Category Archive for: Income Distribution [Return to Main]

Tuesday, May 03, 2016

The Davos Lie

Kevin O'Rourke:

The Davos lie: ... If there's one thing that people agree about in Davos, it's that globalisation is a Good Thing. ...
As is well known, many Western societies have become more unequal over the past two decades... During the 1980s and 1990s, the consensus was that this growing inequality was due not to international trade, but to technological change that was systematically favouring skilled over unskilled workers. ...
More recently, however, the debate has swung back towards the view that trade is important in explaining rising inequality...
Unfortunately for Davos, globalisation's losers are becoming increasingly hostile to trade (and immigration)..., ordinary people's attitudes towards globalisation are exactly what Heckscher-Ohlin economics would predict. ...
Economists can tut-tut all they want about working-class people refusing to buy into the benefits of globalisation, but as social scientists we surely need to think about the predictable political consequences of economic policies. Too much globalisation, without domestic safety nets and other policies that can adequately protect globalisation's losers, will inevitably invite a political backlash. Indeed, it is already upon us.

Monday, May 02, 2016

Growth of Income and Welfare in the U.S, 1979-2011

From the NBER:

Growth of income and welfare in the U.S, 1979-2011, by John Komlos, NBER Working Paper No. 22211 Issued in April 2016: We estimate growth rates of real incomes in the U.S. by quintiles using the Congressional Budget Office’s (CBO) post-tax, post-transfer data as basis for the period 1979-2011. We improve upon them by including only the present value of earnings that will accrue in retirement and excluding items included in the CBO income estimates such as “corporate taxes borne by labor” that do not increase either current purchasing power or utility. We estimate a high and a low growth rate using two price indexes, the CPI and the Personal Consumption Expenditure index. The major consistent findings include what in the colloquial is referred to as the “hollowing out” of the middle class. According to these estimates, the income of the middle class 2nd and 3rd quintiles increased at a rate of between 0.1% and 0.7% per annum, i.e., barely distinguishable from zero. Even that meager rate was achieved only through substantial transfer payments. In contrast, the income of the top 1% grew at an astronomical rate of between 3.4% and 3.9% per annum during the 32-year period, reaching an average annual value of $918,000, up from $281,000 in 1979 (in 2011 dollars). Hence, the post-tax, post-transfer income of the 1% relative to the 1st quintile increased from a factor of 21 in 1979 to a factor of 51 in 2011. However, income of no other group increased substantially relative to that of the lowest quintile. Oddly, the income of even those in the 96-99 percentiles increased only from a multiple of 8.1 to a multiple of 11.3. We next estimate growth in welfare assuming diminishing marginal utility of income. A logarithmic utility function yields a growth in welfare for the middle class of roughly 0.01% to 0.07% per annum, which is indistinguishable from zero. With interdependent utility functions only the welfare of the 5th quintile experienced meaningful growth while those of the first four quintiles tend to be either negligible or even negative.

[Open link to earlier version.]

Thursday, April 21, 2016

Why Wages Aren’t Keeping Up

Robert Solow:

The Future of Work: Why Wages Aren’t Keeping Up: ... The suggestion I want to make is that one important reason for the failure of real wages to keep up with productivity is that the division of rent in industry has been shifting against the labor side for several decades. This is a hard hypothesis to test in the absence of direct measurement. But the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished. This is not to say that international competition and the biased nature of new technology have no role to play, only that they are not the whole story. Internal social change and the division of rent matter too.
Now I would like to connect this hypothesis with another change taking place in the labor market. Lacking anything more euphonious, I will call it the casualization of labor. The proportion of part-time workers has been rising: both those who prefer it that way and those who would rather have a full-time job. So is the number of temporary workers... So are the numbers of workers on fixed-term contracts and independent contractors, many of whom are doing the same work as they once did as regular employees. These are all good-faith members of the labor force; they are employed but without what used to be thought of as a regular job.
This shift toward more casual labor interacts with the issue of the division of rents. Casual workers have little or no effective claim to the rent component of any firm’s value added. They have little identification with the firm, and they have correspondingly little bargaining power. Unions find them difficult to organize, for obvious reasons. If the division of corporate rents has indeed been shifting against labor, an increasingly casual work force will find it very hard to reverse that trend.

Monday, April 18, 2016

Paul Krugman: Robber Baron Recessions

Paul Krugman made similar points in 2012, but the part about secular stagnation is new:

Robber Baron Recessions, by Paul Krugman, NY Times: ...In recent years many economists, including people like Larry Summers and yours truly, have  come to the conclusion that growing monopoly power is a big problem for the U.S. economy — and not just because it raises profits at the expense of wages. ...
The argument begins with a seeming paradox about overall corporate behavior. You see, profits are at near-record highs, thanks to a substantial decline in the percentage of G.D.P. going to workers. You might think that these high profits imply high rates of return to investment. But corporations themselves clearly don’t see it that way: their investment in plant, equipment, and technology ... hasn’t taken off...
How can this paradox be resolved? Well, suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power. In that case many corporations would be in the position I just described...
And such an economy wouldn’t just be one in which workers don’t share the benefits of rising productivity; it would also tend to have trouble achieving or sustaining full employment. Why? Because when investment is weak despite low interest rates, the Federal Reserve will too often find its efforts to fight recessions coming up short. So lack of competition can contribute to “secular stagnation” ... But do we have direct evidence that such a decline in competition has actually happened? Yes, say a number of recent studies...
The obvious next question is why competition has declined. The answer can be summed up in two words: Ronald Reagan.
For Reagan didn’t just cut taxes and deregulate banks; his administration also turned sharply away from the longstanding U.S. tradition of reining in companies that become too dominant in their industries. A new doctrine, emphasizing the supposed efficiency gains from corporate consolidation, led to what those who have studied the issue often describe as the virtual end of antitrust enforcement. ...
On Friday the White House issued an executive order directing federal agencies to use whatever authority they have to “promote competition.” What this means in practice isn’t clear... But it may mark a turning point in governing philosophy, which could have large consequences if Democrats hold the presidency.
For we aren’t just living in a second Gilded Age, we’re also living in a second robber baron era. And only one party seems bothered by either of those observations.

Thursday, April 14, 2016

Multidimensional Poverty and Race in America

Richard V. Reeves, Edward Rodrigue, and Elizabeth Kneebone at the Brookings Institution:

Multidimensional poverty and race in America: Poverty is typically defined in terms of a lack of adequate income, especially in U.S. policy debates. But the experience of poverty goes well beyond household finances, and can include a lack of education, work, access to healthcare, or distressed neighborhood conditions. These additional dimensions of poverty can be layered on top of income poverty; they can also put those who are not income-poor at a disadvantage.

In a new report published today, we look at poverty across multiple dimensions for adults aged 25 to 61, using the 2014 American Community Survey. We look in particular at differences in how different dimensions of disadvantage overlap, or cluster together for people in different racial categories. We find stark race gaps in the risks of overlapping disadvantage in five dimensions (as this accompanying interactive shows):

  1. Low household income (below 150 percent of the federal poverty line)
  2. Limited education (less than a high school degree)
  3. Lack of health insurance
  4. Low income area (PUMA poverty rate exceeds 20 percent)
  5. HoHousehold unemployment

Almost half of the U.S. population suffered from at least one of the five disadvantages in 2014. The proportion suffering from many dimensions of poverty is lower—but far from trivial. For instance, there are more than 3 million black adults and 5 million Hispanic adults facing at least three disadvantages:

Reeves 41416001

Most white adults don’t suffer any of the five disadvantages. Most Hispanic and black adults do. Only 38 percent of white adults face at least one disadvantage, versus almost 70 percent for Hispanic and black residents. Furthermore, among the white adults that do experience at least one disadvantage, most don’t experience any additional disadvantages. By contrast, most black and Hispanic adults with at least one disadvantage suffer at least one additional disadvantage. ...

There are important differences between people in different racial categories, however. Black residents are more likely to live in a poor area and/or a jobless family than Hispanics, who are more likely to lack a high school education and/or health insurance ...

Scholars and policy-makers inspired by the capabilities-based approach of Amartya Sen are advancing broader approaches to measures of poverty and well-beinga. Some nations including Mexico have formally adopted a multidimensional measure. Others such as France and England are giving more weight to non-monetary forms of disadvantage. The U.S. has made strides in addressing the many shortcomings of the official poverty measure through the creation of the much more nuanced Supplemental Poverty Measure. But it is still an income-only yardstick.

A A more multifaceted approach to measuring poverty, like the one offered here, reveals some of the insights that can be gained in the U.S. by framing the issue more broadly—from revealing the deep racial and ethnic disparities that exist to shedding light on the differing dimensions of disadvantage experienced from one group to the next.

In our next paper, to be published next week, we examine the geography of multidimensional poverty...

Friday, April 08, 2016

Inequality and Aggregate Demand

Next paper at the conference:

Inequality and Aggregate Demand, by with Adrien Auclert and Mathew Rognile: Abstract: We explore the quantitative effects of transitory and persistent increases in income inequality on equilibrium interest rates and output. Our starting point is a Bewley-Huggett-Aiyagari model featuring rich heterogeneity and earnings dynamics as well as downward nominal wage rigidities. A temporary rise in inequality, if not accommodated by monetary policy, has an immediate effect on output that can be quantified using the empirical covariance between income and marginal propensities to consume. A permanent rise in inequality can lead to a permanent Keynesian recession, which is not fully offset by monetary policy due to a lower bound on interest rates. We show that the magnitude of the real interest rate fall and the severity of the steady-state slump can be approximated by simple formulas involving quantifiable elasticities and shares, together with two parameters that summarize the effect of idiosyncratic uncertainty and real interest rates on aggregate savings. For plausible parametrizations the rise in inequality can push the economy into a liquidity trap and create a deep recession. Capital investment and deficit-financed fiscal policy mitigate the fall in real interest rates and the severity of the slump.

