Category Archive for: Income Distribution [Return to Main]

Sunday, August 02, 2015

'The Myth of Mobility'

In case you somehow missed that socioeconomic mobility is low in the US relative to many other countries, this is Anne Kim at Washington Monthly:

The Myth of Mobility: ... Surveys find that nearly two-thirds of Americans believe it’s “still possible to start out poor in this country, work hard and become rich,” while also discounting the value of family background and connections in achieving success. In a 2014 survey by the Pew Research Center, just 18 percent of Americans said “belonging to a wealthy family” was “very important” for getting ahead.
But a mounting pile of evidence is beginning to show that family background is, in fact, determinative. ...
“[C]hildren raised in low-income families will probably have very low incomes as adults, while children raised in high-income families can anticipate very high incomes as adults,” write co-authors Pablo Mitnik and David Grusky of the Stanford University Center on Poverty and Inequality in a report published by the Pew Charitable Trusts and the Russell Sage Foundation.
In particular, the study finds, children raised in wealthy households can expect to enjoy incomes that are at least 200 percent larger than the expected incomes of children raised in low-income households and 75 percent larger than the incomes of children from the middle class.
As a result of the persistence of these advantages - and disadvantages - from generation to generation, Mitnik and Grusky conclude: “[T]he United States is very immobile.” ...

And remember:

Our findings suggest that wealth transmission is not primarily because children from wealthier families are inherently more talented or more able...

Friday, July 31, 2015

'U.S. Paychecks Grow at Record-Slow Pace'

Martin Feldstein says that when it comes to income inequality, you're all a bunch of whiners:

...we should not lose sight of how well middle-income families have actually done over the past few decades. Unfortunately, the political debate is distorted by misleading statistics that grossly understate these gains..., the US middle class has been doing much better than the statistical pessimists assert. ...

So it's yet another another round of "inequality has not grown as much as Democrats claim." Thought we had gotten beyond that. Today's news:

U.S. wages and benefits grew in the spring at the slowest pace in 33 years, stark evidence that stronger hiring isn't lifting paychecks much for most Americans. The slowdown also likely reflects a sharp drop-off in bonus and incentive pay for some workers.
The employment cost index rose just 0.2 percent in the April-June quarter after a 0.7 increase in the first quarter, the Labor Department said Friday. The index tracks wages, salaries and benefits. Wages and salaries alone also rose 0.2 percent.
Both measures recorded the smallest quarterly gains since the second quarter of 1982.
Salaries and benefits for private sector workers were unchanged, the weakest showing since the government began tracking the data in 1980. ...
The employment cost index figures now match the sluggish pace of growth reported in the average hourly pay data that's part of the monthly jobs report. ...

Monday, July 27, 2015

'Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth'

Genes are not as important as people think:

Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth, by Sandra E. Black, Paul J. Devereux, Petter Lundborg, and Kaveh Majlesi, NBER Working Paper No. 21409 Issued in July 2015: Wealth is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use administrative data on the net wealth of a large sample of Swedish adoptees merged with similar information for their biological and adoptive parents. Comparing the relationship between the wealth of adopted and biological parents and that of the adopted child, we find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for genetics. We also examine the role played by bequests and find that, when they are taken into account, the role of adoptive parental wealth becomes much stronger. Our findings suggest that wealth transmission is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth.

[Open link]

Friday, July 24, 2015

'What Is Wrong with the West’s Economies?'

This is from Edmund Phelps. It was kind of hard to highlight the main points in brief extracts, so you may want to take a look at the full article:

What Is Wrong with the West’s Economies?: What is wrong with the economies of the West—and with economics? ...
Many of us in Western Europe and America feel that our economies are far from just...
With little or no effective policy initiative giving a lift to the less advantaged, the jarring market forces of the past four decades—mainly the slowdowns in productivity that have spread over the West and, of course, globalization, which has moved much low-wage manufacturing to Asia—have proceeded, unopposed, to drag down both employment and wage rates at the low end. The setback has cost the less advantaged not only a loss of income but also a loss of what economists call inclusion—access to jobs offering work and pay that provide self-respect. And inclusion was already lacking to begin with. ...
How might Western nations gain—or regain—widespread prospering and flourishing? Taking concrete actions will not help much without fresh thinking: people must first grasp that standard economics is not a guide to flourishing—it is a tool only for efficiency. Widespread flourishing in a nation requires an economy energized by its own homegrown innovation from the grassroots on up. For such innovation a nation must possess the dynamism to imagine and create the new—economic freedoms are not sufficient. And dynamism needs to be nourished with strong human values.
Of the concrete steps that would help to widen flourishing, a reform of education stands out. The problem here is not a perceived mismatch between skills taught and skills in demand. ... The problem is that young people are not taught to see the economy as a place where participants may imagine new things, where entrepreneurs may want to build them and investors may venture to back some of them. It is essential to educate young people to this image of the economy.
It will also be essential that high schools and colleges expose students to the human values expressed in the masterpieces of Western literature, so that young people will want to seek economies offering imaginative and creative careers. Education systems must put students in touch with the humanities in order to fuel the human desire to conceive the new and perchance to achieve innovations. This reorientation of general education will have to be supported by a similar reorientation of economic education.
We will all have to turn from the classical fixation on wealth accumulation and efficiency to a modern economics that places imagination and creativity at the center of economic life.

I'm skeptical that this is the answer to our inequality/job satisfaction problems.

Friday, July 17, 2015

Paul Krugman: Liberals and Wages

We can do more to encourage firms to raise wages:

Liberals and Wages, by Paul Krugman, Commentary, NY Times: Hillary Clinton gave her first big economic speech on Monday, and progressives were by and large gratified. For Mrs. Clinton’s core message was that the federal government can and should use its influence to push for higher wages. ...
Mrs. Clinton’s speech reflected major changes, deeply grounded in evidence, in our understanding of what determines wages. And a key implication of that new understanding is that public policy can do a lot to help workers without bringing down the wrath of the invisible hand.
Many economists used to think of the labor market as being pretty much like the market for anything else, with the prices of different kinds of labor — that is, wage rates — fully determined by supply and demand. So if wages for many workers have stagnated or declined, it must be because demand for their services is falling.
In particular, the conventional wisdom attributed rising inequality to technological change, which was raising the demand for highly educated workers while devaluing blue-collar work. And there was nothing much policy could do to change the trend... But the case for “skill-biased technological change” as the main driver of wage stagnation has largely fallen apart. ...
Meanwhile, our understanding of wage determination has been transformed by an intellectual revolution...
The ... market for labor isn’t like the market for, say, wheat, because workers are people. And because they’re people, there are important benefits, even to the employer, from paying them more: better morale, lower turnover, increased productivity. These benefits largely offset the direct effect of higher labor costs, so that raising the minimum wage needn’t cost jobs after all.
The direct takeaway from this intellectual revolution is, of course, that we should raise minimum wages. But there are broader implications, too: Once you take what we’ve learned from minimum-wage studies seriously, you realize that they’re not relevant just to the lowest-paid workers.
For employers always face a trade-off between low-wage and higher-wage strategies — between, say, the traditional Walmart model of paying as little as possible and accepting high turnover and low morale, and the Costco model of higher pay and benefits leading to a more stable work force. And there’s every reason to believe that public policy can, in a variety of ways — including making it easier for workers to organize — encourage more firms to choose the good-wage strategy.
So there was a lot more behind Hillary’s speech than I suspect most commentators realized. ...

Wednesday, July 15, 2015

'Have Changing Job and Worker Characteristics Restrained Wage Growth?'

John Robertson and Ellyn Terry at the Atlanta Fed's macroblog:

Have Changing Job and Worker Characteristics Restrained Wage Growth?: In the wake of the Great Recession, nominal wage growth has been subdued. But it is unclear how much of this relatively low wage growth reflects protracted weakness in the labor market versus other factors, such as changes in the composition of the workforce and jobs over time. Wage growth tends to vary across personal and job characteristics, so it stands to reason that changes in the composition of the workforce, alongside demographic and work characteristics, could be an important explanation of overall movements in wage growth.
In this post, we explore the impact of the changing mixture of worker characteristics (by age and education) and types of jobs (by industry and occupation) on the Atlanta's Fed Wage Growth Tracker. We find that composition effects do not account for the low median wage growth experienced in recent years. Holding worker and job characteristics fixed at their 1997 shares raises the median wage growth in 2014 by only about 0.2 percentage point. Our results are consistent with the analysis in a previous macroblog post, which found that changing industry-employment shares could not explain much of the sluggish growth in the average hourly earnings data from the payroll survey. ...

