Category Archive for: Income Distribution [Return to Main]

Wednesday, January 11, 2017

The Earnings Gap between Black and White Men

John Laidler at the NBER Digest:

The Earnings Gap between Black and White Men: Since the end of slavery a century and a half ago, differences between the earnings of black and white Americans have been a reality of the U.S. labor market. Among working men, this gap narrowed sharply between 1940 and 1970 and has remained largely stable ever since. In Divergent Paths: Structural Change, Economic Rank, and the Evolution of Black-White Earnings Differences, 1940-2014, (NBER Working Paper No. 22797), Patrick Bayer and Kerwin Kofi Charles point out that focusing only on those who are employed fails to account for the growing numbers of men who are not working for a number of reasons. This group includes those who are unemployed, disabled, or no longer searching for work, as well as the rising number of individuals who are incarcerated.
Among working men, "the median earnings gap between blacks and white fell by almost 60 percent from 1940 to 1980 (with large decreases in the 1940s and 1960s) but has been essentially flat ever since, remaining in the 35-40 percent range in every sample from 1980-2014," the researchers report. But when they consider the entire population of men, they find that the earnings gap has actually widened substantially in recent decades. In 2010, the gap in the population as a whole was comparable to that in 1950.

Their analysis, which focuses on the black-white earnings differences among prime-aged men from 1940 through the Great Recession, "points to the incredible lack of progress and, in many cases, regress in closing the gaps in labor market outcomes for black and white men."

The findings are most striking among median- and low-income blacks, whose position relative to median-income whites changed little in the seven-decade study period. In 1940, the earnings of a median-income black earner fell at the 24th percentile of the earnings distribution for whites. At the time of the Great Recession, the comparable black earners' earnings fall at the 27th percentile of the earnings distribution for whites—only a slight improvement in rank over the entire 75-year study period.

In contrast, a black earner at the 90th percentile of the distribution for African Americans saw progress relative to the earnings of whites. In 1940, the earnings of the 90th percentile black were comparable to those of the median white, but by the late 2000s, this earnings level had risen to the 75th percentile in the white earnings distribution.

The racial earnings gap around the median narrowed from 1940-70, due largely to broad economic forces which reduced the income disparities among all workers. But since then, the relative gains made by low-skilled blacks through improved education have been countered by the growing overall connection between education and economic rank, the researchers find. "Racial convergence in educational attainment would have led to strong positional gains for black men at the median and below, except that these men faced strong structural headwinds from the simultaneously rising returns to education, both in terms of wages and in the probability of employment," the researchers find.

By contrast, high-skilled black men have moved closer to their white counterparts in income, which the researchers suggest has been due to more-equal access to quality higher education and high-skilled occupations.

"While the entire economy has experienced a marked increase in earnings inequality, this increase has been even more dramatic for black men," the researchers find, "with those at the top continuing to make clear gains within the earnings distribution, and those at the bottom being especially harmed by the era of mass incarceration and the failing job market for men with low skills." The impact of rising incarceration is particularly striking: The incarceration rate tripled for black men between 1980 and 2010, from 2.6 percent to 8.3 percent of the population. The rate quintupled for white men, but remained much lower, at 1.5 percent of the population.

The researchers conclude that education "has played a subtle but extremely important role in the evolution of the racial earnings gap," both fueling and stalling progress.

Sunday, January 08, 2017

Monopsony Takes Center Stage

Marshall Steinbaum at ProMarket:

Monopsony Takes Center Stage: In October, the Council of Economic Advisors released a report about monopsony in the labor market. That alone was rather astonishing—employer power and its consequences for labor market outcomes has been a distinctly minority concern in the economics profession for quite a while, notwithstanding mounting evidence of its importance coming from a number of subfields.
For that agenda to gain a hearing at the apex of economic policy-making is evidence of the shifting ground in matters of public economic debate. It is also reminiscent of the last time inequality was so high: then, as now, it sparked a sea change in the economics profession, including both the mainstreaming of labor exploitation as a subject of economic research and the founding of the American Economic Association. ...

Thursday, January 05, 2017

Market Failure and Income Distribution

John Quiggin:

Market Failure and Income Distribution: Notes for Economics in Two Lessons: For quite a while now, I’ve been working through my book-in-progress...

Thinking about the standard market failures (monopoly, externality and so on), I’ve come to the conclusion that I need to say more about the interaction between market failure and income distribution. I’ve already looked at the opportunity costs involved in income redistribution and predistribution, but different kinds of questions are coming up in relation to issues like monopoly, privatisation and for-profit provision of public services.