Saturday, April 02, 2016

'The Schumpeter Hotel: Income Inequality and Social Mobility'

Branko Milanovic:

The Schumpeter hotel: income inequality and social mobility: In one of his rare discussions of inequality, Joseph Schumpeter illustrated in a metaphor the difference between the inequality we observe at a moment in time and social (or inter-generational) mobility. Suppose, Schumpeter writes, that there is a multiple-story-high hotel with higher floors containing fewer people and having much nicer rooms. At any given moment, there would be lots of people on the ground floor living in cramped small rooms, and just a few people in the nice and comfortable top-floor rooms with a view. But then let the guests move around and change the rooms every night. This  is what, Schumpeter said, social mobility will do: at every given moment of time there are rich and poor but as we extend the time period, today’s rich are yesterday’s poor and vice versa. The guests from the ground floors (or at least their children) have made it to the top, those from the top might have tumbled down to the bottom.
Now, Schumpeter’s metaphor was for a long time a metaphor for US inequality too. It was granted that in the 20th, and even in the 19th, century US income inequality might have been greater than inequality in Europe, but it was also held that US society was much more fluid, less class-bound and that there was greater social mobility. (That view of course conveniently overlooked the huge racial divide in the US.) In other words, inequality was the price that America paid for high social mobility.
This was a reassuring  picture consonant with the idea of the American dream.  But was it  true? We actually never knew it, beyond anecdotal evidence of migrants’ lives, since no consistent empirical studies of inter-generational mobility existed until very recently. ...
The comforting picture of high inequality which does not impede mobility between generations turns out to be false. US does not behave any differently than other societies with high inequality. High income inequality today reinforces income differences between the generations and makes social mobility more difficult to achieve. This is also the point of my recent paper with Roy van der Weide. We use US micro data from 1960 to 2010 to show that poor people in US states with higher initial inequality experienced lower income growth in subsequent periods.
This important finding ... two important implications:  (1) American exceptionalism in the matters of income distribution does not have a basis in reality, and (2) we can use, with a good degree of confidence, the easily available data on current inequality as predictors of social mobility. Thus one cannot argue that societies with high inequality in incomes are societies with high equality of opportunity. On the contrary, observed high inequality today implies low equality of opportunity.

Thursday, March 31, 2016

The Spiral of Inequality

Interesting to go back nearly 20 years and ask how much things have changed (or not). This is Paul Krugman at the end of 1996:

The Spiral of Inequality, by Paul Krugman,  November/December 1996 Issue, Mother Jones: Ever since the election of Ronald Reagan, right-wing radicals have insisted that they started a revolution in America. They are half right. If by a revolution we mean a change in politics, economics, and society that is so large as to transform the character of the nation, then there is indeed a revolution in progress. The radical right did not make this revolution, although it has done its best to help it along. If anything, we might say that the revolution created the new right. But whatever the cause, it has become urgent that we appreciate the depth and significance of this new American revolution—and try to stop it before it becomes irreversible.
The consequences of the revolution are obvious in cities across the nation. Since I know the area well, let me take you on a walk down University Avenue in Palo Alto, California. ...
You can confirm what your eyes see, in Palo Alto or in any American community, with dozens of statistics. The most straightforward are those on income shares supplied by the Bureau of the Census, whose statistics are among the most rigorously apolitical. In 1970, according to the bureau, the bottom 20 percent of US families received only 5.4 percent of the income, while the top 5 percent received 15.6 percent. By 1994, the bottom fifth had only 4.2 percent, while the top 5 percent had increased its share to 20.1 percent. That means that in 1994, the average income among the top 5 percent of families was more than 19 times that of the bottom 20 percent of families. In 1970, it had been only about 11.5 times as much. (Incidentally, while the change in distribution is most visible at the top and bottom, families in the middle have also lost: The income share of the middle 20 percent of families has fallen from 17.6 to 15.7 percent.) These are not abstract numbers. They are the statistical signature of a seismic shift in the character of our society.
The American notion of what constitutes the middle class has always been a bit strange, because both people who are quite poor and those who are objectively way up the scale tend to think of themselves as being in the middle. But if calling America a middle-class nation means anything, it means that we are a society in which most people live more or less the same kind of life.
In 1970 we were that kind of society. Today we are not, and we become less like one with each passing year. As politicians compete over who really stands for middle-class values, what the public should be asking them is, What middle class? How can we have common "middle-class" values if whole segments of society live in vastly different economic universes?
If this election was really about what the candidates claim, it would be devoted to two questions: Why has America ceased to be a middle-class nation? And, more important, what can be done to make it a middle-class nation again? ...
The Sources of Inequality...
Values, Power, and Wages ...
The Decline of Labor ...
Strategies for the Future ...

Here's a link to the article.

Sunday, March 27, 2016

'Make Elites Compete: Why the 1% Earn So Much and What To Do about It'

Jonathan Rothwell at Brookings:

... In his “defense of the one percent,” economist Greg Mankiw argues that elite earnings are based on their higher levels of IQ, skills, and valuable contributions to the economy. The globally-integrated, technologically-powered economy has shifted so that very highly-talented people can generate very high incomes.
It is certainly true that rising relative returns to education have driven up inequality. But as I have written earlier, this is true among the bottom 99 percent. There is no evidence to support the idea that the top 1 percent consists mostly of people of “exceptional talent.” In fact, there is quite a bit of evidence to the contrary.
Drawing on state administrative records for millions of individual Americans and their employers from 1990 to 2011, John Abowd and co-authors have estimated how far individual skills influence earnings in particular industries. They find that people working in the securities industry (which includes investment banks and hedge funds) earn 26 percent more, regardless of skill. Those working in legal services get a 23 percent pay raise. These are among the two industries with the highest levels of “gratuitous pay”—pay in excess of skill (or “rents” in the economics literature). At the other end of the spectrum, people working in eating and drinking establishments earn 40 percent below their skill level. ...

Much more here.

Monday, March 21, 2016

Paul Krugman: On Invincible Ignorance

Republicans are in denial:

On Invincible Ignorance, by Paul Krugman, Commentary, NY Times: Remember Paul Ryan? The speaker of the House... I was interested to read what Mr. Ryan said in a recent interview with John Harwood. What has he learned from recent events?
And the answer is, nothing.
Like just about everyone in the Republican establishment, Mr. Ryan is in denial about the roots of Trumpism, about the extent to which the party deliberately cultivated anger and racial backlash, only to lose control of the monster it created. ...
You might think that Republican thought leaders would be engaged in some soul-searching about their party’s obsession with cutting taxes on the wealthy. ...
But here’s what Mr. Ryan said about all those tax cuts for the top 1 percent: “I do not like the idea of buying into these distributional tables. What you’re talking about is what we call static distribution. It’s a ridiculous notion.”
Aha. The income mobility zombie strikes again.
Ever since income inequality began its sharp rise in the 1980s, one favorite conservative excuse has been that it doesn’t mean anything, ... statistics showing that many people who are in the top 1 percent in any given year are out of that category the next year.
But a closer look at the data shows that there is less to this observation than it seems. These days, it takes an income of around $400,000 a year to put you in the top 1 percent, and most of the fluctuation in incomes we see involves people going from, say, $350,000 to $450,000 or vice versa..., which means that tax cuts that mainly benefit the rich are indeed targeted at a small group of people, not the public at large.
And here’s the thing: This isn’t a new observation. ...
Appalled Republicans may rail against Donald Trump’s arrogant ignorance. But how different, really, are the party’s mainstream leaders? Their blinkered view of the world has the veneer of respectability, may go along with an appearance of thoughtfulness, but in reality it’s just as impervious to evidence — maybe even more so, because it has the power of groupthink behind it. ...
What we’re getting ... is at least the possibility of a cleansing shock — of a period in the political wilderness that will finally force the Republican establishment to rethink its premises. That’s a good thing — or it would be, if it didn’t also come with the risk of President Trump.

'Income Inequality and Income Mobility: New Evidence from OECD Nations'

From VoxEU:

Income inequality and income mobility: New evidence from OECD nations, by Andrea Garnero, Alexander Hijzen , and Sébastien: Summary Some economists argue that income inequality suggests intra-generational mobility in society. This column provides comprehensive evidence across a large number of advanced economies on the importance of intra-generational mobility and its relationship with earnings inequality. The findings do not support the belief that higher earnings inequality necessarily goes hand-in-hand with greater mobility over the working life. Higher inequalities are not systematically compensated by higher mobility opportunities. ...

Friday, March 11, 2016

'How Wage Insurance Could Ease Economic Inequality'

Robert Shiller:

How Wage Insurance Could Ease Economic Inequality: Wage insurance may not be on your radar, but it should be. It helps people who have lost their jobs and cannot find new ones that pay as well. That assistance can reduce economic inequality while providing incentives for unemployed people to go back to work quickly.
What’s more, wage insurance has bipartisan support, at least in its current limited form. We ought to expand it, both through government and in the private sector. ...
The role of government is important in this case because for social insurance, governments have a significant advantage in putting into place big ideas that are difficult to market. That was true for federal Old-Age, Survivors and Disability Insurance in the Social Security system starting in 1935, which was followed by an explosion of additional private pension, life insurance and disability plans. Government is needed again now.
But ultimately, there should be two insurance systems, a government one that is limited to assisting lower-income workers and a private one that allows everyone — including those with higher incomes — to buy insurance against wage loss. ...

Sunday, March 06, 2016

Thomas Piketty, Paul Krugman, and Joseph Stiglitz: The Genius of Economics (Video)

Friday, March 04, 2016

'Trade, Trump, and Downward Class Warfare'

This is from Mark Kleiman (via Brad DeLong):

Trade, Trump, and Downward Class Warfare, by Mark Kleiman: A conversation with my Marron Institute colleague Paul Romer yesterday crystallized an idea I’d been toying with for some time. In a nutshell: opponents of taxing the rich have destroyed, on a practical level, the theoretical basis for believing that free trade benefits everyone.
The Econ-101 case for free trade is straightforward: Trade benefits those who produce exports and those who consume imports (including producers who use imported goods as inputs). It hurts the producers of goods which can be made better or more cheaply abroad. But the gains to the winners exceed the gains to the losers: that is, the winners could make the losers whole and still come out ahead themselves. Therefore, trade passes the Pareto test.
[Yes, this elides a number of issues, including path-dependency in increasing-returns and learning-by-doing markets on the pure-economics side and the salting of actual agreements with provisions that create or protect economic rents on the political-economy side. It also ignores the biggest gainers from trade: workers in low-wage countries, most notably the Chinese factory workers whose parents were barefoot peasants.]
So when the modern Republican Party (R.I.P), in the name of “small government” and opposition to “class warfare,” set its face against policies to redistribute the gains from economic growth, it destroyed the theoretical basis for thinking that a rising tide would lift all the boats, rather than lifting the yachts and swamping the trawlers. Free trade without redistribution (especially the corrupt version of “free trade” with corporate rent-seeking written into it) is basically class warfare waged downwards. ...