Tuesday, July 07, 2015

'Effects of Income Inequality on Economic Growth'

One more from Vox EU. This is by Markus Brückner and Daniel Lederman:

Effects of income inequality on economic growth: ... Conclusion Our empirical analysis is motivated by the theoretical work of Galor and Zeira (1993). who examined the relationship between inequality and aggregate output in the presence of credit market imperfections and indivisibilities in human capital investment. Galor and Zeira’s model predicts heterogeneity in the effects of inequality on aggregate output across countries' initial income levels. Taking this prediction seriously, our econometric model included an interaction between measures of income inequality and countries' initial level of GDP per capita. Instrumental variables estimates showed that income inequality has a significant negative effect on aggregate output for the average country in the sample. However, for poor countries income inequality has a significant positive effect. We document that this heterogeneity is also present when considering investment – in particular, investment in human capital – as a channel through which inequality affects aggregate output. Overall, our empirical results provide support for the hypothesis that income inequality is beneficial to economic growth in poor countries, but that it is detrimental to economic growth in advanced economies.

Monday, July 06, 2015

'The Great Recession and its Aftermath: What Role Do Structural Changes Play?'

Jesse Rothstein at the WCEG:

The Great Recession and its aftermath: What role do structural changes play?: Overview The last seven years have been disastrous for many workers, particularly for lower-wage workers with little education or formal training, but also for some college-educated and higher-skilled workers. One explanation is that lackluster wage growth and, until recently, high unemployment reflect cyclical conditions—a combination of a lack of demand in the U.S. economy and greater sensitivity of workers on the bottom-rungs of the job ladder to changes in the business cycle. A second explanation attributes stagnant wages and employment losses to structural changes in the labor market, including long-term industrial and demographic shifts and policy changes that reduce the incentive to work. This explanation interprets recent trends as the “new normal” and suggests that the U.S. economy will never return to pre-recession labor market conditions unless policies are changed dramatically.
My research, based on a review of extensive data on labor market outcomes since the end of the Great Recession of 2007-2009, finds no basis for concluding that the recent trend of stagnant wages and low employment is the “new normal.” Rather, the data point to continued business cycle weakness as the most important determinant of workers’ outcomes over the past several years. It is only in the past few months that we have started to see data consistent with growing labor market tightness, and even this trend is too new to be confident. The continued stagnation of wages through the end of 2014 implies that, at a minimum, a fair amount of slack remained in the labor market as of that late date. In turn, policies that would promote faster recoveries and encourage aggregate demand during and after recessions remain key policy tools. ...

Sunday, July 05, 2015

'De-Industrialisation, 'New Speenhamland' and Neo-Liberalism'

Via Vox EU:

De-industrialisation, ‘new Speenhamland’ and neo-liberalism, by Jim Tomlinson: In the run-up to the recent general election, 65 Social Policy professors wrote to the Guardian in the following terms:
"Now the majority of children and working-age adults in poverty live in working, not workless, households. In other words – and ironically in view of the coalition’s rhetoric – many of those forced to claim the working-age benefits targeted for further cuts are not what the prime minister calls ‘shirkers’ but, in fact, ‘hard working families’" (5th May).
Plainly, the authors were concerned to make an immediate political point about the government’s austerity policies. But the sentences cited above, I suggest, indicate a profound, long-term shift in the social security system and beneath that, a shift of the British economy.
To indicate the significance of this shift we need to go back to two key moments in Britain’s modern history. First is 1795, when the Speenhamland system was introduced in a parish of that name near Newbury in the South of England. Under this system, wages deemed to be below those sufficient for subsistence were subsidized through the Poor Law out of taxes (local poor rates). This system was not actually new, nor did it become universal, but it has been widely recognized as symbolizing the rejection of a crucial principle of liberal political economy (Polanyi 1947). The principle is that wages should be determined in a market, and should not be subsidized out of the public purse. Hostility to Speenhamland was widespread amongst the governing class of the time and especially amongst political economists, who argued that such a system created no incentives for the workers to maximize their wages, nor for employers to pay what was affordable to them. These perverse consequences were held-up as the typical result of well-intentioned but misguided intervention in the labor market. Eventually, at another key moment, under the Poor Law Amendment Act of 1834, such subsidies were outlawed, and liberal political economy emerged triumphant.
Another component of this political economy was the assumption that wages would not need to be subsidized to provide adequate wages; that waged work would be an effective route out of poverty. Of course, this principle was breached at the margins by such mechanisms as Wages Boards (later Councils) which imposed minimum pay on certain sectors of the economy. But here, of course, there was no state subsidy; the state just insisted that employers pay the minimum wage.  
The classic mid-20th century Beveridge analysis of the sources of poverty suggested the problem lay fundamentally in ‘interruption to earnings’ (by unemployment, sickness, or age) along with large numbers of children, the latter to be addressed by ‘Family Allowances’ (Cutler et al 1987). While this analysis always misrepresented the labor market, not least in its barely-qualified notion of the ‘male-breadwinner household’, its fundamental idea that normally paid work would provide a route out of poverty has underpinned most modern understandings of how society works down to the present day.
But as the social policy professors’ letter indicates, we have come a long way from a Beveridgean world. My argument is that structural changes in the labor market have brought about profound changes in the social security system. What has changed in the period of de-industrialization has been the numbers earning poverty wages, and being supported by in-work benefits. Effectively we have moved towards a huge ‘new Speenhamland’ system of ‘outdoor relief’ of the employed; or, viewed differently, large subsidies to employers, which has mitigated, but not cured the problem of poverty-level wages (Farnsworth 2012). ...

Saturday, July 04, 2015

'Professor Hubbard’s Claim about Wage and Compensation Stagnation Is Not True'

Larry Mishel:

Professor Hubbard’s Claim about Wage and Compensation Stagnation Is Not True: ...A New York Times editorial points out ... that Glenn Hubbard, a leading conservative economist and key adviser to GOP candidate Jeb Bush, does not seem to believe there is a wage stagnation problem. As an earlier New York Times article pointed out: “Mr. Hubbard argued that ‘compensation didn’t stagnate,’ citing large increases that employers have paid out in health and pension benefits.”

Hubbard is definitely mistaken, as the New York Times indicates and as I demonstrate below by examining actual wage and benefit trends. Shifting the discussion from wages to compensation (wages and benefits) does not alter any of the salient facts about stagnant pay in recent years, especially for the typical worker or for low-wage workers, and not even for the ‘average’ worker (including high wage as well as low and middle-wage workers). In fact, there has been an even greater growth of inequality in total compensation than there has been in wages alone.

The intuition behind Hubbard’s claim is that the costs of benefits provided by employers–especially those for health care insurance–have risen rapidly, suggesting that compensation has risen far more quickly than wages. What this ignores, of course, is that many workers in the bottom half receive very few health or pension benefits and employers provide fewer and fewer workers with health insurance and pension benefits each year. Hubbard’s intuition also ignores that employers have actually cut back on some benefits, particularly pensions, with a concomitant decline in the quality of those benefits (such as by providing defined contribution rather than defined benefit plans). ...

Thursday, July 02, 2015

'Poverty & Ideology'

Chris Dillow:

... Two big facts, however, suggest that the link between child poverty and parental failure is weak. One comes from the DWP's own report:

Children  in  families where at least one adult was in work made up around 64 per cent of all children  in  low  income  [before housing costs]  in  2013/14 (p46 of this pdf).

Think what it means to be in work. It means you've impressed an employer sufficiently to get hired, and you are managing to turn up roughly on time most days. You have, in short, got your shit together. And yet you're still unable to get your family out of relative poverty.

Secondly, Andrew Dickerson and Gurleen Popli point out that there is zero correlation between material child poverty and a measure of parental involvement based upon facts such as whether parents read to their children or given them regular meal times and bed times. There is, therefore, no link between bad parenting (on this measure) and material poverty.

These two facts suggest another, bigger reason for child poverty. Quite simply, it has become harder for less skilled people to provide for their families. ...

Monday, June 29, 2015

'The Stimulative Effect of Redistribution'

Bart Hobijn and Alexander Nussbacher in the SF Fed's Economic Letter:

The Stimulative Effect of Redistribution, by Bart Hobijn and Alexander Nussbacher: The idea of taking from the rich and giving to the poor goes back long before the legend of Robin Hood. This kind of redistribution sounds desirable out of a sense of fairness. However, economists often judge a policy less on whether it is fair, and more in terms of whether it is efficient or inefficient, as well as whether it stimulates or slows economic activity.
In this Economic Letter we evaluate the stimulative effect of redistributing income from rich to poor households in a few distinct steps. We first provide a simple back-of-the-envelope calculation of the potential stimulus from redistributive policies. We then review the two main assumptions behind this policy prescription. We argue that the stimulative impact of such policies is likely to be lower than the simple calculation suggests. ...