The discussion here and at my blog has been very helpful in stimulating my thoughts, but I need to do a lot more clarification. Some preliminary thoughts are over the fold: comments and criticism much appreciated...

Tuesday, December 13, 2016

Should Some Countries Cease to Exist?

Branko Milanovic:

Should some countries cease to exist?: Working on global inequality makes you ask questions you would never ask otherwise simply because they would not occur to you. ...
Take the convergence economics. In growth theory, convergence indicates the regularity that poorer countries tend to grow faster than richer countries because they can use all the knowledge and innovations that the richer have already produced..., there is some evidence for conditional convergence in empirical studies and it is, for obvious reasons, considered a good thing.
Now, when you look more closely you realize that convergence is studied in terms of countries but in reality it deals with the convergence in living standards between individuals. We express it in terms of a poorer country catching up with the richer because we are used to doing our economics in terms of nation-states and implicitly assume that there is no movement of people between countries. But in reality convergence is nothing else but the diminution of income inequality between all individuals in the world.
So, how best to achieve such a decrease in inequality between people? Economic theory, common sense and simulation exercises clearly show that it can be best done by allowing free movement of people. Such a policy would increase global income (as any free movement of factors of production in principle should), reduce global poverty and global inequality. It is immaterial, from a global perspective, that it might slower between-country convergence (as some recent results for EU indicate) because countries are, as we have just seen, not the relevant entities in global economics: the relevant entities are individuals and their welfare levels. ... To see this point, think in the familiar terms of the nation-state: no one in his or her right mind would argue that people from the Appalachian in the US should not be allowed to move to California because the average income in the Appalachia might go down. In fact, both the average income in California and in Appalachia might go down, and both inequalities in the Appalachia and California might go up, and yet the overall US income would rise and US inequality would be less.
The argument is identical for the world as a whole ... The objections to migration, namely that it might reduce the average income in recipient countries, raised by Paul Collier in his book “Exodus” are immaterial because the real subject of our analysis is not the nation-state but the individual.
Thus far the argument seems to me entirely incontestable. But then things get a bit messier. Pushing this logic further, and using the results of the Gallup poll that show the percentage of people who desire to move out of their countries, we find that in the case of unimpeded global migration some countries could lose up to 90 percent of their populations. They may cease to exist: everybody but a few thousand people might move out. Even the few who might at first remain, could soon find their lives there intolerable, not least because providing public goods for a very small population may be exceedingly expensive.
So, what?—it could be asked. If Chad, Liberia and Mauritania cease to exist because everybody wants to move to Italy and France, why should one be concerned: people have freely chosen to be better off in Italy and France, and that’s all there is to that. But then, it could be asked, would not disappearance of countries also mean disappearance of distinct cultures, languages and religions? Yes, but if people do not care about these cultures, languages and religions, why should they be maintained?
Destroying the variety of human traditions is not costless, and I can see that one might believe that maintaining variety of languages and cultures is not less important that maintaining variety of the flora and fauna in the world, but I wonder who needs to bear the cost of that. Should people in Mali be forced to live in Mali because somebody in London thinks that some variety of human existence would be lost if they all came to England? I am not wholly insensitive to this argument, but I think that it would be more honest to say openly that the cost of maintaining this “worldwide heritage” is borne not by those who defend it in theory but by those in Mali who are not allowed to move out.
There is a clear trade-off between the maintenance of diversity of cultural traditions and freedom of individuals to do as they please. I would be happier if the trade-off did not exist, but it does. And if I have to choose between the two, I would choose human freedom even if it means loss of tradition. After all, are traditions that no one cares about worth preserving? The world has lost Macromanni, Quadi, Sarmatians, Visigoths, Alans, Vandals, Avars and thousands others. They have disappeared together with their languages, cultures and traditions. Do we really miss them today?

Sunday, December 11, 2016

The In-Betweeners

Frances Coppola (the full post is much longer):

The in-betweeners: How effective is monetary policy?

Highly effective, according to the Governor of the Bank of England. In a speech earlier this week, Mark Carney robustly defended the Bank of England's record...

Well, lots of us might agree that monetary policy did help to offset the damaging effects of bank and household deleveraging in the aftermath of the worst financial crisis since the 1930s. ...

But the most persistent criticism of monetary policy is that it has, in the words of HSBC's Stephen King, "unfortunate distributional effects". It benefits the holders of financial assets - primarily the rich - at the expense of those dependent on interest income, who are believed to be much poorer, though not necessarily the poorest.