Wednesday, March 02, 2016

'Nearly Half of American Children Living Near Poverty Line'

"Millions of children are living in families still struggling to make ends meet in our low-growth, low-wage economy":

Nearly half of American children living near poverty line, Eurekalert!: Nearly half of children in the United States live dangerously close to the poverty line, according to new research from the National Center for Children in Poverty (NCCP) at Columbia University's Mailman School of Public Health. Basic Facts about Low-Income Children, the center's annual series of profiles on child poverty in America, illustrates the severity of economic instability and poverty conditions faced by more than 31 million children throughout the United States. Using the latest data from the American Community Survey, NCCP researchers found that while the total number of children in the U.S. has remained about the same since 2008, more children today are likely to live in families barely able to afford their most basic needs.
"These data challenge the prevailing beliefs that many still hold about what poverty looks like and which children in this country are most likely to be at risk," said Renée Wilson-Simmons, DrPH, NCCP director. "The fact is, despite the significant gains we've made in expanding nutrition and health insurance programs to reach the children most in need, millions of children are living in families still struggling to make ends meet in our low-growth, low-wage economy."
According to NCCP researchers, the number of poor children in the U.S. grew by 18 percent from 2008 to 2014 (the latest available data), and the number of children living in low-income households grew by 10 percent. ...

Wednesday, February 24, 2016

'Introducing Kuznets Waves: How income Inequality Waxes and Wanes over the Very Long Run '

Branko Milanovic at VoxEU:

Introducing Kuznets waves: How income inequality waxes and wanes over the very long run: In 1955 when Simon Kuznets wrote about the movement of inequality in rich countries (and a couple of poor ones), the US and the UK were in the midst of the most significant decrease of income inequality ever registered in history, coupled with fast growth. It thus seemed eminently reasonable to look at the factors behind the decrease of inequality, and Kuznets famously found them in expanded education, lower inter-sectoral productivity differences (thus the rent component of wages would be equalized), lower return to capital, and political pressure for greater social transfers. He then looked at (or rather imagined) the evolution of inequality during the previous century and thought that, driven by the transfer of labor from agriculture to manufacturing, inequality rose and reached its peak in the rich world sometime around the turn of the 20th century. Thus, he created the famous Kuznets curve.
The Kuznets curve was the main tool used by inequality economists when thinking about the relationship between development or growth and inequality over the past half century. But the Kuznets curve gradually fell out of favor because its prediction of low inequality in very rich societies could not be squared with the sustained increase in income inequality that started in the late 1970s in practically all developed nations (see the long-run graphs for the US and the UK). Many people thus rejected it.
The upswing in current inequality as a second Kuznets curve
In a new book (Milanovic 2016), I argue however that we should see the current upswing in inequality as the second Kuznets curve in the modern times, being driven, like the first, mostly by a technological revolution and the transfer of labor from more homogeneous manufacturing into skill-heterogeneous services (and thus producing a decline in the ability of workers to organize), but also (again like the first) by globalization, which has both led to the famous hollowing out of the middle classes in the west and to a pressure to reduce high tax rates on mobile capital and high-skilled labor. The elements listed here are not new. But putting them together (especially viewing technological progress and globalization as practically indissoluble, even if conceptually different) and viewing this as part of regular Kuznets waves is new. It has obvious implications for the future, not the least that this bout of inequality growth will peak like the previous one and eventually go down. ...

Skipping forward:

Inequality may not be overturned soon

Which leads us to the present. How long will the current upswing of the Kuznets wave continue in the rich world, and when and how will it stop? I am skeptical that it will be overturned soon, at least not in the US where I see four powerful forces that keep on pushing inequality up. I will just list them here (they are, of course, discussed in the book):

  • Rising share of capital income which is in all rich countries extremely concentrated among the rich (with a Gini in excess of 90);
  • Growing association of high incomes from both capital and labor in the hands of the same people (Atkinson and Lakner 2014);
  • Homogamy (the educated and the rich marrying each other); and
  • Growing importance of money in politics which allows the rich to write rules favorable to them and thus to maintain the inequality momentum (Gilens 2012).

The peak of inequality in the second Kuznets wave should be lower than in the first (when in the UK, it was equal to the inequality level of today’s South Africa) because the rich societies have in the meantime acquired a number of ‘inequality stabilizers’, from unemployment benefits to state pensions.

The pro-inequality trends will be very hard to overturn during the next generation, but eventually they may be – through a combination of political change, pro-unskilled labor technological innovations (which will become more profitable as skilled labor’s price increases), dissipation of rents acquired during the current bout of technological efflorescence, and possibly greater attempts to equalize ownership of assets (through forms of ‘people’s capitalism’ and workers’ shareholding).   

Now, these are of course the benign factors that, I think, will ultimately set inequality in rich countries on its downward path. But history teaches us too that there are malign factors, notably wars, in turn caused by domestic maldistribution of income and power of the elites (as was the case in the World War I), that can also do the job of income leveling. But they do it at the cost of millions of human lives. One can hope that we have learned something from history and would avoid this destructive path to equality in poverty and death.

Monday, February 22, 2016

A 'Second-Chance' Society

Social programs "need to be refitted for a polarized labor market hard-wired to generate inequalities":

Why Canada should foster a ‘second-chance’ society, by Miles Corak: Canadians should be thumping their chests, after all many others are patting us on the back. When it comes to social mobility we are among the world leaders. Even U.S. President Obama acknowledged that a poor child is more likely to move up in life in Canada than in the United States.
This kind of mobility, the capacity for children to become all that they can be without regard to their starting point in life, is the bedrock of fairness. ...
But ... the ... foundations of fairness are shifting; luck will matter more, meritocracy will be perverted by growing inequality, and our public policies haven’t really changed to prepare for the new reality that is already pressing on young people. ...
Canadians need to build a “second chance” society so that the consequences of bad luck or bad choices don’t matter as much.
There is a whole host of ways our social programs built up in an era of stable and steady job growth need to be refitted for a polarized labor market hard-wired to generate inequalities. ...

He goes on to explain some of the ways this might be accomplished.

Saturday, February 20, 2016

'How Did Globalization Affect German Manufacturing Workers?'

From VoxEU:

How did globalization affect the job biographies of German manufacturing workers?, by Wolfgang Dauth, Sebastian Findeisen, and Jens Südekum: What are the labor market effects of globalization? This question dates back, at least, to the seminal work by Stolper and Samuelson (1941), but even today relatively little is known about the micro-level impacts of trade shocks on the job biographies of single workers. How are different individuals affected? Does it depend on their initial sectoral affiliation, location, and personal characteristics? Do they systematically adjust to globalization by moving across industries, regions, or plants to mitigate import shocks or to benefit from export opportunities? Does this endogenous mobility occur smoothly, or does it involve disruptive unemployment spells? And what are the cumulated long-run effects of trade shocks? These are central concerns for policymakers who worry about the distributive consequences of trade liberalizations. ...

Moving forward to the conclusion:

Summing up, our key insight is that German manufacturing workers benefited at large from this particular globalization episode. Yet, there have been winners and losers. Moreover, we find that individuals systematically adjust to globalization, and we discover a notable asymmetry in the individual labor market response to positive and negative shocks.
Trade shocks do not seem to trigger much ‘voluntary’ sorting from import-competing to export-oriented manufacturing industries. The patterns we observe in the data are more consistent with a type of mobility that is ‘forced’ by job displacement and unemployment. The push effects out of import-competing manufacturing industries are not mirrored by comparable pull effects into export-oriented branches. Often, the direction of the move is to the service sector.
We also find strong heterogeneity across different types of workers. Younger and less-skilled individuals, for example, are hit harder by import shocks but also benefit more from export opportunities. Women and men are affected similarly from import penetration, but men seem to materialize the benefits of rising export exposure better than women, thereby fueling the gender-wage gap. The basic upshot is that trade causes strong distributional effects in the German labor market, and our micro-level empirical findings might be informative for policymakers to design targeted policies that aim at those who benefit the least from globalization.

Thursday, February 11, 2016

'Does Inequality Cause Financial Distress?'

This is from a Federal Reserve Bank of Philadelphia Working Paper:

Does inequality cause financial distress? Evidence from lottery winners and neighboring bankruptcies Sumit Agarwal, Vyacheslav Mikhed, and Barry Scholnick: Abstract We test the hypothesis that income inequality causes financial distress. To identify the effect of income inequality, we examine lottery prizes of random dollar magnitudes in the context of very small neighborhoods (13 households on average). We find that a C$1,000 increase in the lottery prize causes a 2.4% rise in subsequent bankruptcies among the winners’ close neighbors. We also provide evidence of conspicuous consumption as a mechanism for this causal relationship. The size of lottery prizes increases the value of visible assets (houses, cars, motorcycles), but not invisible assets (cash and pensions), appearing on the balance sheets of neighboring bankruptcy filers.
Download Full text.

Wednesday, February 03, 2016

'The Costs of Inequality: When a Fair Shake Isn’t'

The beginning of a relatively long discussion:

The costs of inequality: When a fair shake isn’t, by Alvin Powell, Harvard Staff Writer: It’s a seemingly nondescript chart, buried in a Harvard Business School (HBS) professor’s academic paper.
A rectangle, divided into parts, depicts U.S. wealth for each fifth of the population. But it appears to show only three divisions. The bottom two, representing the accumulated wealth of 124 million people, are so small that they almost don’t even show up.
Other charts in other journals illustrate different aspects of American inequality. They might depict income, housing quality, rates of imprisonment, or levels of political influence, but they all look very much the same.
Perhaps most damning are those that reflect opportunity — whether involving education, health, race, or gender — because the inequity represented there belies our national identity. America, we believe, is a land where everyone gets a fair start and then rises or falls according to his or her own talent and industry. But if you’re poor, if you’re uneducated, if you’re black, if you’re Hispanic, if you’re a woman, there often is no fair start. ...

Thursday, January 21, 2016

When Robots Rule the Working World

I haven't had the courage to read the comments:

What happens if robots take all the jobs?, by Mark Thoma: The theme of this year's World Economic Forum (WEF) meeting in Davos, Switzerland, can be summarized as the impact of the fourth industrial revolution on jobs, inequality and the quality of life.
How will digital revolution change our lives? Will robots take most of the good jobs? Are we headed for a future where a few people -- those who are fortunate enough to own the robots and other technology needed to produce goods and services -- receive most of the income, and those who don't struggle to find work that pays enough to feed their families? ...

Real Median Household Income in the US

Jpg

Friday, January 15, 2016

Paul Krugman: Is Vast Inequality Necessary?