'U.S. Income Inequality Persists Amid Overall Growth in 2014'

Emmanuel Saez:

U.S. income inequality persists amid overall growth in 2014, by Emmanuel Saez, WCEG: Income inequality in the United States grew more acute in 2014, yet the bottom 99 percent of income earners registered the best real income growth (after factoring in inflation) in 15 years. The latest data from the U.S. Internal Revenue Service show that incomes for the bottom 99 percent of families grew by 3.3 percent over 2013 levels, the best annual growth rate since 1999. But incomes for those families in the top 1 percent of earners grew even faster, by 10.8 percent, over the same period. ...
More broadly, the top 1 percent of families captured 58 percent of total real income growth per family from 2009 to 2014, with the bottom 99 percent of families reaping only 42 percent. ...
The higher tax rates for top U.S. income earners enacted in 2013 as part of the Obama Administration and Congress’ federal budget deal seem to have had only a fleeting impact on the outsized accumulation of pre-tax income by families in the top 1 percent and 0.1 percent of income earners.
To be sure, there was a shifting  of income among high-income earners ... as these wealthy families sought to avoid the higher rates enacted in 2013. This adjustment created a spike in the share of top incomes accumulated by the very wealthy in 2012 followed by a trough in 2013. By 2014, however, top incomes shares were back to their upward trajectory. This suggests that the higher tax rates starting in 2013, while not negligible, will not be sufficient by themselves to curb the enormous increase in pre-tax income concentration that has taken place in the United States since the 1970s.

Friday, June 26, 2015

'Lunch with the FT: Thomas Piketty'

A small part of an interview of Thomas Piketty in the Financial Times:

... Piketty says his interest in inequality crystallised after the collapse of the Berlin Wall and the first Gulf war. He recalls visiting Moscow in 1991 and being struck by “the lines in front of shops”. He came back vaccinated against communism — “I believe in capitalism, private property, the market” — but also with a question central to his work: “How come those people had been so afraid of inequality and capitalism in the 19th and 20th century that they created such a monstrosity? How can we tackle inequality without repeating this disaster?” ...

And a point I've been making for a long time about taxes and incentives:

... Though Piketty concedes that the global wealth tax he recommends is a “utopian” dream, he also says a confiscatory tax rate of more than 80 per cent on earnings exceeding $1m would work. In fact, he continues, such a rate was in place for five decades before the presidency of Ronald Reagan, and would curb exuberant executive pay without hurting productivity. “It did not kill US capitalism then — productivity grew the fastest during that time,” he notes. “This idea, according to which no one will accept to work hard for less than $10m per year . . .  It’s OK to pay someone 10, 20 times the average worker’s salary but do you really need to pay them 100 or 200 times to get their arses in gear?” ...

Wednesday, June 24, 2015

'Growth’s Secret Weapon: The Poor and the Middle Class'

Era Dabla-Norris, Kalpana Kochhar, and Evridiki Tsounta at the IMF:

Growth’s Secret Weapon: The Poor and the Middle Class: The gap between the rich and the poor is at its widest in decades in advanced countries, and inequality is also rising in major emerging markets...  It is becoming increasingly clear that these developments have profound economic implications.
Earlier IMF work has shown that income inequality is bad for growth and its sustainability. Our new research shows that income distribution itself—not just the level of income inequality—matters for growth.
Specifically, we find that making the rich richer by one percentage point lowers GDP growth in a country over the next five years by 0.08 percentage points—whereas making the poor and the middle class one percentage point richer can raise GDP growth by as much as 0.38 percentage points...  Put simply, boosting the incomes of the poor and the middle class can help raise growth prospects for all.
One possible explanation is that the poor and the middle class tend to consume a higher fraction of their income than the rich. ... What this means is that the poor and the middle class are key engines of growth. But with inequality on the rise, those engines are stalling.
Over the longer run, persistent inequality means that the the poor and the middle class have fewer opportunities to get educated, enhance their skills, and pursue their entrepreneurial dreams.  As a result, labor productivity and growth suffer. ...

Friday, June 12, 2015

The Education-Deficit Does Not Explain Rising Inequality

Brad DeLong:

Discussion of Matthew Rognlie: "Deciphering the Fall and Rise in the Net Capital Share": The Honest Broker for the Week of June 14, 2015, b J. Bradford DeLong: ... I was weaned on the education-deficit explanation of recent trends in US inequality, perhaps best set out by the very sharp Claudia Goldin and Larry Katz (2009) in The Race Between Education and Technology. In their view, the bulk of U.S. inequality trends since the 1980s were driven by education's losing this race. In the era that had begun in 1636 the United States-to-be had made increasing the educational level of the population a priority. But that era came to an end in the 1970s, while skill-biased technological change continues. That meant that the return to education-based skills began to rise. And it was that rise that was the principal driver of rising income inequality.
But, recently, reality does not seem to agree with what had once seemed to me to be a satisfactory explanation. First, to get large swings in the income distribution out of small changes in the relative supply of educated workers requires relatively low substitutability between college-taught skills and other factors of production. As inequality has risen, the required substitutability to fit the data has dropped to what now feels to me an unreasonably low magnitude. Second, while it is true that we have seen higher experience-skill premiums and sharply higher education-skill premiums, the real action in inequality appears now to be unduly concentrated in the upper tail. The distribution of the rise in inequality does not seem to match the distribution of technology-complementary skills at all. ...
Looking simply at my own family history, my Grandfather Bill reached not just the 1% or the 0.1% but the 0.01% back in the late 1960s in the days before the rise in inequality by selling his construction company to a conglomerate back in 1968. A good many of those of us who are his grandchildren have been very successful... But even should any of us be as lucky as my Grandfather Bill was in terms of our peak income and wealth as a multiple of median earnings, we would still be a multiple of his rank further down in the percentile income distribution.
Today, you need roughly 3.5 times the wealth now in the U.S. and 8 times the wealth worldwide to achieve the same percentile rank in the distribution... I find it simply impossible to conceptualize such an extreme concentration as in any way a return to a factor of production obtained as the product of "hours spent studying" times "brainpower", even when you also multiply by a factor "luck" and a factor "winner-take-all-economy".
So what, then, is going on and driving the sharp rise in inequality, if not some interaction between our education policy on the one hand and the continued progress of technology on the other? Thomas Piketty (2014) has a guess. Piketty guesses that the real explanation is that 1914-1980 is the anomaly. Without great political disturbances, wealth accumulates, concentrates, and dominates. The inequality trends we have seen over the past generation are simply a return to the normal pattern of income distribution in an industrialized market economy in which productivity growth is not unusually fast and political, depression, and military shocks not unusually large and prevalent. ...

[He goes on to talk about Matthew Rognlie's "Deciphering the Fall and Rise in the Net Capital Share."]

Wednesday, June 10, 2015

'Inequality of Opportunity: Useful Policy Construct or Will o’ the Wisp?'

Can economic opportunity be separated from economic outcomes?:

Inequality of opportunity as a policy construct: ...Concluding remarks
Any attempt to separate circumstances from effort – to identify that portion of the inequality of outcomes which is a legitimate target for redistribution – is fraught with empirical and conceptual difficulties.[4] Fine-grained distinctions between inequality of opportunity and inequality of outcomes do not hold water in practice, and we are likely to greatly underestimate inequality of opportunity and hence the need for intervention.
Further, what if one person’s effort becomes another person’s circumstance, as when income generated through parents’ effort provides a better start in life for some children? Or when freely made choices by one group of upper-income house buyers push up prices for others who may have lower incomes? Is it legitimate or is it not legitimate to intervene in this case?
These arguments support the case for generalised social protection in dimensions such as income, health and education, irrespective of whether the outcomes can be specifically attributed to circumstance or to effort.
The important questions then relate to what the best available policy instruments are for delivering this social protection, what effects they have on incentives, and how best they can be deployed. To be sure, we may make some Type I and Type II errors in doing so; we may penalize effort when we should not, and we may not fully compensate for circumstances when we should. But this is preferable to being frozen into perpetually underestimating the need for intervention by a focus on that will o’ the wisp, inequality of opportunity.

Walmart and Wages

Paul Krugman:

Notes on Walmart and Wages (Wonkish): Walmart reports that its recent wage hike is paying off via reduced turnover, which produces cost savings that offset the direct expense of the higher wages. In other words, efficiency wage theory is vindicated. What are the political/policy implications? What follows is a slightly wonkish note, largely to myself.
Efficiency wage theory is the idea that for any of a number of reasons, employers get more out of their workers when they pay more. It could be effort, it could be morale, it could be turnover. The causes of the efficiency gain could lie in psychology, or simply in the fact that workers are less willing to risk better-paying jobs with bad behavior. ...
Or to put it differently, efficiency wages suggest right away that the invisible hand’s grip on labor is a lot looser than people imagine, that wages are relatively easy to shift with social and political pressure. And this is one important reason attempts to reduce inequality can and should involve working on the distribution of market income as well as ex-post redistribution through taxes and transfers.