Carney is having none of it. He rejected the distributional criticism of monetary policy... He points to these two charts as evidence that the poor have done better than the rich from monetary policy...

It is all very well crowing that the poorest have been supported. They have, to some extent, though perhaps not quite as much as you claim. But it is painfully evident that the "in-betweeners" have had much less support. Relative to the rich, they have lost out both in wealth and in income. And relative to the poor, they have lost out too: they no longer qualify for many benefits and other public support, and they are seeing public money going to people not much poorer than them while they are left to struggle on their own. These are people who see themselves as having done everything right: they have worked hard, saved and paid into the system. Now, they think the system has abandoned them. And with reason.

To be fair, it is not the Bank of England that has abandoned them, though some of them blame you for their woes: "in-betweener" pensioners are those who have been hardest hit by very low interest rates. The real failures lie on the fiscal side, and are of very long standing.

The promise of "cradle to grave" support upon which the British welfare state was founded has been systematically dismantled. Now, only the poorest are supported. The neglected in-betweeners are on their own. And their anger is shaking our political establishment to its foundations.

Thursday, December 08, 2016

The American Dream, Quantified at Last

David Leonhardt:

The American Dream, Quantified at Last: ...Chetty, a Stanford professor, and his colleagues .... constructed a data set that shows the percentage of American children who earn more money — and less money — than their parents earned at the same age.
The index is deeply alarming. It’s a portrait of an economy that disappoints a huge number of people who have heard that they live in a country where life gets better, only to experience something quite different. ...
It begins with children who were born in 1940... The researchers went into the project assuming that most of these children had earned more than their parents — but were surprised to learn that nearly all of them had... About 92 percent of 1940 babies had higher pretax household earnings at age 30 than their parents had at the same age. (The results were similar at older ages and for post-tax earnings.)
The few 1940 children who earned less than their parents were also, for the most part, doing just fine. They were generally earning less because they had grown up rich...
For children born in 1950, the likelihood of achieving the American Dream had begun to fall but remained very high. ...
For babies born in 1980 — today’s 36-year-olds — the index of the American dream has fallen to 50 percent: Only half of them make as much money as their parents did. In the industrial Midwestern states that effectively elected Donald Trump, the share was once higher than the national average. Now, it is a few percentage points lower. There, going backward is the norm. ...

It goes on to discuss how the trend might be reversed.

Tuesday, December 06, 2016

Economic Growth in the United States: A Tale of Two Countries

Thomas Piketty, Emmanuel Saez, Gabriel Zucman:

Economic growth in the United States: A tale of two countries, by Thomas Piketty, Emmanuel Saez, Gabriel Zucman, Equitable Growth: Overview The rise of economic inequality is one of the most hotly debated issues today in the United States and indeed in the world. Yet economists and policymakers alike face important limitations when trying to measure and understand the rise of inequality.

One major problem is the disconnect between macroeconomics and the study of economic inequality. Macroeconomics relies on national accounts data to study the growth of national income while the study of inequality relies on individual or household income, survey and tax data. Ideally all three sets of data should be consistent, but they are not. The total flow of income reported by households in survey or tax data adds up to barely 60 percent of the national income recorded in the national accounts, with this gap increasing over the past several decades.1

This disconnect between the different data sets makes it hard to address important economic and policy questions...

A second major issue is that economists and policymakers do not have a comprehensive view of how government programs designed to ameliorate the worst effects of economic inequality actually affect inequality. Americans share almost one-third of the fruits of economic output (via taxes that help pay for an array of social services) through their federal, state, and local governments. ... Yet we do not have a clear measure of how the distribution of pre-tax income differs from the distribution of income after taxes are levied and after government spending is taken into account. This makes it hard to assess the extent to which governments make income growth more equal.2

In a recent paper, the three authors of this issue brief attempt to create inequality statistics for the United States that overcome the limitations of existing data by creating distributional national accounts.3 We combine tax, survey, and national accounts data to build a new series on the distribution of national income. ... Our distributional national accounts enable us to provide decompositions of growth by income groups consistent with macroeconomic growth.

In our paper, we calculate the distribution of both pre-tax and post-tax income. The post-tax series deducts all taxes and then adds back all transfers and public spending so that both pre-tax and post-tax incomes add up to national income. This allows us to provide the first comprehensive view of how government redistribution in the United States affects inequality. Our benchmark series use the adult individual as the unit of observation and split income equally among spouses in married couples. But we also produce series where each spouse is assigned their own labor income, allowing us to study gender inequality and its impact on overall income inequality. In this short summary, we would like to highlight three striking findings.