Time to put the Gini back in the bottle:

Is Vast Inequality Necessary?, by Paul Krugman, Commentary, NY Times: How rich do we need the rich to be?
That’s not an idle question. It is, arguably, what U.S. politics are substantively about. Liberals want to raise taxes on high incomes and use the proceeds to strengthen the social safety net; conservatives want to do the reverse, claiming that tax-the-rich policies hurt everyone by reducing the incentives to create wealth.
Now, recent experience has not been kind to the conservative position. ... Is there, however, a longer-term case in favor of vast inequality? ...
I find it helpful to think in terms of three stylized models of where extreme inequality might come from, with the real economy involving elements from all three.
First, we could have huge inequality because individuals vary hugely in their productivity..
Second, we could have huge inequality based largely on luck..., those who hit the jackpot ... just happen to be in the right place at the right time.
Third, we could have huge inequality based on power: executives at large corporations who get to set their own compensation, financial wheeler-dealers who get rich on inside information or by collecting undeserved fees from naïve investors.
As I said, the real economy contains elements of all three stories. ...
But the real question, in any case, is whether we can redistribute some of the income currently going to the elite few to other purposes without crippling economic progress.
Don’t say that redistribution is inherently wrong. Even if high incomes perfectly reflected productivity, market outcomes aren’t the same as moral justification. And given the reality that wealth often reflects either luck or power, there’s a strong case to be made for collecting some of that wealth in taxes and using it to make society as a whole stronger, as long as it doesn’t destroy the incentive to keep creating more wealth.
And there’s no reason to believe that it would. Historically, America achieved its most rapid growth and technological progress ever during the 1950s and 1960s, despite much higher top tax rates and much lower inequality than it has today.
In today’s world, high-tax, low-inequality countries like Sweden are also both highly innovative and home to many business start-ups. This may in part be because a strong safety net encourages risk-taking...
So coming back to my original question, no, the rich don’t have to be as rich as they are. Inequality is inevitable; the vast inequality of America today isn’t.

Tuesday, January 12, 2016

Three Ways to Help the Working Class

I have a new column:

Three Ways to Help the Working Class: ... In graduate school, I was once told that “people don’t have marginal products, jobs do.” What does this mean? ...

I wish I would have connected the last part to the Supreme Court case on public unions.

Saturday, January 09, 2016

'Who Owns U.S. Business? How Much Tax Do They Pay?'

From the NBER Digest

'Who Owns U.S. Business? How Much Tax Do They Pay?', by Laurent Belsie, NBER DigestIn 1980, pass-through entities accounted for 20.7 percent of U.S. business income; by 2011, they represented 54.2 percent.

The importance of pass-through business entities has soared in the past three decades. Over the same period, the amount of pass-through business income flowing to the top 1 percent of income earners has increased sharply, according to Business in the United States: Who Owns It and How Much Tax Do They Pay? (NBER Working Paper No. 21651).

"Despite this profound change in the organization of U.S. business activity, we lack clean, clear facts about the consequences of this change for the distribution and taxation of business income," write Michael Cooper, John McClelland, James Pearce, Richard Prisinzano, Joseph Sullivan, Danny Yagan, Owen Zidar, and Eric Zwick. "This problem is especially severe for partnerships, which constitute the largest, most opaque, and fastest growing type of pass-through."

Pass-through entities — partnerships, tax code subchapter S corporations, and sole proprietorships — are not subject to corporate income tax. Their income passes directly to their owners and is taxed under whatever tax rules those owners face. In contrast, the income of traditional corporations, more specifically subchapter C corporations, is subject to corporate income taxes, and after-tax income distributed from the corporation to its owners is also taxable.

In 1980, pass-through entities accounted for 20.7 percent of U.S. business income; by 2011, they represented 54.2 percent. Over roughly the same period, the income share of the top 1 percent of income earners doubled. Previous research has shown that the two phenomena are linked: The growth of income from pass-through entities accounted for 41 percent of the rise in the income of the top 1 percent. By linking 2011 partnership and S corporation tax returns with federal individual income tax returns, in particular Form 1065 and Form 1120S K-1 returns, the researchers find that over 66 percent of pass-through business income received by individuals goes to the top 1 percent. The concentration of partnership and S corporation income is much greater than the concentration of dividend income (45 percent to the top 1 percent) which proxies for income from C corporations (traditional corporations). While taxpayers in the top 1 percent are eight times as likely to receive dividends as taxpayers in the bottom 50 percent, the ratio for partnerships is more than 50 to 1.

Many partnerships are opaque. A fifth of partnership income was earned by partners that the study's authors were not able to classify into one of several categories, such as a domestic individual or a foreign corporation. In addition, some partnerships are circular, in the sense that they are owned by other partnerships, which could in turn be owned by yet other partnerships.

Pass-through business income faces lower tax rates than traditional corporate income. The tax rate on the income earned by pass-through partnerships is a relatively low 15.9 percent, excluding interest payments and unrepatriated foreign income. That compares with a 31.6 percent rate for C corporations and a 24.9 percent rate for S corporations. Only sole proprietorships have a lower average rate, 13.6 percent. Combining both taxes on corporations and taxes on investors, the researchers calculate that the U.S. business sector as a whole pays an average tax rate of 24.3 percent.

The lower average tax rate for pass-through entities than for traditional corporations translates into reduced federal revenues, the researchers conclude. They estimate that in 2011, if the share of pass-through tax returns had been at its 1980 level, when traditional C corporations and sole proprietorships dominated, the average rate would have been 3.8 percentage points higher and the Treasury would have collected $100 billion more in tax revenue.

One reason partnerships pay such a low average tax rate is that nearly half their income (45 percent) is classified as capital gains and dividend income, which is taxed at preferential rates. Another 15 percent of their income is earned by tax-exempt and foreign entities, for which the effective tax rate is less than five percent. The roughly 30 percent of partnership income that is earned by unidentifiable and circular partnerships is taxed at an estimated 14.7 percent rate.

"A long-standing rationale for the entity-level corporate income tax is that it can serve as a backstop to the personal income tax system," the researchers conclude. "Our inability to unambiguously trace 30 percent of partnership income to either the ultimate owner or the originating partnership underscores the concern that the current U.S. tax code encourages firms to organize opaquely in partnership form in order to minimize tax burdens."

Friday, January 01, 2016

Paul Krugman: Privilege, Pathology and Power

Our "narcisstocracy?":

Privilege, Pathology and Power, by Paul Krugman: Wealth can be bad for your soul. That’s ... a conclusion from serious social science... The affluent are, on average, less likely to exhibit empathy, less likely to respect norms and even laws, more likely to cheat, than those occupying lower rungs on the economic ladder. ...
America is a society in which a growing share of income and wealth is concentrated in the hands of a small number of people,... these people have huge political influence.., and that is surely the biggest problem.
But ... those empowered by money-driven politics include a disproportionate number of spoiled egomaniacs. ...
Donald Trump would probably have been a blowhard and a bully whatever his social station. But his billions have insulated him from the external checks that limit most people’s ability to act out their narcissistic tendencies; nobody has ever been in a position to tell him, “You’re fired!” ...
But Mr. Trump isn’t the only awesomely self-centered billionaire playing an outsized role in the 2016 campaign.
There have been ... reports lately about Sheldon Adelson, the Las Vegas gambling magnate. Mr. Adelson has been involved in ... court proceedings ... around claims of misconduct in his operations in Macau, including links to organized crime and prostitution. ... What was surprising was his behavior in court, ... he refused to answer routine questions and argued with the judge, Elizabeth Gonzales. That, as she rightly pointed out, isn’t something witnesses get to do.
Then Mr. Adelson bought Nevada’s largest newspaper..., reporters ... were told to drop everything and start monitoring ... Ms. Gonzales. And while the paper never published any results..., an attack on Judge Gonzales, with what looks like a fictitious byline, did appear in a small Connecticut newspaper owned by one of Mr. Adelson’s associates.
O.K., but why do we care? Because Mr. Adelson’s political spending has made him a huge player in Republican politics...
Are there other cases? Yes indeed...
Just to be clear, the biggest reason to oppose the power of money in politics is the way it lets the wealthy rig the system and distort policy priorities. ... The fact that some of those buying influence are also horrible people is secondary.
But it’s not trivial. Oligarchy, rule by the few, also tends to become rule by the monstrously self-centered. Narcisstocracy? Jerkigarchy? Anyway, it’s an ugly spectacle, and it’s probably going to get even uglier over the course of the year ahead.

Wednesday, December 23, 2015

'An Aging Society Is No Problem When Wages Rise'

Dean Baker:

An Aging Society Is No Problem When Wages Rise: Eduardo Porter discusses the question of whether retirees will have sufficient income in twenty or thirty years. He points out that if no additional revenue is raised, Social Security will not be able to pay full scheduled benefits after 2034.
While this is true, it is important to note that this would have also been true in the 1940, 1950s, 1960s, and 1970s. If projections were made for Social Security that assumed no increase in the payroll tax in the future, there would have been a severe shortfall in the trust fund making it unable to pay full scheduled benefits.
We have now gone 25 years with no increase in the payroll tax, by far the longest such period since the program was created. With life expectancy continually increasing, it is inevitable that a fixed tax rate will eventually prove inadequate if the retirement age is not raised. (The age for full benefits has already been raised from 65 to 66 and will rise further to 67 by 2022, but no further increases are scheduled.)
The past increases in the Social Security tax have generally not imposed a large burden on workers because real wages rose. The Social Security trustees project average wages to rise by more than 50 percent over the next three decades. If most workers share in this wage growth, then the two or three percentage point tax increase that might be needed to keep the program fully funded would be a small fraction of the wage growth workers see over this period. Of course, if income gains continue to be redistributed upward, then any increase in the Social Security tax will be a large burden.
For this reason, Social Security should be seen first and foremost as part of the story of wage inequality. If workers get their share of the benefits of productivity growth then supporting a larger population of retirees will not be a problem. On the other hand, if the wealthy manage to prevent workers from benefiting from growth during their working lives, they will also likely prevent them from having a secure retirement.

Sunday, December 20, 2015

'The Ambivalent Role of China in Global Income Distribution'

Branko Milanovic:

The ambivalent role of China in global income distribution: It is well known that China’s role in reductions of global poverty and global inequality was crucial. For example, according to Chen and Ravallion, between 1981 and 2005, 98 percent (yes, ninety-eight percent) of reduction of global poverty, calculated using the poverty line $1 per person per day, was due to China. China’s role was similarly impressive when it comes to  reduction of global inequality (income inequality between all individuals in the world). ....      
But the question can be asked next, what happens if China continues growing fast? Will its inequality reducing effects wane, and eventually reverse? ...

Friday, December 18, 2015

Working Paper: The Upward Redistribution of Income: Are Rents the Story?

Dean Baker:

Working Paper: The Upward Redistribution of Income: Are Rents the Story?: In the years since 1980, there has been a well-documented upward redistribution of income. While there are some differences by methodology and the precise years chosen, the top one percent of households have seen their income share roughly double from 10 percent in 1980 to 20 percent in the second decade of the 21st century. As a result of this upward redistribution, most workers have seen little improvement in living standards from the productivity gains over this period.