Tuesday, June 02, 2015

To Overcome Rising Inequality, Workers Need More Bargaining Power

I have a new column:

To Overcome Rising Inequality, Workers Need More Bargaining Power: There is widespread agreement that inequality increased over the last several decades, but why that has happened is the subject of considerable debate.
  • Is it because technological change reduced the number of good, middle class jobs?
  • Is it the result of downward pressure on wages due to globalization?
  • Can the changes be traced to the rise of “winner take all” markets?
  • Or is the decline of unions the main reason for the change in the distribution of income?
  • What about the fall in the inflation-adjusted minimum wage, was that a factor?
  • Did immigration have anything to do with it?
  • How much of an impact did the reduction in income and inheritance taxes for those at the very top have on inequality?
  • Should we focus mainly on differential educational opportunities between those at the top and those at the bottom, and the networking opportunities the top schools provide?
  • What role did politics play in undermining unions, altering tax rates, resisting increases in the minimum wage, and failing to support educational initiatives that benefit the disadvantaged?
Some of these are easier to rule out than others based upon the empirical evidence. For example, there’s little evidence that immigration played a significant role in generating rising inequality. And it’s probably the case that there are multiple causes of rising inequality rather than a single factor, and that some of these factors interact. The decline in unions, for example, is related to the threat of offshoring in a globalized economy as well as political factors that undermined union authority.
But there is one factor, the presence of market power in both product and labor markets, that, in my view, does not get enough attention in this debate. ...[continue]...

For the Poor, the Graduation Gap Is Even Wider Than the Enrollment Gap

Susan Dynarski on inequality in education:

For the Poor, the Graduation Gap Is Even Wider Than the Enrollment Gap: Rich and poor students don’t merely enroll in college at different rates; they also complete it at different rates. The graduation gap is even wider than the enrollment gap.
In 2002, researchers with the National Center for Education Statistics started tracking a cohort of high school sophomores. The project, called the Education Longitudinal Study, recorded information about the students’ academic achievement, college entry, work history and college graduation. A recent publication examines the completed education of these young people, who are now in their late 20s. ...
Thirteen years later, we can see who achieved their goals. Among the participants from the most disadvantaged families, just 14 percent had earned a bachelor’s degree. That is, one out of four of the disadvantaged students who had hoped to get a bachelor’s had done so. Among those from the most advantaged families, 60 percent had earned a bachelor’s, about two-thirds of those who had planned to. ...

And the gap looks just as bad when students with similar academic achievement in high school are compared, e.g. among the "teenagers who scored among the top 25 percent of students on the math test..., the students from the top socioeconomic quartile had very high bachelor’s degree completion rates: 74 percent... But only 41 percent of the poorest students with the top math scores did so. That’s a completion gap of 33 percentage points, not much smaller than the overall gap of 46 percentage points."

Thursday, May 28, 2015

'Income Inequality, Social Mobility, and the Decision to Drop Out of High School'

Melissa S. Kearney and Phillip B. Levine at Vox EU:

Income inequality, social mobility, and the decision to drop out of high school: Compared to other developed countries, the US ranks high on income inequality and low on social mobility. This could be particularly concerning if such a trend is self-perpetuating. In this column, the authors argue that there is a causal relationship between income inequality and high school dropout rates among disadvantaged youth. In particular, moving from a low-inequality to a high-inequality state increases the likelihood that a male student from a low socioeconomic status drops out of high school by 4.1 percentage points. The lack of opportunity for disadvantaged students, therefore, may be self-perpetuating.

Wednesday, May 27, 2015

'Whatever Happened to Antitrust?'

Robert Reich believes, as I do, that monopoly power is one of the reasons that the distribution of income has been skewed toward the top:

Whatever Happened to Antitrust?: Last week’s settlement between the Justice Department and five giant banks reveals the appalling weakness of modern antitrust. 
The banks had engaged in the biggest price-fixing conspiracy in modern history. Their self-described “cartel” used an exclusive electronic chat room and coded language to manipulate the $5.3 trillion-a-day currency exchange market. It was a “brazen display of collusion” that went on for years, said Attorney General Loretta Lynch. 
But there will be no trial, no executive will go to jail, the banks can continue to gamble in the same currency markets, and the fines – although large – are a fraction of the banks’ potential gains and will be treated by the banks as costs of doing business.
America used to have antitrust laws that permanently stopped corporations from monopolizing markets, and often broke up the biggest culprits. 
No longer. Now, giant corporations are taking over the economy – and they’re busily weakening antitrust enforcement. 
The result has been higher prices for the many, and higher profits for the few. It’s a hidden upward redistribution from the majority of Americans to corporate executives and wealthy shareholders. ...
Antitrust has been ambushed by the giant companies it was designed to contain.
Congress has squeezed the budgets of the antitrust division of the Justice Department and the bureau of competition of the Federal Trade Commission. Politically-powerful interests have squelched major investigations and lawsuits. Right-wing judges have stopped or shrunk the few cases that get through. 
We’re now in a new gilded age of wealth and power similar to the first gilded age when the nation’s antitrust laws were enacted. But unlike then, today’s biggest corporations have enough political clout to neuter antitrust. 
Conservatives rhapsodize about the “free market” and condemn government intrusion. Yet the market is rigged. And unless government unrigs it through bold antitrust action to restore competition, the upward distributions hidden inside the “free market” will become even larger.

Inequality - What To Do About It?

A follow up to yesterday's post on what to do about inequality:

Inequality has been on the rise since the 1970s - Tony Atkinson and Sabine Alkire ask what can be done about it? Inequality was a topic covered in The Economic Journal 125th Anniversary Special Issue, available for free online: http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12230/abstract

Watch the full session here: https://www.youtube.com/watch?v=XpdhdUkza88

Tuesday, May 19, 2015

'The Great Utility of the Great Gatsby Curve'

Alan Krueger kicks off a debate on the relationship between inequality and mobility:

The great utility of the Great Gatsby Curve: Every so often an academic finding gets into the political bloodstream. A leading example is "The Great Gatsby Curve," describing an inverse relationship between income inequality and intergenerational mobility. Born in 2011, the Curve has attracted plaudits and opprobrium in almost equal measure. Over the next couple of weeks, Social Mobility Memos is airing opinions from both sides of the argument, starting today with Prof Alan Krueger, the man who made the Curve famous.


Building on the work of Miles Corak, Anders Björklund, Markus Jantti, and others, I proposed the “Great Gatsby Curve” in a speech in January 2012. The idea is straightforward: greater income inequality in one generation amplifies the consequences of having rich or poor parents for the economic status of the next generation. 

The curve is predicted by economic theory…

There are strong theoretical underpinnings for the Great Gatsby Curve. Gary Solon has shown, for example, that the relationship is predicted by a standard intergenerational model if the payoff to education increases over time. This causes inequality to rise in one generation, but also increases the significance of this inequality for children’s economic success, since well-off parents have more resources and more incentive to invest in their children’s education. 

Other mechanisms could also underlie the Great Gatsby Curve. For example, if social connections are important for success in the economy (e.g., getting the right summer internship), and wealthy parents have access to job networks, then a spreading out of the income distribution would leave children from the bottom of the distribution in a more disadvantaged position in terms of gaining access to networks that will ultimately lead to a higher paid job. 

…and supported by evidence

Most of the available empirical evidence supports the Great Gatsby Curve. ...

Consistent with the Great Gatsby Curve, several studies also point to a growing gap in the resources devoted to education between high- and low-income American families. As predicted by the Great Gatsby Curve, it appears that the dramatic rise in income inequality has created a more tilted playing field for the next generation. ... 

The two key remaining questions now are:

  1. What are the main mechanisms underlying the Great Gatsby Curve?  
  2. What policy actions can be taken to improve economic opportunities for children born in disadvantaged circumstances? 

Learning more about the former can help us to achieve the latter — which is, in the end, the most important goal of all.

