subscriptions and additional 22 Interview/Jean Tirole copies: Available free of charge through our website at 28 Economic History/The Rise and Decline of Petersburg, Va. www.richmondfed.org/publi- cations or by calling Research 35 Book Review/Evolution of Economic Ideas: Adam Smith to Publications at (800) 322-0565. Amartya Sen and Beyond Reprints: Text may be reprinted with the disclaimer in italics 36 District Digest/Diversification and Specialization Across Urban Areas below. Permission from the editor is required before reprinting 44 Opinion/Is There a Wage Growth Puzzle? photos, charts, and tables. Credit Econ Focus and send the editor a copy of the publication in which the reprinted material appears. The views expressed in Econ Focus are those of the contributors and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System. ISSN 2327-0241 (Print) ISSN 2327-025x (Online) MESSAGE FROM THE INTERIM PRESIDENT The Richmond Fed and Urban Economics s I’ve shared before in this space, the Richmond in the field of urban econom- Fed has a deep and long-standing interest in ics shared their recent work. Aunderstanding the constraints and opportunities Developments in the field in communities throughout our district. Recently, we have have enabled us to model cities been investing additional resources in studying urban areas mathematically in incredibly specifically. rich detail and make sure that Most economic activity takes place in cities. In the any policy experiment is based Fifth District, metro areas generated more than 90 percent on a city’s current, specific of economic output in 2015 and were home to more than reality. The work economists three-quarters of the population. Just three cities — are doing today holds great Baltimore, Charlotte, and Richmond, where our three promise for giving policymak- branches are located — account for 20 percent of our ers the tools to understand the district’s population and nearly one-quarter of its GDP. consequences for a variety of Not all cities are the same, of course. Our region stakeholders. boasts some of the nation’s most culturally and eco- Of course, these are incredibly complex and difficult nomically vibrant cities, but we also have cities suffering questions, and the solutions are likely to be years in the persistent decline. And even within relatively prosperous making. The Richmond Fed is proud to be playing some or fast-growing cities, there are pockets of entrenched role in helping to advance the science of urban economics, poverty that policymakers have struggled to redress. and we are committed to that effort for as many years as it These neighborhoods face challenges whose roots go takes. But let me emphasize that we do not view our role as back many decades and for which solutions do not seem coming up with the “right” solutions or prescribing specific to be near at hand. solutions to policymakers. Our role is as a convener and a OK, you might be thinking, but isn’t urban economics disseminator; we want to bring together the best research- outside the purview of the Federal Reserve? Isn’t your ers (including our own economists, of course) and help get job monetary policy? From the perspective of a regional that research into the hands of policymakers so they can Reserve Bank, however, studying our region is essential design the most effective solutions for their unique places to conducting monetary policy. For example, what’s hap- and people. pening in one area or one sector might be a harbinger of This is my last column as interim president of the things to come for the economy as a whole. And national Richmond Fed. In June, I will be retiring after more statistics such as the unemployment rate mask significant than three decades with the Federal Reserve System. It disparities between people in different areas of the coun- has been my privilege to work with wonderful colleagues try or different demographic groups. The fact that the throughout the System and an honor to support the Fed’s economy added an average of 171,000 jobs per month mission. In December, our Board of Directors announced during 2017 and the unemployment rate for the nation that Thomas Barkin, a senior partner and chief risk offi- declined to 4.1 percent doesn’t mean that people in rural cer at McKinsey and Company, had been selected as the West Virginia or inner-city Baltimore have an easy time Bank’s new president and chief executive officer. Tom finding jobs. brings a wealth of management and financial experience Moreover, monetary policy isn’t the right tool to to the Bank and has a strong legacy of promoting diversity address these disparities. Effective monetary policy cre- and inclusion. He also has a keen understanding of the ates an environment conducive to economic growth and Federal Reserve from previously serving on the Atlanta job creation, but it doesn’t affect the many other real Fed’s Board of Directors. Everyone at the Richmond Fed variables that influence when and where economic growth looks forward to working with him to continue the Bank’s occurs — such as a region’s initial endowments of land service to the Fifth District and the country. EF or natural resources, transportation patterns, changes in technology, or even changing tastes in where people want to live. Monetary policy is a blunt instrument — address- ing the unique challenges facing any given city requires finesse. MARK L. MULLINIX In November, the Richmond Fed hosted a confer- INTERIM PRESIDENT AND CHIEF EXECUTIVE OFFICER ence in Baltimore where some of the leading economists FEDERAL RESERVE BANK OF RICHMOND E CON F OCUS | F OURTH Q UARTER | 2017 1 PFRONT U Regional News at a Glance BY LISA KENNEY MARYLAND — Medical supply manufacturer Medline announced in December 2017 that it will build a new 1.1 million-square-foot distribution center in Perryville. The Illinois-based firm’s new facility will replace one in Havre de Grace. The center is expected to provide 200 new jobs over six years and, including the current workforce, will bring the total number of jobs to more than 300. Construction is expected to begin in 2018 with an opening in late 2018 or early 2019. NORTH CAROLINA — In February, the newest session of the NC Farm School began giving guidance to farmers and aspiring farmers looking to start a new oper- ation or diversify an existing farm. The four-month program consists of eight busi- ness planning seminars taught by experienced farmers and NC State University specialists who help students create viable business plans; it also offers tours of economically sustainable farms and introduces students to local agents who help them follow through with their plans and connect them to local resources. The program has been running since 2012 and is a partnership of NC State’s Department of Agricultural and Resource Economics and NC State Extension. SOUTH CAROLINA — In December 2017, Samsung announced a five-year partnership with the state, Clemson University, and the University of South Carolina to advance high-tech manufacturing research and development. The R&D program, named the Palmetto Consortium for Home Appliance Innovation, is designed to foster innovation and collaboration while developing a new generation of manufacturing professionals in South Carolina. Research is expected to occur in consumer electronics, energy efficient technology, sensor technology, and other areas. VIRGINIA — The first U.S. manufacturing plant of American Merchant will be located in Bristol, the company announced in December 2017. American Merchant is a newly formed subsidiary of Hong Kong-based home textile manufacturer Merchant House International Ltd. Merchant House will invest $19.9 million in the new textile plant, which will focus on home décor products. It is expected to bring more than 400 jobs to the region, with funding for employee training being provided by the Virginia Jobs Investment Program.
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