This paper argues that the bulk of this upward redistribution comes from the growth of rents in the economy in four major areas: patent and copyright protection, the financial sector, the pay of CEOs and other top executives, and protectionist measures that have boosted the pay of doctors and other highly educated professionals. The argument on rents is important because, if correct, it means that there is nothing intrinsic to capitalism that led to this rapid rise in inequality, as for example argued by Thomas Piketty.
PDF  |  Flash 

Thursday, December 17, 2015

'How Socioeconomic Status Impacts Online Learning'

 Are MOOCs the answer to educational inequality?:

How Socioeconomic Status Impacts Online Learning: The driving force behind the increasing popularity of massive open online courses (MOOCs) is that they provide — as the term defines it — open access to a massive online audience. Anyone with an Internet connection who wants to learn, can. Whether you’re rich or poor, living in a New York City high-rise or a remote Nepalese village, MOOCs promise to level the higher education playing field. The question is: Does reality reflect this ideal?
A new research study by MIT education researcher Justin Reich and Harvard University’s John Hansen seeks the answer. “Democratizing Education? Examining Access and Usage Patterns in Massive Open Online Courses” takes a close look at how socioeconomic resources influence MOOC enrollment and course completion — and whether online learning is truly opening as many doors as anticipated.
“One way we might democratize education would be to provide more widespread access to academic experiences previously reserved for the elite,” explains Reich, who is the executive director of MIT's PK-12 Initiative. “But historically, emerging learning technologies — even free ones — have often benefited people with the social, technical, and financial capital to take advantage of new innovations. As we try to bridge the digital divide, we need to carefully examine how new tools are used by learners from different walks of life.” ...
Reich’s study uses three indicators: parental educational attainment, neighborhood average educational attainment, and neighborhood median income.
The research finds that these indicators are correlated with student enrollment and success in MOOCs, especially among younger students. Young students enrolling in HarvardX and MITx on edX live in neighborhoods where the median income is 38 percent higher than typical American neighborhoods. Among teenagers who register for a HarvardX course, those with a college-educated parent have nearly twice the odds of finishing the course compared to students whose parents did not complete college. At exactly the ages where online learning could offer a new pathway into higher education, already affluent students are more likely to enroll in a course and succeed.
The takeaway is that MOOCs have not yet solved SES-related disparities in educational outcomes, and Reich believes it’s critical to turn these learnings into actions in order to narrow the gaps between MOOC perception and reality.
“MOOCs and other forms of online learning don’t yet live up to their promise to democratize education,” he says. “Closing this digital divide is exactly the kind of grand challenge that the world’s greatest universities should be tackling head on.”

Monday, December 14, 2015

'Offshoring and Unskilled Labor Demand: Evidence That Trade Matters'

From Vox EU:

Offshoring and unskilled labour demand: Evidence that trade matters, by Juan Carluccio, Alejandro Cuñat, Harald Fadinger, and Christian Fons-Rosen: ... Conclusions The empirical evidence suggesting that globalisation is indeed affecting the income distribution in industrialised countries is much stronger than initially thought, at least as far as the manufacturing industry is concerned. In fact, the productivity gains from having access to cheaper inputs through offshoring are not being distributed equally between different economic actors in our rich societies. Consequently, political resistance to free trade by certain groups has a clear rationale as long as the effects discussed above are not addressed through more effective redistribution policies.

Monday, November 30, 2015

'Is Balanced Growth Really the Answer?'

Jared Bernstein:

Is balanced growth really the answer?: A recent must-read article by journalist Alec MacGillis documents a phenomenon that he suggests must “give Democrats the willies:” the increasing political opposition to safety net programs, even among those who’ve been helped by them. ...
MacGillis argues that this outcome is in part driven by resentments of those who believe they’ve pulled themselves up by their bootstraps (even if the government helped them pull) against those they view as milking public support without trying to improve their lot. Such sentiments are amped up by prominent conservatives like House Speaker Paul D. Ryan...
It’s an argument as old as poverty itself (see, e.g., English Poor Laws of 1601). I recall similar polemics during the welfare reform debate of the 1990s...
MacGillis believes that shared growth would go a long way toward altering these political dynamics in favor of a necessary role for policy in the list of areas just noted:
“The best way to reduce resentment … would be to bring about true economic growth in the areas where the use of government benefits is on the rise … if fewer people need the safety net to get by, the stigma will fade, and low-income citizens will be more likely to re-engage in their communities — not least by turning out to vote.”
By “true economic growth,” he means growth that reaches far beyond Wall Street, and even Main Street, to the hollows of Appalachia; growth that would fill the growing black hole in heart of coal country, where opportunity is fading and downward mobility is upon the land. ...

I'm not sure I agree. Growth of this type would be good, but is the problem production or distribution? If the problem is distribution, for example unequal bargaining power leading to low, stagnant wages that do not respond to increased productivity -- instead those gains flow upward -- then more growth will simply lead to even more inequality. So I don't think growth alone will necessarily be enough, we also need to change the institutions and economic incentives that determine how income is divided up within firms.

This is a way of avoiding calls for "redistribution," which implies taking something one person has earned and giving it to someone who has not. But as I've said many times, if the distribution of income is determined by something other than productivity, as it appears to be -- if income that was not earned through higher productivity flows to those at the top of firms due to unequal bargaining power or other forces -- then returning that income to those who did earn it is not taking something unjustly (taking the normative position that people should earn their contribution to national output), instead it is restoring justice. The trick is to get people to understand that.

Anyway, I think it's necessary to think about distribution, not just growth, if we want to solve the inequality problem.

There is this, I suppose:

...there’s some evidence that more growth reaching more people would lead to greater support for progressive policies. Political science provides cross-country evidence that voter turnout falls as inequality rises (though the correlation for the U.S. is weak) and today’s non-voters support notably more progressive agendas than voters. And it does seem that especially given the rising share of non-whites, unmarried women and millennials — the so-called Rising American Electorate — favorable outcomes for Democrats are increasingly dependent on robust turnout. ...

Which reinforces the need to think about changes beyond just growth (I'm sure Jared gets this, just want to reinforce the point).

Paul Krugman: Inequality and the City

"You don’t have to be a conservative to believe that we have too much regulation":

Inequality and the City, by Paul Krugman, Commentary, NY Times: New York, New York, a helluva town. The rents are up, but the crime rate is down. The food is better than ever, and the cultural scene is vibrant. Truly, it’s a golden age for the town I recently moved to — if you can afford the housing. But more and more people can’t.
And it’s not just New York. ... The story for many of our iconic cities is ... one of gentrification... Specifically, urban America reached an inflection point around 15 years ago: after decades of decline, central cities began getting richer, more educated, and, yes, whiter. Today our urban cores are providing ever more amenities, but largely to a very affluent minority. ...
We’re not just talking about the superrich here, or even the 1 percent. At a guess, we might be talking about the top 10 percent. And for these people, it’s a happy story. But what about all the people, surely a large majority, who are being priced out of America’s urban revival? Does it have to be that way?
The answer, surely, is no, at least not to the extent we’re seeing now. Rising demand for urban living by the elite could be met largely by increasing supply. There’s still room to build, even in New York, especially upward. Yet while there is something of a building boom in the city, it’s far smaller than the soaring prices warrant, mainly because land use restrictions are in the way.
And this is part of a broader national story. ... Yes, this is an issue on which you don’t have to be a conservative to believe that we have too much regulation.
The good news is that this is an issue over which local governments have a lot of influence. New York City can’t do much if anything about soaring inequality of incomes, but it could do a lot to increase the supply of housing, and thereby ensure that the inward migration of the elite doesn’t drive out everyone else. And its current mayor understands that.
But will that understanding lead to any action? That’s a subject I’ll have to return to another day. For now, let’s just say that in this age of gentrification, housing policy has become much more important than most people realize.

Sunday, November 29, 2015

'Challenging the Oligarchy'

Paul Krugman reviews Robert Reich's book Saving Capitalism: For the Many, Not the Few:

Challenging the Oligarchy: Back in 1991, in what now seems like a far more innocent time, Robert Reich published an influential book titled The Work of Nations, which among other things helped land him a cabinet post in the Clinton administration. It was a good book for its time—but time has moved on. And the gap between that relatively sunny take and Reich’s latest, Saving Capitalism, is itself an indicator of the unpleasant ways America has changed.
The Work of Nations was in some ways a groundbreaking work, because it focused squarely on the issue of rising inequality—an issue some economists, myself included, were already taking seriously, but that was not yet central to political discourse. Reich’s book saw inequality largely as a technical problem, with a technocratic, win-win solution. That was then. These days, Reich offers a much darker vision, and what is in effect a call for class war—or if you like, for an uprising of workers against the quiet class war that America’s oligarchy has been waging for decades. ...

Thursday, November 19, 2015

Explaining Inequality (Piketty, Murphy, Durlauf Video)

Wednesday, November 18, 2015

'Regional Inequality is Out of Control'

Haven't had a chance to read this carefully yet, but thought it might be of interest:

Boom and Bust, by Phillip Longman, Washington Monthly: Despite all the attention focused these days on the fortunes of the “1 percent,” our debates over inequality still tend to ignore one of its most politically destabilizing and economically destructive forms. This is the growing, and historically unprecedented, economic divide that has emerged in recent decades among the different regions of the United States.

Until the early 1980s, a long-running feature of American history was the gradual convergence of income across regions. The trend goes back to at least the 1840s, but grew particularly strong during the middle decades of the twentieth century. ...

Yet starting in the early 1980s, the long trend toward regional equality abruptly switched. ...

A major factor that has not received sufficient attention is the role of public policy [note: antitrust in particular]. Throughout most of the country’s history, American government at all levels has pursued policies designed to preserve local control of businesses and to check the tendency of a few dominant cities to monopolize power over the rest of the country. These efforts moved to the federal level beginning in the late nineteenth century and reached a climax of enforcement in the 1960s and ’70s. Yet starting shortly thereafter, each of these policy levers were flipped, one after the other, in the opposite direction, usually in the guise of “deregulation.” Understanding this history, largely forgotten in our own time, is essential to turning the problem of inequality around. ...

...Inequality, an issue politicians talked about hesitantly, if at all, a decade ago, is now a central focus of candidates in both parties. The terms of the debate, however, are about individuals and classes: the elite versus the middle, the 1 percent versus the 99 percent. That’s fair enough. But the language we currently use to describe inequality doesn’t capture the way it is manifest geographically. Growing inequality between and among regions and metro areas is obvious to all of us. But it is almost completely absent from the current political conversation. This absence would have been unfathomable to earlier generations of Americans; for most of this country’s history, equalizing opportunity among different parts of the country was at the center of politics. The resulting policies led to the greatest mass prosperity in human history. Yet somehow, about thirty years ago, we forgot our history.