Wednesday, May 13, 2015

Video: Stiglitz on Inequality, Wealth, and Growth: Why Capitalism is Failing

Tuesday, May 12, 2015

'The Rules are What Matter for Inequality'

Mike Konczal:

The Rules are What Matter for Inequality: Our New Report: I’m very excited to announce the release of “Rewriting the Rules of the American Economy” (pdf report), Roosevelt Institute’s new inequality agenda report by Joe Stiglitz. I’m thrilled to be one of the co-authors...
As we argue, inequality is not inevitable: it is a choice that we’ve made with the rules that structure our economy. Over the past 35 years, the rules, or the regulatory, legal and institutional frameworks, that make up the economy and condition the market have changed. These rules are a major driver of the income distribution we see, including runaway top incomes and weak or precarious income growth for most others. Crucially, however, these changes in the rules have not made our economy better off than we would be otherwise; in many cases we are weaker for these changes. We also now know that “deregulation” is, in fact, “reregulation”—that is, a new set of rules for governing the economy that favor a specific set of actors, and that there's no way out of these difficult choices. But what were these changes? ...
This report describes what has happened, going far deeper than this summary here. It also has a policy agenda focused on both taming the top and growing the rest of the economy. Some may emphasize some pieces more than others; but no matter what this argument about the rules is what is missing in the current debates over the economy. ...

Tuesday, May 05, 2015

Explaining US Inequality Exceptionalism

Paul Krugman:

Explaining US Inequality Exceptionalism: Disposable income in the United States is more unequally distributed than in most other advanced countries. But why? ... Janet Gornick and Branko Milanovic at the CUNY Graduate Center’s Luxembourg Income Study Center shed light on the question, partly overturning what all of us believed until recently. They explain their findings in the first Research Brief in a new series launched on the LIS Center website.
The standard story up until now has been that the source of US inequality exceptionalism lies in the unusually low amount of redistribution we do through our tax and transfer system. ...
But can this be right? We know that the US has unusually weak unions, a low minimum wage, an exceptionally wide skills premium and, of course, an exceptionally imperial one percent. Shouldn’t all this leave some mark on market income?
What Gornick and Milanovic realized (helped by suggestions from a number of colleagues, notably Larry Mishel at EPI) was that true US market inequality might be being masked by another exceptional piece of the US system – delayed retirement, causing many older households to have positive market income where comparable households in other countries have no or very little market income. ...
To correct for this possible problem, they recalculated the numbers for households containing only persons under age 60... The US remains the most unequal nation (after taxes and transfers), but now a main driver of that inequality is market inequality. ... Indeed, America also does less redistribution than several other rich countries, European countries in particular, so that’s still part of the story, but it’s not the whole story or even most of it. ...

Sunday, May 03, 2015

Milanovic on Solow on Rents and the Decoupling of Productivity and Wages

Branko Milanovic:

Bob Solow on rents and decoupling of productivity and wages: Atypical or difficult to explain movements in the capital/labor ratio, productivity per worker and real wages have stimulated recent attempts to square them with neoclassical economics, make some adjustments in the neoclassical paradigm or scrap it altogether. ...
Bob Solow explored a ... possibility. Going back to his own initial work on the theory of growth, some 60 years ago, Solow asked...: why did we assume that there is perfect competition and that factors are paid their perfect completion marginal products? ... Solow said: “I could not find a good reason, but since theory and facts were broadly in accord, nobody bothered much with the assumption”. That is, until recently. How can we explain, continued Solow, a sustained ... divergence between nonfarm sector productivity and the real wage..., that goes against everything we thought we knew! ...
However, if you assume a model of imperfect competition..., there is also a rent (due to the fact that price is greater than the marginal revenue product), the issue becomes: how is that rent going to be distributed between labor and capital? And until the early 1980, due to trade union density (“The treaty of Detroit”), relative shortage of labor, trilateral (government-capital-labor) negotiations etc., the rent was divided in a way that favored labor. But with the decline of the unions, ideological assault on labor (the Reagan revolution) and a huge expansion of available wage-labor worldwide (as China and Eastern Europe rejoined the world economy), the bargaining power of labor waned and that of capital increased. Consequently, the share of capital in national income increased, and productivity growth got decoupled from real wage growth.
This is my interpretation of Solow’s talk..., I might have gotten something wrong. ...
If, as Solow said, we came up with an estimate that (say) 20-30% of national income is rent, then surely political factors can explain why capital share is up. If our estimate of rent is 2-3% of national income, then this is not a promising story. So, it is back to empirics!—a nice theory to test where many a young economist can hope to make a difference...

Friday, May 01, 2015

'The Political Roots of Widening Inequality'

Robert Reich:

The Political Roots of Widening Inequality: For the past quarter-century I’ve offered in articles, books, and lectures an explanation for why average working people in advanced nations like the United States have failed to gain ground and are under increasing economic stress: Put simply, globalization and technological change have made most of us less competitive. The tasks we used to do can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.
My solution—and I’m hardly alone in suggesting this—has been an activist government that raises taxes on the wealthy, invests the proceeds in excellent schools and other means people need to become more productive, and redistributes to the needy. These recommendations have been vigorously opposed by those who believe the economy will function better for everyone if government is smaller and if taxes and redistributions are curtailed.
While the explanation I offered a quarter-century ago for what has happened is still relevant—indeed, it has become the standard, widely accepted explanation—I’ve come to believe it overlooks a critically important phenomenon: 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. And the governmental solutions I have propounded, while I believe them still useful, are in some ways beside the point because they take insufficient account of the government’s more basic role in setting the rules of the economic game.
Worse yet, the ensuing debate over the merits of the “free market” versus an activist government has diverted attention from how the market has come to be organized differently from the way it was a half-century ago, why its current organization is failing to deliver the widely shared prosperity it delivered then, and what the basic rules of the market should be. It has allowed America to cling to the meritocratic tautology that individuals are paid what they’re “worth” in the market, without examining the legal and political institutions that define the market. The tautology is easily confused for a moral claim that people deserve what they are paid. Yet this claim has meaning only if the legal and political institutions defining the market are morally justifiable. ...

There's quite a bit more in the article.

Wednesday, April 29, 2015

Video: Closing the Income Inequality Gap

 A widening gap between haves and have-nots is shrinking the American middle class and making it tougher than ever to move up the economic ladder. The U.S. problem reflects a worldwide concentration of wealth. The top 1 percent control 48 percent of the world's assets, up from 44 percent in 2009. Disparate voices ranging from Pope Francis to IMF Director Christine Lagarde warn that the gulf between rich and poor diminishes hope and raises serious political and economic issues. Some companies are listening. Late last year, Walmart Stores pledged to end minimum-wage pay by raising the hourly rate of 500,000 workers. Other companies followed with similar increases for their lowest-paid workers. Will their announcements spur broader efforts to reduce income equality? What else can be done to lift the standard of living for the working poor?

Moderator: Alan Schwartz, Executive Chairman, Guggenheim Partners

Speakers: Jared Bernstein, Economic Policy Fellow, Milken Institute; Senior Fellow, Center on Budget and Policy Priorities; Former Chief Economist to Vice President Joe Biden, Beth Ann Bovino, U.S. Chief Economist, Global Economics and Research, Standard & Poor's Ratings Services, Arthur Brooks, President, American Enterprise Institute, Jeff Greene, Investor and Philanthropist, Kristin Oliver, Executive Vice President, People, Walmart U.S.

Wednesday, April 22, 2015

Faster Productivity Growth May Not Lift Middle Class Incomes

Jared Bernstein:

Faster productivity growth would be great. I’m just not at all sure we can count on it to lift middle-class incomes: Recently, a number of economists and commentators have suggested that faster productivity growth would be a big way to boost the income of middle-class households. I’m all for faster productivity growth, though I’d argue no one knows how to reliably make it happen. But given the wedge of inequality between productivity and low and middle incomes, wages, and wealth, I’m skeptical that this would work as well as some think.
So I wrote this paper exploring the issue and adding some of my own estimates. Here’s the intro...

I tried to make a similar point here: Full Employment Alone Won’t Solve Problem of Stagnating Wages.

Sunday, April 19, 2015

The Lifelong Effects of Early Childhood Poverty

Child-Poverty-100
[source]

Wednesday, April 15, 2015

'Redistribution Can Involve Less Government Rather than More'

Dean Baker:

Redistribution Can Involve Less Government Rather than More: Thomas Edsall presents some interesting polling results in his NYT column indicating less public support for government policies to redistribute income even as the distribution of income is becoming increasingly unequal. He argues that this presents a paradox for Democrats who are concerned about inequality.
Actually the situation is less paradoxical when we consider the possibility that government policies are largely responsible for growing inequality. This is most obvious is with the bailout of the financial industry in 2008. Without the help of the TARP and the Fed, Goldman Sachs, Citigroup, Morgan Stanley, and most of the other Wall Street behemoths would be out of business. This would have drastically reduced the wealth and income of many of the richest people in the country.
The government has also redistributed income upward by supporting an over-valued dollar that has eliminated millions of manufacturing jobs and put downward pressure on the wages of non-college educated workers more generally. In addition, a Federal Reserve Board policy that raises interest rates to keep people from getting jobs any time the labor market gets tight enough to support wage growth has also had the effect of reducing the wages of most workers.
Also our trade policy of selective protectionism, which exposes manufacturing workers to competition with the lowest paid workers in the world, while largely protecting doctors, lawyers, and other highly paid professionals (who comprise much of the one percent), has the effect of redistributing income upward. Similarly, our policy of patent protection redistributes hundreds of billions of dollars a year from ordinary workers to drug companies and other beneficiaries of these government-granted monopolies.
In these areas and others the government has acted to redistribute income upward. A politician who wanted to reduce inequality could focus on having less government action in these areas. That would be consistent with the polls cited by Edsall indicating that the public wanted a smaller role for the government.