Our first finding—a surge in income inequality

First, our data show that the bottom half of the income distribution in the United States has been completely shut off from economic growth since the 1970s. ...

It’s a tale of two countries. For the 117 million U.S. adults in the bottom half of the income distribution, growth has been non-existent for a generation while at the top of the ladder it has been extraordinarily strong. And this stagnation of national income accruing at the bottom is not due to population aging. ...

Our second finding—policies to ameliorate income inequality fall woefully short

Our second main finding is that government redistribution has offset only a small fraction of the increase in pre-tax inequality. ...

Our third finding—comparing income inequality among countries is enlightening

Third, an advantage of our new series is that it allows us to directly compare income across countries. Our long-term goal is to create distributional national accounts for as many countries as possible; all the results will be made available online on the World Wealth and Income Database. One example of the value of these efforts is to compare the average bottom 50 percent pre-tax incomes in the United States and France.8 In sharp contrast with the United States, in France the bottom 50 percent of real (inflation-adjusted) pre-tax incomes grew by 32 percent from 1980 to 2014, at approximately the same rate as national income per adult. While the bottom 50 percent of  incomes were 11 percent lower in France than in the United States in 1980, they are now 16 percent higher. (See Figure 3.) ... Since the welfare state is more generous in France, the gap between the bottom 50 percent of income earners in France and the United States would be even greater after taxes and transfers.

The diverging trends in the distribution of pre-tax income across France and the United States—two advanced economies subject to the same forces of technological progress and globalization—show that working-class incomes are not bound to stagnate in Western countries. In the United States, the stagnation of bottom 50 percent of incomes and the upsurge in the top 1 percent coincided with drastically reduced progressive taxation, widespread deregulation of industries and services, particularly the financial services industry, weakened unions, and an eroding minimum wage.


Given the generation-long stagnation of the pre-tax incomes among the bottom 50 percent of wage earners in the United States, we feel that the policy discussion at the federal, state, and local levels should focus on how to equalize the distribution of human capital, financial capital, and bargaining power rather than merely the redistribution of national income after taxes. Policies that could raise the pre-tax incomes of the bottom 50 percent of income earners could include:

  • Improved education and access to skills, which may require major changes in the system of education finance and admission
  • Reforms of labor market institutions to boost workers’ bargaining power and including a higher minimum wage
  • Corporate governance reforms and worker co-determination of the distribution of profits
  • Steeply progressive taxation that affects the determination of pay and salaries and the pre-tax distribution of income, particularly at the top end

The different levels of government in the United States today obviously have the power to make income distribution more unequal, but they also have the power to make economic growth in America more equitable again. Potentially pro-growth economic policies should always be discussed alongside their consequences for the distribution of national income and concrete ways to mitigate their unequalizing effects. We hope that the distributional national accounts we present today can prove to be useful for such policy evaluations. ...

Why Not Centrism?

Chris Dillow:

Why not centrism?: Some people want to revive centrism. Tony Blair wants to “build a new policy agenda for the centre ground”. And the Lib Dems’ victory in Richmond Park is being seen as a warning to the Tories that it must “keep the votes of the middle ground.”
This poses the question: does the idea of political centre ground even make sense? It does, if you think of political opinion being distributed like a bell curve with a few extremists at either end and lots of moderates in the middle. But this doesn’t seem to apply today, and not just because political opinion has always been multi-dimensional. What we have now is a split between Leavers and Remainers, and the ideas correlated with those positions such as openness versus authoritarianism. Where does the “centre ground” fit into this? ...
This, I think, is the essence of centrism. It accepts that globalization and free markets (within limits) bring potential benefits, but that these benefits must be spread more evenly via the tax and welfare system. This stands in contrast to nativism and some forms of leftism which oppose globalization and favour market intervention. It also contrasts to libertarianism and Thatcherism which emphasize freeish markets whilst underplaying redistribution. It’s also what New Labour stood for. ...
I have a ... beef. It’s that this form of centrism offers too etiolated a vision of equality. Inequality isn’t simply a matter of pay packets but of power too. Centrism fails to tackle the latter. This is a big failing... For me, therefore, a centrism which ignores inequalities of power must be inadequate.
Herein, though, lies the sadness: even this form of centrism would be a big  improvement upon a lot of today’s politics.