Wednesday, November 11, 2015

'Friction is Now Between Global Financial Elite and the Rest of Us'

Robert Reich at Comment is Free:

Friction is now between global financial elite and the rest of us, The Guardian: The standard explanation for why average working people in advanced nations such as Britain and the United States have failed to gain much ground over the past several decades and are under increasing economic stress is that globalization and technological change have made most people less competitive. The tasks we used to perform can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.
The left’s standard solution has been an activist government that taxes the wealthy, invests the proceeds in excellent schools and in other means that people need to become more productive, and redistributes to those in need. These prescriptions have been opposed vigorously by those on the right, who believe the economy will function better for everyone if government is smaller, public debt is reduced and taxes and redistributions are curtailed.
But the standard explanation, as well as the standard debate, overlooks the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs. ...

Saturday, November 07, 2015

'Economic Policy Splits Democrats'

Anyone think this is correct?:

Economic Policy Splits Democrats, WSJ: The old guard of a party that laid the groundwork for the election of a two-term president watches with unease at what’s happening to their electoral prospects and economic policy proposals. ...
That alarm shines through in a new 52-page report from centrist Democratic think tank the Third Way...
“The right cares only about growth, hoping it will trickle down,” says Jonathan Cowan, president of Third Way. The left, meanwhile, is too focused on “redistribution to address income inequality.”
Third Way says a better agenda focuses on growth by promoting skills, job growth and wealth creation without adding to deficits or raising taxes on the middle class. Its report outlines a series of policies it says can do this...
The gist of the report concludes that the economic problems facing the American middle class have less to do with unfairness—or the idea that the system is fundamentally “rigged” against workers—and more to do with technological and globalization forces that can’t be reversed.

[That statement will drive Larry Mishel nuts.]

The report spotlights a divide on the left in both substance and style. ...
Progressives want to see a more fundamental rewrite of the rules to break up political power, on par with President Theodore Roosevelt‘s “trust-busting” of a century ago. “This country is in real trouble,” Ms. Warren said at the May event. “The game is rigged and we are running out of time.”
That kind of rhetoric gives Mr. Cowan fits because he says it isn’t a winning political message. ...
He says that leading economic ideas on the left, including advocacy for a $15 minimum wage, expanded Social Security benefits and a single-payer health-care system, won’t play well with independent voters. The report cites focus group research in advancing its argument that Americans, particularly independents and moderate voters, are more anxious than they are angry about these changes.
Third Way cites the failures of main street icons such as Kodak, Borders Books and Tower Records as proof that new technologies and delivery systems, as opposed to a “stacked deck” in Washington, are primarily responsible for economic upheaval.

Tower Records explains inequality? Seriously? From Larry Mishel (linked above):

Many economists contend that technology is the primary driver of the increase in wage inequality since the late 1970s, as technology-induced job skill requirements have outpaced the growing education levels of the workforce. The influential “skill-biased technological change” (SBTC) explanation claims that technology raises demand for educated workers, thus allowing them to command higher wages—which in turn increases wage inequality. A more recent SBTC explanation focuses on computerization’s role in increasing employment in both higher-wage and lower-wage occupations, resulting in “job polarization.” This paper contends that current SBTC models—such as the education-focused “canonical model” and the more recent “tasks framework” or “job polarization” approach mentioned above—do not adequately account for key wage patterns (namely, rising wage inequality) over the last three decades.

So, should I adopt a message I don't think is true because it sells with independents who have been swayed by Very Serious People, or should I say what I believe and try to convince people they are barking up the wrong tree? (For the most part anyway, I believe both the technological/globalization and institutional/unfairness explanations have validity -- but how do workers capture the gains Third Way wants to create through growth and wealth creation without the bargaining power they have lost over time with the decline in unionization, threats of offshoring, etc.? That's the bigger problem.) It is unfair when, say, economic or political power redirects income away from those who created it to those who did not (I am using the normative equity principle that each person has a right to keep what he or she produces, to reap what they have sowed, and I have little doubt that workers have been paid less than their productivity, and those at the top more. That's unfair, and redirecting income -- redistributing if you will -- to those who actually earned it is not harmful. It is just, and it creates the correct economic incentives). Wealth creation/growth has not been the biggest problem over the last four decades (i.e. since inequality started to increase), it is how the gains have been distributed. I'd rather convince people of the truth that more growth and more wealth creation won't solve the problem if we don't address workers' bargaining power at the same time than gain their support by patronizing their views. In the meantime redistributing income from those who didn't earn it to those who did can serve as a temporary solution until we get the more fundamental underlying problems fixed (e.g. level the playing field on bargaining power between workers and firms).

Maybe politicians have to tell people what they want to hear, I'll let them figure that out, but I will continue to call it as I see it even if "independents and moderate voters are more anxious than they are angry about these changes." That won't change if we play into those anxieties instead of explaining why new approaches are needed, and explaining how they will benefit from a system that does a better job of rewarding hard work instead of ownership, connections, and power.

Friday, November 06, 2015

'Health Inequality'

Health inequality is large and consequential:

Health Inequality, by Giacomo De Giorgi and Maxim Pinkovskiy, Libery Street Economics: However important income inequality is, it is only a partial representation of the inequality in well-being among individuals, households, counties, and other communities. At a minimum, we need to consider other crucial measures such as consumption, leisure, and health. ...

It seems rather obvious that health is a fundamental component of welfare, yet more work needs to be done on analyzing the evolution of health inequality and its relationship with income inequality in a consistent framework that would allow us to draw welfare conclusions, as we do later in this blog.

First, we document, and map below, a large dispersion in life expectancy across counties.

Average Life Expectancy by County in 2007

...From the map’s legend, we can immediately notice a very large dispersion: the top 20 percent of life expectancy is about a decade longer than the bottom 20 percent. Looking at the map also immediately tells us that the Southeast has a substantially lower life expectancy. We note that this is partly owing to differences in demography and income across counties. ...
Welfare Analysis How important are these large health inequalities for welfare? ...

We ... conclude that raising life expectancy out of the lower tail would be a much more welfare-improving intervention than fully equalizing consumption. (We get analogous results if we ask by how much the decision maker would need to have all consumption levels raised in order to be indifferent between the current consumption and life expectancy distribution and the proposed intervention).


Health is a Key Component of Inequality
In terms of welfare (under standard assumptions on the welfare function), the elimination of the left tail of mortality would have a beneficial impact that is about 60 percent larger than full consumption equalization.

What are the policies that might eliminate the lower tail of the life-expectancy distribution? This remains a topic for further discussion. However, we observe that the increase in life expectancy that we need to achieve the elimination of the lower tail is not unprecedented. Over a span of twenty years, life expectancy increased on average by three years across U.S. counties, which would be sufficient to raise the lower tail substantially.

Monday, November 02, 2015

'The Rigging of the American Market'

When I tweeted a link to this post by Robert Reich, it received an unusually large number of retweets:

The Rigging of the American Market: Much of the national debate about widening inequality focuses on whether and how much to tax the rich and redistribute their income downward.
But this debate ignores the upward redistributions going on every day, from the rest of us to the rich. These redistributions are hidden inside the market.
The only way to stop them is to prevent big corporations and Wall Street banks from rigging the market. ...

After explaining how concentrated many industries are, and the monopoly/pricing power that gives firms in these industries (which they exploit), he concludes:

... Add it up – the extra money we’re paying for pharmaceuticals, Internet communications, home mortgages, student loans, airline tickets, food, and health insurance – and you get a hefty portion of the average family’s budget.
Democrats and Republicans spend endless time battling over how much to tax the rich and then redistribute the money downward.
But if we didn’t have so much upward redistribution inside the market, we wouldn’t need as much downward redistribution through taxes and transfer payments.
Yet as long as the big corporations, Wall Street banks, their top executives and wealthy shareholders have the political power to do so, they’ll keep redistributing much of the nation’s income upward to themselves.
Which is why the rest of us must gain political power to stop the collusion, bust up the monopolies, and put an end to the rigging of the American market.

Saturday, October 31, 2015

'The Mystery of the Vanishing Pay Raise'

Please, sir, may I have a little more of that growing pie I worked so hard to help you make?

...millions of Americans have one overriding question: When will my pay increase arrive? The nation’s unemployment rate has fallen ... to 5.1 percent from 10 percent in 2009, but wages haven’t accelerated upward, as many had expected.
In fact, the labor market is a lot softer than a 5.1 percent jobless rate would indicate. ... This ... continued labor market weakness ... goes far to explain why wage increases remain so elusive. ...
But work force experts assert ... many other factors ... help explain America’s stubborn wage stagnation. Outsourcing, offshoring and imports exert a steady downward tug on wages. Labor unions have lost considerable muscle. Many employers have embraced pay-for-performance policies that often mean nice bonuses for the few instead of across-the-board raises for the many.
Peter Cappelli, a professor at the Wharton School of Business, noted, for instance, that many retailers give managers bonuses based on whether they keep their labor budgets below a designated ceiling. “They’re punished to the extent they go over those budgets,” Professor Cappelli said. “If you’re a local manager and you’re thinking, ‘Should we bump up wages,’ it could really hit your bonus. ...
Jared Bernstein ... put it another way: “There’s this pervasive norm” among employers “that labor costs must be held down at all costs because maximizing profits is the be-all and end-all.”
He added that the “atomization” of the American workplace — with the use of more temps, subcontractors, part-timers and on-call workers — had reduced companies’ costs and workers’ bargaining power.
As a result of all these trends, the share of corporate income going to workers has sunk to its lowest level since 1951. ...

More here.

Tuesday, October 27, 2015

'Can Taxing the Rich Reduce Inequality? You Bet it Can!'

Henry Aaron at Brookings:

Can taxing the rich reduce inequality? You bet it can!: Two recently posted papers by Brookings colleagues purport to show that “even a large increase in the top marginal rate would barely reduce inequality.”[1] This conclusion, based on one commonly used measure of inequality, is an incomplete and misleading answer to the question posed: would a stand-alone increase in the top income tax bracket materially reduce inequality? More importantly, it is the wrong question to pose, as a stand-alone increase in the top bracket rate would be bad tax policy that would exacerbate tax avoidance incentives. Sensible tax policy would package that change with at least one other tax modification, and such a package would have an even more striking effect on income inequality. In brief:

  • A stand-alone increase in the top tax bracket would be bad tax policy, but it would meaningfully increase the degree to which the tax system reduces economic inequality. It would have this effect even though it would fall on just ½ of 1 percent of all taxpayers and barely half of their income.
  • Tax policy significantly reduces inequality. But transfer payments and other spending reduce it far more. In combination, taxes and public spending materially offset the inequality generated by market income.
  • The revenue from a well-crafted increase in taxes on upper-income Americans, dedicated to a prudent expansions of public spending, would go far to counter the powerful forces that have made income inequality more extreme in the United States than in any other major developed economy.