Just one comment. I don't like the word "redistribution" as it is used here since it implies the current distribution of income is correct and just. I don't think it is for a variety of reasons I've hammered on over the years. Returning income/wealth to its rightful owners is not redistribution in the sense the word generally implies (i.e. taking from someone who has earned the income and giving it to someone who has not -- it's the opposite, taking it back from those who haven't earned it, generally those at the top of the income distribution, and returning it to those who have).

Friday, April 10, 2015

INET Video: Piketty and Stiglitz

"Thomas Piketty and Joseph E. Stiglitz discuss the causes of, consequences of, and remedies for inequality. With opening remarks from Clive Cowdery, George Soros, OECD Secretary General Angel Gurria, Institute President Rob Johnson and Institute Board Members Anatole Kaletsky and Lord Adair Turner."

'The Opportunity Dodge'

Larry Mishel of the EPI:

The Opportunity Dodge, The American Prospect: We think of America as the land of opportunity, but the United States actually has low rates of upward mobility relative to other advanced nations... Creating more opportunity is therefore a worthy goal. However, when the goal of more opportunity is offered instead of addressing income inequality, it’s a dodge and an empty promise—because opportunity does not thrive amid great inequalities. ...
The opportunity dodgers .... ignore that income inequality and intergenerational mobility are closely linked..., one of the most robust and long-standing social science research findings is that ... the circumstances in which children grow up ... greatly shapes educational advancement. So, promoting education solutions to mobility without addressing income inequality is ultimately playing pretend. We can’t substantially change opportunity without changing the actual lived circumstances of disadvantaged and working-class youth. ...
Acknowledging that income inequality and poverty greatly affect schooling success means we need to improve the circumstances of poor children’s lives by providing stable, adequate housing and healthy, safe environments. Decent income for their parents is essential. ...
Last, it is important to recognize that some people are always going to end up on the bottom and middle rungs since ... somebody has to be below average. Economic policy must also be concerned that low- and moderate-income families have decent incomes, health care, and retirement. The opportunity dodgers are really saying they do not care how low- and middle-income families actually live.

Wednesday, April 08, 2015

'The Financial Pressures of the Middle Class'

From the St. Louis Fed blog On the Economy:

The Financial Pressures of the Middle Class: Many references to the “middle class” are based on a simplistic definition, such as the middle 50 percent of families by income or wealth. While this may be effective for discovering, for example, trends in wealth distribution over time, these definitions uncover little about the characteristics of individual middle-class families and about how these families fare over time. A recent report from the St. Louis Fed's Center for Household Financial Stability sought to provide a demographic definition of the middle class and found that the middle class may be under more financial pressure than has been otherwise reported.

Senior Economic Adviser William Emmons and Lead Policy Analyst Bryan Noeth, both with the center, noted, “Our version of the demographically defined middle class reveals that families that are neither rich nor poor may be under more downward economic and financial pressure than common but simplistic rank-based measures of income or wealth would suggest.”

Defining the Middle Class

Emmons and Noeth separated families into three groups, all headed by someone at least 40 years old:

  • Thrivers, which are families likely to have income and wealth significantly above average in most year and are headed by someone with a two- or four-year college degree who is non-Hispanic white or Asian
  • Middle class, which are families likely to have income and wealth near average in most year and are headed by someone who is white or Asian with exactly a high school diploma or black or Hispanic with a two- or four-year college degree
  • Stragglers, which are families likely to have income and wealth significantly below average in most years and are headed by someone with no high school diploma of any race or ethnicity and black or Hispanic families with at most a high school diploma

The authors assigned black and Hispanic families with college degrees to the middle class and with high school degrees to the stragglers category due to the well-documented fact that black and Hispanic families typically have significantly lower income and wealth than their similarly educated white and Asian counterparts.

Income and Wealth

Using data from the Survey of Consumer Finances, Emmons and Noeth found that the median incomes of thrivers and stragglers were slightly higher in 2013 than in 1989, rising 2 percent and 8 percent, respectively. The middle class, however, experienced a decline in median income of 16 percent over the same period.

Regarding wealth, thrivers experienced an increase in median wealth of 22 percent over the period 1989-2013. The middle class and stragglers experienced large declines, with the median wealth of the middle class dropping 27 percent and of the stragglers dropping 54 percent over the same period.

Emmons and Noeth also examined the performance of each group relative to the population as a whole. They found that the median income of the middle class as they defined it grew 21 percent less than the overall median income from 1989 through 2013. The cumulative growth shortfall in wealth for the median demographically defined middle-class family was about 24 percent compared to overall median wealth. ...

Wednesday, April 01, 2015

'Why More Education Won’t Fix Economic Inequality'

Speaking of Larry Summers:

Why More Education Won’t Fix Economic Inequality: Suppose you accept the persuasive data that inequality has been rising in the United States and most advanced nations in recent decades. But suppose you don’t want to fight inequality through politically polarizing steps like higher taxes on the wealthy or a more generous social welfare system.
There remains a plausible solution to rising inequality that avoids those polarizing ideas: strengthening education so that more Americans can benefit from the advances of the 21st-century economy. This is a solution that conservatives, centrists and liberals alike can comfortably get behind. After all, who doesn’t favor a stronger educational system? But a new paper shows why the math just doesn’t add up, at least if the goal is addressing the gap between the very rich and everyone else.
Brad Hershbein, Melissa Kearney and Lawrence Summers offer a simple little simulation that shows the limits of education as an inequality-fighter. In short, more education would be great news for middle and lower-income Americans, increasing their pay and economic security. It just isn’t up to the task of meaningfully reducing inequality, which is being driven by the sharp upward movement of the very top of the income distribution. ...

Friday, March 20, 2015

Paul Krugman: Trillion Dollar Fraudsters

Why do Republicans use "magic asterisks" in their budget proposals?:

Trillion Dollar Fraudsters, by Paul Krugman, Commentary, NY Times: By now it’s a Republican Party tradition: Every year the party produces a budget that allegedly slashes deficits, but which turns out to contain a trillion-dollar “magic asterisk” — a line that promises huge spending cuts and/or revenue increases, but without explaining where the money is supposed to come from.
But the just-released budgets from the House and Senate majorities break new ground. Each contains not one but two trillion-dollar magic asterisks: one on spending, one on revenue. And that’s actually an understatement. If either budget were to become law, it would leave the federal government several trillion dollars deeper in debt than claimed, and that’s just in the first decade. ...
The modern G.O.P.’s raw fiscal dishonesty is something new in American politics... And the question we should ask is why.
One answer you sometimes hear is that what Republicans really believe is that tax cuts for the rich would generate a huge boom and a surge in revenue, but they’re afraid that the public won’t find such claims credible. So magic asterisks are really stand-ins for their belief in the magic of supply-side economics, a belief that remains intact even though proponents in that doctrine have been wrong about everything for decades.
But I’m partial to a more cynical explanation. Think about what these budgets would do if you ignore the mysterious trillions in unspecified spending cuts and revenue enhancements. What you’re left with is huge transfers of income from the poor and the working class, who would see severe benefit cuts, to the rich, who would see big tax cuts. And the simplest way to understand these budgets is surely to suppose that they are intended to do what they would, in fact, actually do: make the rich richer and ordinary families poorer.
But this is, of course, not a policy direction the public would support... So the budgets must be sold as courageous efforts to eliminate deficits and pay down debt — which means that they must include trillions in imaginary, unexplained savings.
Does this mean that all those politicians declaiming about the evils of budget deficits and their determination to end the scourge of debt were never sincere? Yes, it does.
Look, I know that it’s hard to keep up the outrage after so many years of fiscal fraudulence. But please try. We’re looking at an enormous, destructive con job, and you should be very, very angry.