Friday, December 02, 2016

Minimum Wage Increases and Earnings in Low-Wage Jobs

Brad DeLong:

I think I have to change my mind: Back when Card and Krueger first suggested that there was substantial effective monopsony power in the low-wage labor market and thus that there would be no disemployment effect from (modest) increases in the minimum wage to make it binding, I said: "Clever, but nahhh." The reason for their findings, I thought, was that labor demand is just inelastic in the short and perhaps the medium run--but maybe not in the long run.
I confess that I think I have to change my mind. Economists do not fail to find disemployment effects from (modest) increases in the minimum wage that make it binding because labor demand is inelastic and statistical power is insufficient. Employers actually do have substantial monopsony power in the low-wage labor market--even though they shouldn't. And the minimum wage is best thought of as an anti-monopsony rate-regulation policy that raises low-wage employment, raises average low-wage earnings, and brings the market closer to its competitive equilibrium:
Sandra Black, Jason Furman, Laura Giuliano and Wilson Powell: Minimum Wage Increases and Earnings in Low-Wage Jobs ...

Wednesday, November 30, 2016

One Tax Policy Americans Yugely Favor

Gerald E. Scorse:

One tax policy Americans yugely favor, The Hill: Nobody likes taxes, but roughly nine out of 10 Americans want income from investments to be taxed at least as much as other income. Republican leaders, tone-deaf,... close their eyes to a reform enacted under President Ronald Reagan: equal taxes on capital gains, dividends, and ordinary income such as wages. It’s one policy the country would love to have back, yugely. ...
The landslide national preference for at least equal taxes on investments—for tax fairness, not tax breaks—meshes perfectly with the populist belief that the system is rigged in favor of the rich. ... According to an analysis by the non-partisan Tax Policy Center, the top 1 percent of Americans receives over 62 percent of the benefits from lower rates on capital gains, dividends and related tax preferences; for the top 10 percent, the total benefit share is just short of 80 percent.
That’s more than alright with Republicans, whose tax plans will likely drive those percentages even higher—in exactly the opposite direction of the reform ushered in a generation ago by President Reagan. He took Main Street’s side on taxing Wall Street gains, but the GOP likes to pretend it never happened. ...
Donald Trump rode the populist tide all the way to the White House. Let’s see if President Trump listens to the populist yearning—the yuge populist yearning—for equal taxes on income from wealth and income from work.

Sunday, November 27, 2016

Should We Worry About the Top 1%, or Praise Them?

Miles Corak:

...Earnings mobility for children from the very broad middle—parents whose income ranges from the bottom 10 percent all the way to the cusp of the top 10 percent—is not tied strongly to family income. These children tend to move up or down the income distribution without regard to their starting point in life. This may be one element of insecurity among the middle class: in spite of their best efforts, their children may be as likely to lose ground and fall in the income distribution as they are to rise.
The situation is very different for children raised by top-earning parents...

Much more here.

Wednesday, November 16, 2016

We Must Rethink Globalization, or Trumpism will Prevail

Thomas Piketty:

We must rethink globalization, or Trumpism will prevail: Let it be said at once: Trump’s victory is primarily due to the explosion in economic and geographic inequality in the United States over several decades and the inability of successive governments to deal with this. ...
The tragedy is that Trump’s program will only strengthen the trend towards inequality. ..
The main lesson for Europe and the world is clear: as a matter of urgency, globalization must be fundamentally re-oriented. The main challenges of our times are the rise in inequality and global warming. We must therefore implement international treaties enabling us to respond to these challenges and to promote a model for fair and sustainable development. ...
There should be no more signing of international agreements that reduce customs duties and other commercial barriers without including quantified and binding measures to combat fiscal and climate dumping in those same treaties. For example, there could be common minimum rates of corporation tax and targets for carbon emissions which can be verified and sanctioned. It is no longer possible to negotiate trade treaties for free trade with nothing in exchange. ... 
It is time to change the political discourse on globalization: trade is a good thing, but fair and sustainable development also demands public services, infrastructure, health and education systems. In turn, these themselves demand fair taxation systems. If we fail to deliver these, Trumpism will prevail.

I recently made a similar argument:

...Those of us in the economics profession have a choice to make. 

We can hold onto old ideas, inflated promises about the benefits of globalization and international trade for example, while charlatans such as Donald Trump take advantage of the fears people have to divide us through racism and xenophobia that miscasts the blame for our economic woes. Or we can recognize that change and new ways of thinking are needed and lead the way to policies that move us toward a more equitable economic system.