Thursday, October 22, 2015

'Union Power and Inequality'

IMF economists Florence Jaumotte and Carolina Osorio Buitron (via Vox EU):

Union power and inequality, by Florence Jaumotte and Carolina Osorio Buitron, Vox EU: Inequality in advanced economies has risen considerably since the 1980s, largely driven by the increase of top earners’ income shares. This column revisits the drivers of inequality, emphasizing the role played by changes in labor market institutions. It argues that the decline in union density has been strongly associated with the rise of top income inequality and discusses the multiple channels through which unionization matters for income distribution.
Revisiting the drivers of inequality: The role of labor market institutions
Rising inequality in advanced economies, in particular at the top of the distribution, has become a great focus of attention for economists and policymakers. In most advanced economies, the share of income accruing to the top 10% earners has increased at the expense of all other income groups (Figure 1). While some inequality can increase efficiency by strengthening incentives to work and invest, recent research suggests that high inequality is associated with lower and less sustainable growth in the medium run (Berg and Ostry 2011, Dabla-Norris et al. 2015). Moreover, a rising concentration of income at the top of the distribution can also reduce welfare by allowing top earners to manipulate the economic and political system in their favor (Stiglitz 2012).
Traditional explanations for the rise of inequality in advanced economies have been skill-biased technological change and globalization, which increase the relative demand for skilled workers. However, these forces foster economic growth, and there is little policymakers are able or willing to do to reverse these trends. Moreover, while high income countries have been similarly affected by technological change and globalization, inequality in these economies has risen at different speeds and magnitudes.

Figure 1. Evolution of inequality measures in advanced economies

Jaumotte%20fig1%2021%20oct[1]

Sources: World Top Incomes Database; SWIID (v.4.0); and  Luxembourg Income Study/New York Times Income Distribution Database.
1/ Advanced Economies = USA, GBR, AUT, BEL, DNK, FRA, DEU, ITA, NLD, NOR, SWE, CHE, CAN, JPN, FIN, IRL, PRT, ESP, AUS, and NZL. For the top 10 income share,  FIN, GBR, and PRT are excluded  due  to missing data over part of the 1980-2010 period. Simple average.
2/ Shares of disposable income by decile using Luxembourg Income Study data. Varying years for countries, including  AUS, AUT, BEL, CAN, DNK, FIN, FRA, DEU, IRL, ITA, NLD, NOR, ESP, SWE, CHE, GBR, and USA.
As a consequence, the more recent literature focuses on the relation between institutional changes and the rise of inequality, with financial deregulation and the decline in top marginal personal income tax rates often cited as important contributors. Surprisingly, the role played by changes in labor market institutions – such as the widespread decline in the share of workers affiliated with trade unions, so-called ‘union density’ – has not featured prominently in recent inequality debates. Nevertheless, these changes could potentially have profound implications on income distribution.
In a recent paper (Jaumotte and Osorio Buitron 2015), we fill this gap in the literature and examine the relationship between labor market institutions and various income inequality measures (namely, the top 10% income share, the Gini of gross income, and the Gini of net income), focusing on the experience of 20 advanced economies over the 1980-2010 period.1 While we pay particular attention to labor market institutions, our empirical approach controls for other determinants of inequality identified in the literature, such as technology, globalization, financial liberalization, top marginal personal income tax rates, and common global trends.
A surprising finding: A strong negative link between union density and top earners’ income shares
The most novel aspect of our paper is the discovery of a strong negative relationship between unionization and top earners’ income shares (Figure 2).2 Although causality is always difficult to establish, the influence of union density on top income shares appears to be largely causal, as evidenced by our instrumental variable estimates. The set of instruments used for union density captures the fact that, although unionization tends to decline in periods of high unemployment, the effect is weaker in countries where unemployment benefits are managed by unions (i.e. the Ghent system) or where collective bargaining is more centralized. In addition, the result survives the inclusion of possible omitted variables that could both reduce unionization and increase inequality. These additional controls include changes in elected government and in social norms on inequality, sectoral employment shifts such as the decline of industry and rise of services sectors, the strong expansion of employment in finance, and rising education levels.

Figure 2. Top 10% income share and union density in advanced economies

Sources: OECD; and World Top Incomes Database.
Note: *** denote significance at the 1 percent level, ** at the 5 percent level, and * at the 10 percent level. Advanced Economies = USA, AUT, CAN, DNK, FIN, FRA, DEU, IRL, ITA, JPN, NLD, NZL, NOR, PRT, ESP, SWE, CHE, and GBR.

The magnitude of the effect is also significant; the decline in union density explains about 40% of the average increase in the top 10% of income share in our sample countries. One important caveat, though, is that the effect could be partly offset when collective bargaining coverage largely exceeds unionization (e.g. through extension agreements), likely reflecting higher unemployment. While this second finding is somewhat less robust and needs further corroboration, it does suggest that representativeness of unions may be an important element for the latter to reduce inequality.
Another main result of our analysis is that the decline in union density has been strongly associated with less income redistribution, likely through unions’ reduced influence on public policy (Figure 3). Historically, unions have played an important role in the introduction of fundamental social and labor rights. Again, this relationship appears largely causal. With regard to other labor market institutions, we find that reductions in the minimum wage relative to the median wage are related to significant increases in overall inequality. But we do not find compelling evidence concerning the effects of unemployment benefits and employment protection laws on income inequality. 

Figure 3. Redistribution effect of unions in advanced economies

Jaumotte fig3 21 oct

Sources: OECD; and SWIID (v.4.0).
Note: *** denote significance at the 1 percent level, ** at the 5 percent level, and * at the 10 percent level. Advanced Economies = USA, FRA, DEU, ITA, NLD, NOR, SWE, CHE, CAN, JPN, IRL, PRT, ESP, AUS, AUT, BEL, DNK, FIN, NZL,and GBR.
Channels: A balance of power story
Our finding of a strong negative relationship between union density and top earners’ income share challenges preconceptions about the channels through which union density affects the distribution of incomes. Indeed, the widely held view is that changes in labor market institutions affect low- and middle-wage workers but are unlikely to have a direct impact on top income earners. Our finding highlights the interconnectedness between what happens to the middle class and top income shares. If de-unionization weakens earnings of middle- and low-income workers, the income share of corporate managers and shareholders necessarily increases.
There are several channels through which weaker unions could lead to higher top income shares. In the workplace, the weakening of unions reduces the bargaining power of average wage earners relative to capital owners and top executives. Channels include the positive effect of weaker unions on the share of capital income – which tends to be more concentrated than labor income – and the fact that lower union density may reduce workers’ influence on corporate decisions, including those related to top executive compensation (Figure 4). Outside the workplace, there could be a political economy channel by which a weakening of unions reduces workers’ political voice and strengthens other already dominant groups, enabling them to better control the economic and political system in their favor (Acemoglu and Robinson 2013).

Figure 4. Episodes of strong declines in union density: Effects on inequality

Jaumotte fig4 21 oct

Sources: World Top Incomes Database; EU Klems; OECD; and author’s calculations.
1/  Labor income share is share of labor compensation in value added, adjusted for the labor income of the self-employed.
2/ Relative wage in finance is the ratio of labor compensation per hour worked in finance to the labor compensation per hour worked in the rest of the economy.

Conclusion
If our findings are interpreted as causal, higher unionization and minimum wages can help reduce inequality. However, this is not necessarily a blanket recommendation for higher unionization and minimum wages. Other dimensions are clearly relevant. The experience with unions has been positive in some countries, but less so in others. For instance, if unions primarily represent the interests of only some workers, they can lead to high structural unemployment for some other groups (e.g. the young). Similarly, in some instances, minimum wages can be too high and lead to high unemployment among unskilled workers and competitiveness losses. Deciding whether or not to reform labor market institutions has to be done on a country-by-country basis, taking into account how well the institutions are functioning and possible trade-offs with other policy objectives (competitiveness, growth, and employment). Finally, addressing rising inequality will likely require a multi-pronged approach including tax reform and policies to curb excesses associated with the deregulation of the financial sector.
Authors’ note: The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.
References
Acemoglu, D and J A Robinson (2013), “Economics versus Politics: Pitfalls of Policy Advice,” Journal of Economic Perspectives, Vol. 27, No. 2, pp.173-192.
Berg, A and J Ostry (2011), “Inequality and Unsustainable Growth: Two Sides of the Same Coin?” IMF Staff Discussion Note No. 11/08 (Washington: International Monetary Fund).
Dabla-Norris, E, K Kochhar, N Suphaphiphat, F Ricka, and E Tsounta (2015), “Causes and Consequences of Income Inequality: A Global Perspective” IMF Staff Discussion Note No. 15/13 (Washington: International Monetary Fund).
Jaumotte, F and C Osorio Buitron (2015), “Inequality and Labor Market Institutions” IMF Staff Discussion Note No. 15/14 (Washington: International Monetary Fund).
Stiglitz, J (2012), The Price of Inequality: How Today’s Divided Society Endangers Our Future (New York: W.W. Norton).
Footnotes
1 The advanced economies in this study are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the UK, and the US.
2 The relationship with the Gini coefficient of gross income is also negative but somewhat less robust.

Monday, October 19, 2015

'Putting Rents at the Center of U.S. Income Inequality'

Nick Bunker:

Putting rents at the center of U.S. income inequality: The rise of income inequality in the United States since the late 1970s is a well-documented fact, but the reasons for the rise still aren’t well understood. The possible culprits include skill-biased technological change, globalization, the rise of the robots, and an increasingly popular reason: increased “rents” in the U.S. economy.
Rents, in economics parlance, are extra returns above and beyond what we’d expect in a competitive market. A new paper by Jason Furman, chair of the President’s Council of Economic Advisers, and Peter Orszag, former director of the Office of Management and Budget and a current Vice Chairman at Citigroup Inc., presents some evidence that not only have rents increased, but they provide a fundamentally important explanation for rising inequality. ...
While the evidence is far from definitive, increased market power could help explain raising rents as well as decreased labor demand. In conjunction with product, frictions in the labor market generate rents. If a firm has monopsonic power, for example, results in firms hiring fewer workers than is optimal for the entire economy. Increased market power and rents are also potential reasons for the decline in the share of income going to labor.
As Furman and Orszag make clear several times in the paper, the story presented here is far from a slam dunk. The evidence for each individual link in the chain isn’t rock solid yet, and digging into the different research areas is vital. Putting more emphasis on rents in the investigation of income inequality prompts a lot of interesting questions.