Tuesday, March 17, 2015

'Inequality in Black and White'

Kathleen Geier on "The rigged economics of race in America, in five studies":

Inequality in Black and White: For the past few years, Americans have been engaged in two big public conversations about inequality. One is about economic insecurity (stagnant wages, wealth concentration, Occupy Wall Street). The other is about racial inequality (incarceration rates, police brutality, disenfranchisement). Often, these two discussions are kept separate, but they are closely intertwined.
The economic trends that have battered Americans have been exceptionally hard on African Americans, making them perhaps the truest face of economic inequality. Much of the progress in the workplace and in schools that African Americans have made since the 1964 Civil Rights Act has now ground to a halt, or worse. Blacks are nearly three times as likely to be poor as whites and more than twice as likely to be unemployed. Compared to whites with the same qualifications, blacks remain less likely to be hired and more likely to earn lower wages, to be charged higher prices for consumer goods, to be excluded from housing in white neighborhoods, and to be denied mortgages or steered into the subprime mortgage market. Racial disparities in household wealth haven’t just persisted; they’ve increased. What’s more, the reasons for these divergences aren’t always outwardly apparent or easy to understand. ...

Monday, March 16, 2015

Paul Krugman: Israel’s Gilded Age

What was Netanyahu's real purpose?:

Israel’s Gilded Age, by Paul Krugman, Commentary, NY Times: Why did Prime Minister Benjamin Netanyahu of Israel feel the need to wag the dog in Washington? For that was, of course, what he was doing in his anti-Iran speech to Congress. If you’re seriously trying to affect American foreign policy, you don’t insult the president and so obviously align yourself with his political opposition. No, the real purpose of that speech was to distract the Israeli electorate with saber-rattling bombast, to shift its attention away from the economic discontent that, polls suggest, may well boot Mr. Netanyahu from office in Tuesday’s election.
But wait: Why are Israelis discontented? After all, Israel’s economy has performed well by the usual measures. ...
Israel has experienced a dramatic widening of income disparities. Key measures of inequality have soared; Israel is now right up there with America as one of the most unequal societies in the advanced world. And Israel’s experience shows that this matters, that extreme inequality has a corrosive effect on social and political life. ...
Still, why is Israeli inequality a political issue? Because it didn’t have to be this extreme.
You might think that Israeli inequality is a natural outcome of a high-tech economy that generates strong demand for skilled labor — or, perhaps, reflects the importance of minority populations with low incomes, namely Arabs and ultrareligious Jews. It turns out, however, that those high poverty rates largely reflect policy choices: Israel does less to lift people out of poverty than any other advanced country — yes, even less than the United States.
Meanwhile, Israel’s oligarchs owe their position not to innovation and entrepreneurship but to their families’ success in gaining control of businesses that the government privatized in the 1980s — and they arguably retain that position partly by having undue influence over government policy, combined with control of major banks.
In short, the political economy of the promised land is now characterized by harshness at the bottom and at least soft corruption at the top. And many Israelis see Mr. Netanyahu as part of the problem. He’s an advocate of free-market policies; he has a Chris Christie-like penchant for living large at taxpayers’ expense, while clumsily pretending otherwise.
So Mr. Netanyahu tried to change the subject from internal inequality to external threats, a tactic those who remember the Bush years should find completely familiar. We’ll find out on Tuesday whether he succeeded.

Thursday, March 12, 2015

The Government is Why the US has More Inequality than Sweden

Dylan Mathews:

The government is the only reason the US has more inequality than Sweden, by Dylan Matthews: ...the income distribution in the US still stands out as particularly uneven. ...
The US actually isn't especially unequal if you look at income before taxes or government transfers like Social Security and food stamps..., a whole number of wealthy countries — Israel, the UK, Greece, Poland, Germany, Finland, and Ireland — have more pre-tax/transfer inequality than we do... Spain, Norway, the Netherlands, and Sweden all have exactly the same level as the US does.
The entire difference comes after taxes and transfer spending. ...Germany and Ireland both have significantly more pre-tax/transfer inequality than the US, but significantly less post-tax/transfer inequality... Meanwhile, the Netherlands and Sweden, which have famously egalitarian economies with generous welfare states, have the exact same level of pre-tax/transfer inequality as the US. It's not that their societies just naturally produce more equitable distributions. Their governments simply do more redistribution. ...
Note that the pre-tax/transfer number doesn't take out the effects of government policy entirely; there's a lot the government can do to alter the pre-tax/transfer distribution, including promoting or hampering labor unions or increasing the minimum wage. A number of countries, including Japan, Korea, and Switzerland, boast significantly lower pre-tax/transfer inequality than the US. ...

Monday, March 09, 2015

'Publicly Funded Inequality'

Kemal Derviş

Publicly funded inequality, Brookings: One of the factors driving the massive rise in global inequality and the concentration of wealth at the very top of the income distribution is the interplay between innovation and global markets. In the hands of a capable entrepreneur, a technological breakthrough can be worth billions of dollars, owing to regulatory protections and the winner-take-all nature of global markets. What is often overlooked, however, is the role that public money plays in creating this modern concentration of private wealth.
As the development economist Dani Rodrik recently pointed out, much of the basic investment in new technologies in the United States has been financed with public funds. The funding can be direct, through institutions like the Defense Department or the National Institutes of Health (NIH), or indirect, via tax breaks, procurement practices, and subsidies to academic labs or research centers.
When a research avenue hits a dead end – as many inevitably do – the public sector bears the cost. For those that yield fruit, however, the situation is often very different. Once a new technology is established, private entrepreneurs, with the help of venture capital, adapt it to global market demand, build temporary or long-term monopoly positions, and thereby capture large profits. The government, which bore the burden of a large part of its development, sees little or no return. ...
A combination of measures and international agreements must be found that would allow taxpayers to obtain decent returns on their investments, without removing the incentives for savvy entrepreneurs to commercialize innovative products.
The seriousness of this problem should not be understated. The amounts involved contribute to the creation of a new aristocracy that can pass on its wealth through inheritance. If huge sums can be spent to protect privilege by financing election campaigns (as is now the case in the US), the implications of this problem, for both democracy and long-term economic efficiency, could become systemic. The possible solutions are far from simple, but they are well worth seeking.

["Several ways to change such a system" are also discussed.]

Sunday, March 08, 2015

'A Trade Deal Must Work for America’s Middle Class'

Larry Summers:

A trade deal must work for America’s middle class: Over the next few months the question of US participation in the Trans-Pacific Partnership trade deal is likely to be resolved one way or the other. It is, to put it mildly, a highly controversial issue. ... I believe that the right TPP is very much in the American national interest.
First, in considering what is most fundamental — the interests of American workers... The view now is that trade and globalisation have increased inequality... But increases in the extent of US trade are driven largely by technology and by the increased sophistication of developing country economies — not by trade agreements. ...
Arrangements such as TPP have the potential to tilt the gains from trade towards the American middle class. This is due to the fact that the US has been a very open market for a long time. It means that properly negotiated trade agreements bring down foreign barriers and promote exports to a much greater extent than they ... benefit imports.
Crucially, TPP is necessary to let American producers compete on a level playing field... Only through TPP do we have the chance to manage international competition in the interests of American workers through binding arrangements in areas such as labour and environmental standards. ...

Wednesday, March 04, 2015

'How Higher Education Perpetuates Intergenerational Inequality '

Bad news for those who propose education as the solution to inequality:

How Higher Education Perpetuates Intergenerational Inequality, by Tim Taylor: Part of the mythology of US higher education is that it offers a meritocracy, along with a lot of second chances, so that smart and hard-working students of all background have a genuine chance to succeed--no matter their family income. But the data certainly seems to suggest that family income has a lot to do with whether a student will attend college in the first place, and even more to do with whether a student will obtain a four-year college degree.

Margaret Cahalan and Laura Perna provide an overview of the evidence in "2015 Indicators of Higher Education Equity in the United States: 45 Year Trend Report," published by the Pell Institute for the Study of Opportunity in Higher Education and the and University of Pennsylvania Alliance for Higher Education and Democracy (PennAHEAD). ...
The report offers a range of evidence that the affordability of college is a bigger problem for students from low-income families even after taking financial aid into account. Students from low-income families take out more debt, and are more likely to attend for-profit colleges. Indeed, a general pattern for higher education a whole is that even as the cost of attending has risen, the share of the cost paid by households, rather  than by the state or federal government, has been rising. ...
The effects of these patterns on inequality of incomes in the United States are clearcut: higher income families are better able to provide financial and other kinds of support for their children, both as they grow up, and when it comes time to attend college, and when it comes time to find a job after college. In this way, higher education has become a central part part of the process by which high-income families can seek to assure that their children are more likely to have high incomes, too.

This connection is perhaps underappreciated. After all, it's a lot easier for professors and college students to protest high levels of compensation for the top professionals in finance, law, and the corporate world who are in the top 1% of the income distribution, rather than to face the idea that their own institutions of higher education are implicated in perpetuating inequality of incomes across generations. ...

[He also has a long quote from Alan Krueger on this topic.]

Monday, March 02, 2015

'Is Income Inequality Harmful?'

Lane Kenworthy:

Is income inequality harmful?, The Good Society, March 2015: A generation ago, perhaps even just a few years ago, worry about high or rising income inequality stemmed mainly from a belief that it is unfair. In recent years the source of apprehension has shifted. The dominant concern now is that inequality may have harmful effects on a range of outcomes we value, from education to health to economic growth to happiness to democracy and more. Does it?

My answer is organized as follows:

How should we assess income inequality’s effects?

  • Education
  • Health
  • Family
  • Safety
  • Residential mixing
  • Trust
  • Economic growth
  • Employment
  • Economic stability
  • Household income growth: the poor
  • Household income growth: the middle class
  • Household balance sheets
  • Equality of opportunity
  • Happiness
  • Democracy
  • Is income inequality harmful?
  • What should we do?

One hypothesis of interest for some of these outcomes is that a higher level of income inequality increases inequality in the outcome. For instance, we might expect greater income inequality to contribute to greater inequality between the rich and the poor in life expectancy or happiness.

A second hypothesis is that a higher level of income inequality worsens the aggregate level of an outcome. For example, greater income inequality might reduce the average life expectancy or average happiness in a country.

Third, for some outcomes the hypothesis is that a higher level of income inequality worsens change in the aggregate level of an outcome. Greater income inequality might, for instance, reduce a country’s economic growth (change in per capita GDP) or median household income growth.

How Should We Assess Income Inequality's Effects?

The most informative test, which I’ll use here, is to see whether changes in income inequality in the world’s rich countries correlate with changes in the various outcomes. It’s important to understand why this analytical approach is useful, so bear with me for a moment while I elaborate. ...

After many, many paragraphs of analysis of the points listed above (including figures illustrating important points), he concludes:

Should we worry about high and rising income inequality in the United States? My answer is yes, for three reasons.
First, we have good evidence that income inequality tends to reduce middle-class income growth, increase disparities in education, health, family structure, and happiness, and heighten residential segregation. Not everyone will find these consequences objectionable, but I do.
Second, although we don’t have strong evidence that the rise in income inequality over the past generation has increased inequality of political influence, there’s good reason to fear that it has. That would be an intrinsically bad thing; it’s antithetical to what most of us understand to be the core of democracy — government by and for all of the people, not just some of the people. In addition, if rising income inequality does increase the political influence of the rich, that could potentially have harmful spillover effects on a variety of outcomes in the future.
Third, the level of income inequality that currently obtains in the United States is unfair. Given that luck plays a huge role in determining the income people end up with, much of the disparity in incomes is, arguably, undeserved. Most of us accept some amount of income inequality as consistent with a reasonable degree of freedom and needed to sustain a dynamic, healthy economy. But the degree of inequality in the contemporary US surely is past that point.
That said, reducing income inequality isn’t likely to be easy or quick. And income inequality’s apparently small or nonexistent impact on many of the outcomes examined here suggests that it shouldn’t necessarily be at the forefront of policy goals. For many of these outcomes, from education to health to economic growth and more, a direct approach, rather than an indirect one that works via reduced income inequality, is likely to be the most successful path.

Paul Krugman: Walmart’s Visible Hand

How the pie is sliced depends upon more than economic forces:

Walmart’s Visible Hand, by Paul Krugman, Commentary, NY Times: A few days ago Walmart, America’s largest employer, announced that it will raise wages for half a million workers. For many of those workers the gains will be small, but the announcement is nonetheless a very big deal, for two reasons. First, there will be spillovers: Walmart is so big that its action will probably lead to raises for millions of workers employed by other companies. Second, and arguably far more important, is what Walmart’s move tells us — namely, that low wages are a political choice, and we can and should choose differently.
Some background: Conservatives — with the backing, I have to admit, of many economists — normally argue that the market for labor is like the market for anything else. The law of supply and demand, they say, determines the level of wages, and the invisible hand of the market will punish anyone who tries to defy this law.
Specifically,... a minimum wage, it’s claimed, will reduce employment and create a labor surplus... Pressuring employers to pay more, or encouraging workers to organize into unions, will have the same effect.
But labor economists have long questioned this view..., workers are people, wages are not, in fact, like the price of butter, and how much workers are paid depends as much on social forces and political power as it does on simple supply and demand. ...
Walmart is ready to raise wages.... And its justification for the move echoes what critics of its low-wage policy have been saying for years: Paying workers better will lead to reduced turnover, better morale and higher productivity.
What this means, in turn, is that engineering a significant pay raise for tens of millions of Americans would almost surely be much easier than conventional wisdom suggests. Raise minimum wages by a substantial amount; make it easier for workers to organize, increasing their bargaining power; direct monetary and fiscal policy toward full employment, as opposed to keeping the economy depressed out of fear that we’ll suddenly turn into Weimar Germany. It’s not a hard list to implement — and if we did these things we could make major strides back toward the kind of society most of us want to live in.
The point is that extreme inequality and the falling fortunes of America’s workers are a choice, not a destiny imposed by the gods of the market. And we can change that choice if we want to.

Thursday, February 26, 2015

The Decline in Unionization and Inequality

Research by Jaumotte and Carolina Osorio Buitron of the IMF finds that "The decline in unionization in recent decades has fed the rise in incomes at the top":

Power from the People: Inequality has risen in many advanced economies since the 1980s, largely because of the concentration of incomes at the top of the distribution. ...
While some inequality can increase efficiency by strengthening incentives to work and invest, recent research suggests that higher inequality is associated with lower and less sustainable growth in the medium run (Berg and Ostry, 2011; Berg, Ostry, and Zettelmeyer, 2012), even in advanced economies (OECD, 2014). Moreover, a rising concentration of income at the top of the distribution can reduce a population’s welfare if it allows top earners to manipulate the economic and political system in their favor (Stiglitz, 2012). ...
We examine the causes of the rise in inequality and focus on the relationship between labor market institutions and the distribution of incomes, by analyzing the experience of advanced economies since the early 1980s. ... [W]e find strong evidence that lower unionization is associated with an increase in top income shares in advanced economies during the period 1980–2010 (for example, see Chart 2)... This is the most novel aspect of our analysis, which sets the stage for further research on the link between the erosion of unions and the rise of inequality at the top. ...

Wednesday, February 25, 2015

'Robots Aren’t About to Take Your Job'

Timothy Aeppel at the WSJ:

Be Calm, Robots Aren’t About to Take Your Job, MIT Economist Says: David Autor knows a lot about robots. He doesn’t think they’re set to devour our jobs. ... His is “the non-alarmist view”...
Mr. Autor’s latest paper, presented to a packed audience at this year’s meeting of central bankers at Jackson Hole, Wyo., emphasized how difficult it is to program machines to do many tasks that humans find often easy and intuitive. In it, he played off a paradox identified in the 1960s by philosopher Michael Polanyi, who noted that humans can do many things without being able to explain how, like identify the face of a person in a series of photographs as they age. Machines can’t do that, at least not with accuracy.
This is why big breakthroughs in automation will take longer than many predict, Mr. Autor told the bankers. If a person can’t explain how they do something, a computer can’t be programmed to mimic that ability. ...
To Mr. Autor, polarization of the job market is the real downside of automation. He calculates middle-skill occupations made up 60% of all jobs in 1979. By 2012, this fell to 46%. The same pattern is visible in 16 European Union economies he studied.
The upshot is more workers clustered at the extremes. At the same time, average wages have stagnated for more than a decade. He attributes this to the loss of all those relatively good-paying middle-range jobs, as well as downward pressure on lower-skilled wages as displaced workers compete for the lesser work. ...

I've been arguing for a long time that in coming decades the major question will be about distribution, not production. I'm not very worried about stagnation, etc. -- we'll have plenty of stuff to go around. I'm worried about, to quote the title of a political science textbook I used many, many, many years ago as an undergraduate, "who gets the cookies?" not how many cookies we're able to produce So I agree with Autor on this point:

Mr. Autor ... added, “If we automate all the jobs, we’ll be rich—which means we’ll have a distribution problem, not an income problem.”

What's a Fair Tax Rate?

Me, at MoneyWatch:

What's a fair tax rate? It depends: How progressive should the U.S. tax system be? Answering this question requires an assumption about what's fair in terms of tax burdens across income groups. But people differ widely on what they consider fair. Therefore, fairness isn't something economic theory can address. Instead, a principle of fairness must be assumed.
For example...

Tuesday, February 24, 2015

The Best Investment the U.S. Could Make — Affordable Higher Education

I have a new column. Education is not the solution to inequality, but we still need to a much better job of supporting higher education:

The Best Investment the U.S. Could Make — Affordable Higher Education

[I should add that I wrote this before I saw Paul Krugman's latest column.]