Saturday, October 17, 2015

''Those Who are Left Out in the Cold''

Branko Milanovic:

Disarticulation goes North: ... In a recent piece published in the New York Times, Paul Theroux, after traveling through the American South, was shocked by the depth of poverty there, wrought in his opinion by the destruction of jobs that have all gone to Asia and import of cheap commodities from China. He was even more distraught by the apparent lack  of interest of American political and economic elites who seem to even fail to notice the plight of the Americans in states like Mississippi and most ironically in Arkansas where philanthropists such as the Clinton Foundation have not been much seen even as they proudly boast of  efforts “to save the elephants in Africa”.  
The key issue raised by Theroux was whether trade, that is, globalization was responsible for this plight. The second issue that was raised was why there is so little empathy with the domestic poor or interest in doing something about their destitution. ...
One can safely claim, to the extent that these things that be causally proven, that the rapid worldwide progress in poverty alleviation is due to globalization. It is also true that on any income or consumption metric, poverty in parts of Africa is much worse than in Mississippi. But of course none of that may be politically or socially relevant because national populations seldom care about cosmopolitan welfare functions (where happiness of every individual in the world is equally valued).  They work with national welfare functions where a given level of destitution locally is given a much greater weight than the same destitution abroad. There are studies that show the revealed difference in implicit national vs. cosmopolitan weighting of poverty (the ratio for the US is estimated at 2000 to 1); there are arguments for this, going back to Aristotle who in Nicomachean ethics thought that our level of empathy diminishes as in concentric circles as we move further from a very narrow community. And there are also political  philosophy arguments (by Rawls) why co-citizens do care more for each other than for the others.
But I think that it is insufficient to leave this argument at a very abstract level where one group of Americans would have a more cosmopolitan welfare function and better perception of global benefits of trade and another would be more nativist and ignorant of economics. I do not think that the real difference between the two groups has to do with welfare concerns and economic literacy  but with their interests. Many rich Americans who like to point out to the benefits of globalization worldwide significantly benefited and continue to benefit from the type of globalization that has been unfolding during the past three decades. The numbers, showing their real income gains, are so well known that they need no repeating.  They are large beneficiaries from this type of globalization because of their ability to play off less well-paid and more docile labor from poorer countries against the often too expensive domestic labor. They also benefit through inflows of unskilled foreign labor that keep the costs of the services they consume low. Thus rich Americans are made better off by the key forces of globalization: migration, outsourcing, cheap imports, which have also been responsible for the major reduction of worldwide poverty.  Perhaps in a somewhat crude materialist fashion I think that their sudden interest in reducing worldwide poverty is just an ethical sugar-coating over their economic interests which are perfectly well served by globalization. Like every dominant class, or every beneficiary of an economic or political regime, they feel the need to situate their success within some larger whole and to explain that it is a by-product of a much grander betterment of human condition.
A new alliance, based on the coincidence of interests, is thus formed between some of the richest people in the world and poor people  of Africa, Asia and Latin America. Those who are left out in the cold are the domestic lower-middle and middle classes squeezed between the competition from foreign labor and indifference of national ruling classes. ...
The idea that globalization is a force that is good and beneficial for all is an illusion. Tectonic economic changes such as those brought by globalization always have winners and losers. (The first sentence of my forthcoming book “Global inequality”, Harvard University Press, April 2016, says exactly that.) Even if globalization is, as I believe, a positive phenomenon overall, both economically ... and ethically because it allows for the creation of something akin to community of all humankind, it is, and will remain, a deeply contradictory and disruptive force that would leave, at times significant groups of people, worse off. Refusing to see that is possible only if one is blinded by ideology of universal harmonies or by own economic interests.

Thursday, October 15, 2015

'Black Families Lost, on Average, 43 Percent of Their Wealth'

Via David Dayen on Twitter:

Black Americans Would Have Been Better Off Renting Than Buying: ...white Americans with low net worth who bought during the boom years made out much better than black Americans who had the same timing and similar financial circumstances. Black families who bought in 2005 lost almost $20,000 of net worth by 2007, according to the paper. By 2011 those losses were more like $30,000. White homeowners didn’t have quite the same problem. Those who purchased in 2007 saw their net worth grow by $18,000 in two years, and then those gains eroded, leaving them with an increase of $13,000 by 2011. All told, the black families lost, on average, 43 percent of their wealth.
That news is perhaps to be expected given the inequities that exists in the housing market, including the quality of financing people have access to and the prospects of the neighborhoods they are buying into. The researchers note that neighborhood location, predatory loan practices, and how long families were able to hold on to homes all likely played a role in how white and black families fared during the early aughts. ...

Saturday, October 03, 2015

'How Poverty Affects Children’s Brains'

We need to do more to "inoculate young children’s pliable brains against the ravages of poverty":

How poverty affects children’s brains, Washington Post: ... In a study published this year in Nature Neuroscience, several co-authors and I found that family income is significantly correlated with children’s brain size — specifically, the surface area of the cerebral cortex, which ... does most of the cognitive heavy lifting. Further, we found that increases in income were associated with the greatest increases in brain surface area among the poorest children. ...
Some feared the study would be used to reinforce the notion that people remain in poverty because they are less capable than those with higher incomes. As neuroscientists, we interpret the results very differently. We know that the brain is most malleable in the early years of life...
Our [new] clinical trial is designed to provide strong evidence regarding whether and how poverty reduction promotes cognitive and brain development. This study, however, will take at least five years to complete — far too long for young children living in poverty today. We should not wait until then to push for policies that can help inoculate young children’s pliable brains against the ravages of poverty. ...

Friday, October 02, 2015

''You Just Don’t See the Positive Side'' of High Managerial Compensation

From an interview with Thomas Piketty during a trip to South Africa:

...I think in all cases there is always a lot to learn from these historical experiences and probably the one … lesson is we don’t want, we don’t need 19th-century inequality to grow in the 21st century. We find the role of inequality may be justified by incentive and growth considerations, but certainly no extreme and sometimes obscene level of inequality of pay that we’ve seen in recent days, with top managerial compensation going to millions of dollars. You just don’t see the positive side of this in the performance, in the job creation. ... The idea that you need to pay top managers 100, 200 times the minimum wage to get them to work and otherwise they will just not do the work. That ideology is not consistent at all with the historical data that we have, which shows that you can develop with reasonable, not extreme inequality levels. ...

The comments on the interview, at least when I read them, were not supportive.

Thursday, October 01, 2015

Market Power, Labor's Share of Income, and Measured Productivity

For a long time, I have been making the argument that part of the reason for the inequality problem is distortions in the distribution of income driven by market imperfections such as monopoly power that allows prices to exceed marginal costs. What I didn't realize is that this can also affect measurements of productivity growth:

The relationship between U.S. productivity growth and the decline in the labor share of national income, by Nick Bunker: One of the ongoing debates about the state of the U.S. economy is the extent to which the profits from productivity gains are increasingly going to the owners of capital instead of wage earners. These researchers are debating the extent to which the labor share of income, once considered a constant by economists, is on the decline.
But what if the decline of national income going to labor actually affects the measured rate of U.S. productivity growth? In a blog post published last week, University of Houston economist Dietz Vollrath sketches out a model showing just that scenario. ...
Vollrath argues that businesses with more market power are able to charge higher markups on their goods and services, meaning their pricing is higher than the cost of producing an additional goods or services compared to pricing in a perfectly competitive market. So in this situation where markups are high, goods and services are being produced less efficiently, with the increased profits going to the owners of capital.
Vollrath argues that this is how measured productivity growth is affected by the decline of the labor share of income. Market power is important for thinking about measured productivity growth because, as Vollrath says, it “dictates how efficiently we use our inputs.” ... Impeding the most efficient use of capital and labor via marked-up prices will reduce measured productivity. ... Perhaps this could explain some of the reason why measured productivity growth looks so meager in the seeming age of innovation...
But Vollrath’s story isn’t a complete explanation of the fall in measured productivity, as he acknowledges...
But Vollrath’s market power explanation for falling productivity growth, alongside the falling share of national income going to wage earners, is supported by some evidence.  Work by Massachusetts Institute of Technology graduate student Matt Rognlie, for example, found evidence of higher markups.
Whether and how the decline of the labor share of income affects productivity growth is obviously a topic far too large for a couple of blog posts. But Vollrath’s model is especially interesting for connecting two important trends in recent years: the slowdown in productivity growth and the declining labor share. It’s worth, at the very least, a bit more investigation.

Wednesday, September 30, 2015

'Jeb Goes Galt'

Paul Krugman:

Jeb Goes Galt: This is amazing:

“I think the left wants slow growth because that means people are more dependent upon government,” Bush told Fox Business’ Maria Bartiromo.

Remember, this is the establishment candidate for the GOP nomination — and he thinks he’s living in Atlas Shrugged.

Back when Romney made his "47 percent" remark, Rich Lowry of the National Review Online responded:

...The contention is that if people aren’t paying federal income taxes, they are essentially freeloaders who will vote themselves more government benefits knowing that they don’t have to pay for them. As NR’s Ramesh Ponnuru has pointed out, there’s no evidence for this dynamic. ...
Fear of the creation of a class of “takers” can slide into disdain for people who are too poor — or have too many kids or are too old — to pay their damn taxes. For a whiff of how politically unattractive this point of view can be, just look at the Romney fundraising video.

Bush didn't learn a thing from Romney' venture down this road. "There's no evidence" for the charge itself, it's a political loser except with a certain population that would vote Republican in any case, and it falsely asserts that Democrats are opposed to policies that spur economic growth (hence our repeated calls for things like infrastructure to provide jobs, get the economy ready for a highly competitive international economy, and avoid the potential for secular stagnation?).

What we are opposed to, or what I am opposed to -- guess I should speak for myself -- is growth where all the benefits are captured by those at the top. Imperfections in economic institutions along with changes in the rules of the game pushed forward by those with political influence have caused those at the top to be rewarded in excess of their contribution to economic output, while those at the bottom have gotten less than their contribution. It's not "taking" to increase taxes at the top and return income to those who actually earned it, to the real makers who toil each day at jobs they'd rather not do to support their families. It's a daily struggle for many, a struggle that would be eased if they simply earned an amount equivalent to their contributions. That's why it's so "politically unattractive", people explicitly or implicitly understand they have been, for lack of a better word, screwed by the system. The blame is sometimes misplaced, but that doesn't change the nature of the problem. They don't want "free stuff," they want what they deserve, and there is nothing whatsoever wrong with that.

The other thing I'm opposed to is tax cuts for those at the top that make this problem even worse without delivering any corresponding benefits. These tax cuts redistribute income upward and cause the income received by workers to fall even further below their contribution, and there's no corresponding benefit to economic growth (or if there is, it's very, very small). We keep hearing that putting money in the hands of the "makers' at the top will produce magical growth, but the reality is that these are the true takers, the ones who are receiving far more from the economy than they contribute, while those who actually work their butts off each day to make the things we all need and enjoy struggle to pay their bills.