Tuesday, November 01, 2016

How Waning Competition Deepens Labor’s Plight

Eduardo Porter:

How Waning Competition Deepens Labor’s Plight: ...collectively, mergers ... are reconfiguring the American economy in ways that seem to be tilting the scales toward the interests of ever-larger corporations, to the broad detriment of labor. ...
Three years ago, the Nobel laureate economist Joseph Stiglitz proposed that increasing profits from companies managing to avoid normal competitive forces — what economists refer to as “rents” — appeared to be an important factor in the rising share of the nation’s income flowing toward corporate profits and top executive pay in recent years. He surmised that weak labor unions ... did not have the clout to protect the workers’ share.
Since then, several other studies have presented various channels through which a lack of competition between employers could keep wages down. ...
Waning competition in employment can muck up the economy in more ways than one. It slows wage growth, of course. Lacking outside options, workers are much less likely to leave a job. But economic output and employment will suffer, too, because fewer workers will be willing to work for the lower wage. ...
Policy makers can push back against employers’ market power. Strengthening labor unions... Raising the minimum wage... But it seems there is an opportunity to rethink the nation’s approach to antitrust law, too. It shouldn’t be seen exclusively as a tool to protect consumers from sticker shock.
In a speech in September, Renata Hesse, the Justice Department’s acting assistant attorney general for antitrust, argued forcefully that “the antitrust laws were intended to benefit participants in the American economy broadly — not just in their capacity as consumers of goods and services.”
Antitrust enforcement efforts, Ms. Hesse said, “also benefit workers, whose wages won’t be driven down by dominant employers with the power to dictate terms of employment.” ...

Wednesday, October 19, 2016

Are Americans Better Off Than They Were a Decade or Two Ago?

Ben Bernanke and Peter Olson:

Are Americans better off than they were a decade or two ago?: Economically speaking, are we better off than we were ten years ago? Twenty years ago? When asked such questions, Americans seem undecided, almost schizophrenic, with large majorities saying the country is heading “in the wrong direction,” even as they tell pollsters that they are optimistic about their personal financial situations and the medium-term economic outlook.
In their thirst for evidence on this issue, commentators seized on the recent report by the Bureau of the Census, which found that real median household income rose by 5.2 percent in 2015, as showing that “the middle class has finally gotten a raise.” Unfortunately, that conclusion puts too much weight on a useful, but flawed and incomplete, statistic. Among the more significant problems with the Census’s measure are that: 1) it excludes taxes, transfers, and non-monetary compensation like employer-provided health insurance; and 2) it is based on surveys rather than more-complete tax and administrative data, with the result that it has been surprisingly inconsistent with the official national income numbers in recent years. Even if precisely measured, data on income exclude important determinants of economic well-being, such as the hours of work needed to earn that income.
While thinking about the question, we came across a recently published article by Charles Jones and Peter Klenow, which proposes an interesting new measure of economic welfare. While by no means perfect, it is considerably more comprehensive than median income, taking into account not only growth in per capita consumption but also changes in working time, life expectancy, and inequality. Moreover, as the authors demonstrate, it can be used to assess economic performance both across countries and over time. In this post we’ll report some of their results, and extend part of their analysis (which ends before the Great Recession) through 2015.[1]
The bottom line: According to this metric, Americans enjoy a high level of economic welfare relative to most other countries, and the level of Americans’ well-being has continued to improve over the past few decades despite the severe disruptions of the last one. However, the rate of improvement has slowed noticeably in recent years, consistent with the growing sense of dissatisfaction evident in polls and politics. ...

Monday, October 17, 2016

How Clones Can Experience Unequal Economic Outcomes

Tim Taylor:

How Clones Can Experience Unequal Economic Outcomes: A certain amount of economic inequality is just luck. At the extreme, some people win the lottery, and others don't. But there is also the potential for more subtle kinds of luck, like two equally talented entrepreneurs, where one business happens to take off while the other doesn't. Or two equally talented workers who go to work for similar-looking companies, but one company takes off while the other craters. Richard Freeman discusses the research literature on why this final example might be significant enough to play a role in overall economic inequality in the US in his essay, "A Tale of Two Clones: A New Perspective on Inequality," just published by the Third Way think tank. Freeman sets the stage like this (footnotes omitted):
"[C]onsider two indistinguishable workers, you and your clone. By definition, you/clone have the same gender, ethnicity, years of schooling, family background, skills, etc. In 2006 you/clone graduated with identical academic records from the same university and obtained identical job offers from Facebook and MySpace. Not knowing any more about the future than the analysts who valued Facebook and MySpace roughly equally in the mid-2000s, you/clone flipped coins to decide which offer to accept: heads – Facebook; tails – MySpace. Clone’s coin came up heads. Yours came up tails. Ten years later, Clone is in the catbird’s seat in the job market — high pay, stock options, a secure future. You struggle. Back to university? Send job search letters to close friends? Ask distant acquaintances to help? The you/clone thought experiment may seem extreme, but recent research that I have conducted with colleagues finds that the earnings of workers with near-clone similarity in attributes diverged so much by the place they worked that rising inequality in pay among employers has become the major factor in the trend rise in inequality. ... The labor market has been dominated by economic forces that pull the wages of firms further apart from each other, motivating our analysis of the role of employers in increasing inequality." 
In other words, a lot of inequality is about where you work. The rise in equality is linked to differences across what firms are paying employees who appear to be similarly qualified. As Freeman acknowledges, this argument that this is a quantitatively important cause of rising inequality isn't ironclad at this point, but it's highly suggested in several ways of looking at the data: Freeman  writes:
"This implies that 86% ... of the trend increase in inequality [from 1977-2009] occurs among people with measurably the same skills, whereas just 14% of the trend increase comes from changes in earnings among workers with different skills. The big surprise in the exhibit is that the inequality of average earnings among establishments increased by the same 0.147 points [measuring variance of natural log of earnings, a standard measure of inequality of earnings] as did inequality among workers with the same characteristics. This suggests that all of the increase in inequality among similar workers comes from the increase in earnings at their workplaces." 
Or here is a figure suggesting a linkage from firm earnings to individual inequality of earnings. The blue line shows the change in individual earnings along the income distribution from 1992-2007. As one would expect, given the rise in inequality, those in the bottom percentiles of the income distribution do worse, while those in the top percentiles of the income distribution do better. But now, notice that the blue line for individual earnings almost matches the orange line for firm earnings. That is, there has also been widening inequality in firm earnings, with those at the bottom of the earnings distribution also seeing a decline from 1992-2007 and those at the top seeing an increase. Freeman also offers evidence that those who stayed at firms have seen their earnings change with the fortunes of the firm--thus contributing to overall inequality. As he writes; "In sum, changes in the distribution of earnings among establishments affect the change in earnings along the entire earnings distribution and the increased advantage of top earners compared to other workers."
What makes it possible for successful firms to pay workers more? The answer must be rooted in higher productivity for those firms. Indeed, productivity seems to be diverging across firms, too.
Indeed, as Freeman emphasizes, this figure shows that the equality of revenue per worker--a rough measure of productivity at the firm level--is diverging faster than inequality of wages across firms. Moreover, Freeman argues that a similar pattern of productivity divergence across firms is happening within each sector of the economy.
 Freeman's evidence is consistent with some other studies. For example, last year I pointed to an OECD report on The Future of Productivity, which argued that while cutting-edge frontier firms continue to see strong increases in productivity, the reason for slower overall rates of productivity is that other firms aren't keeping up.
Thinking about inequality between similar workers may alter how one thinks about public policies related to underlying determinants of inequality. For example, it may be important to think about how productivity gains diffuse across industries and how that process may have changed. I suspect there is also some element of geographical separation here, where firms in certain areas are seeing faster productivity and wage increases, and so thinking about mobility of people and firms across geographic areas may be important, too.

Tuesday, October 04, 2016

Does the One Percent Deserve What it Gets?

Nancy Folbre:

Does the one percent deserve what it gets?: The rich are not like you and me. They contribute far more to society than everybody else, so argues Harvard University economist Gregory Mankiw in his essay “Defending the One Percent.” Mankiw’s praise for talented superstars such as Steven Jobs, J.K. Rowling, and Steven Spielberg quickly blooms into a more general argument that competitive labor markets pay workers what they deserve. This is music to the ears of high earners, and it sings to a very human desire to believe that the world is fair.
But this argument is based on neoclassical economic theories that define the domain of human choice in narrow terms, minimizing the effects of bad luck, bad markets, and bad inequalities that often predetermine market outcomes. Mankiw’s argument leaves room for corporate bad behavior defined in narrow terms as “gaming the system.” But what he most deplores is government meddling with the system.
Most economists do not explicitly endorse such views. But years of schooling in neoclassical economic theories predispose them to the view that perfectly competitive markets yield equitable as well as efficient outcomes. As a result, they often assess “rent seeking,” or efforts to get rich at someone else’s expense, by comparison with hypothetical market outcomes.
Rent seeking becomes just another name for interference with the magic meritocracy of the marketplace. From this perspective, efforts to increase the minimum wage can be considered just as unfair as efforts to challenge compensation practices for corporate chief executives and other well-heeled top managers.
Like neoclassical economic theory in general, this approach is too narrow. Competitive markets comprise a relatively small part of an economy dominated by large multinational corporations—marketplaces and firms that are embedded in a global environment of unpriced goods and services.
Efforts to get rich at someone else’s expense, which fall under the academic rubric of distributional conflict, are multidimensional. Forms of collective bargaining power based on citizenship, class, race and ethnicity, and gender, as well as other aspects of group identity, influence the resources that individuals bring to the labor market. They also influence the power that individuals possess to modify labor market outcomes.
Some of us contribute more than members of the top one percent to the economy, and some of us contribute less. None of us gets exactly what we deserve. One difference between the rich and us is that they have more money. They also enjoy—both as cause and effect—a lot more power.

Link to paper.

Thursday, September 29, 2016

The Decline of the Middle Class is Causing Economic Damage

Larry Summers:

The decline of the middle class is causing even more economic damage than we realized: I have just come across an International Monetary Fund working paper on income polarization in the United States that makes an important contribution to the secular stagnation debate. The authors ... find that polarization has reduced consumer spending by more than 3 percent or about $400 billion annually. If these findings stand up to scrutiny, they deserve to have a policy impact.
This level of reduction in spending is huge. For example, it exceeds by a significant margin the impact in any year of the Obama stimulus program. Alone it would be enough to account for a significant reduction in neutral real interest rates. If consumers were spending 3 percent more, there would be scope to maintain full employment at interest rates much closer to normal. And there would be much less of a problem of monetary policy’s inability to respond to the next recession.
What is the policy implication? Principally, it is the macroeconomic importance of supporting middle class incomes. This can be done in a range of ways from promoting workers right to collectively bargain to raising spending on infrastructure to making the tax system more progressive. ...

Thursday, September 22, 2016

Estate Tax a Key Tool for Fighting US Inequality

Caroline Freund at PIIE:

Estate Tax a Key Tool for Fighting US Inequality: This year marks the 100th anniversary of the US estate tax, which affects only the ultra-wealthy. Given the rising focus on American income inequality, the tax should be on solid ground. Not so.
Republican presidential candidate Donald Trump has vowed to eliminate the estate tax, while Democrat candidate Hillary Clinton wants to revive it ...
There are good reasons to support this tax:
As I have pointed out previously, there is no productive activity in inheriting a large sum of money, so it does little to distort the economy.
Estate taxes also raise revenue and redistribute wealth. ...
Historically such taxes have worked well in the United States. ...
The future of the estate tax will depend heavily on the upcoming presidential election. Donald Trump would like to see it gone. This is not unthinkable, since in a largely symbolic vote last year the House of Representatives voted to abolish it. ...
Hillary Clinton proposes higher estate tax brackets as wealth increases, reaching 65 percent for a billionaire couple. My guess is that if people really understood the incidence of the tax, 99.8 percent of the population would support her proposal.

Saturday, September 17, 2016

The Downside of Upward Mobility

Branko Milanovic:

The downside of upward mobility: ...If we ... really wanted to support upward mobility or give equal chances to all there are many political measures we could enact. ...Ganesh shows how totally politically unfeasible they are: confiscatory inheritance taxes, smaller class sizes in poorer neighborhood funded from the taxes from the rich, end of tax-exempt status for the richest universities, moral suasion that rich universities annually transfer 1% of their wealth to poorer state schools, criminalization of nepotism etc. None of these proposals will have the remotest chance of being accepted by those who currently wield political and economic power. ...

If upward mobility is about the relative positions in a society, then upward mobility for some implies downward mobility for the others. But if those currently at the top have a stronghold on the top places in society, there will no upward mobility however much we clamor for it. This positional (or relative) approach to mobility is a fairly accurate description of reality in societies that are growing slowly. In societies that develop quickly even if a lot of mobility is about positional advantages (and they are by definition fixed) it can be compensated by creating enough new social layers, new jobs and by making people richer. Thus the upwardly mobile have some room to move up which does not require an equal number of people to move down.

In more stagnant societies, mobility becomes a zero-sum game. To effect real social mobility in such societies, you need revolutions that, while equalizing chances or rather improving dramatically the chances of those on the bottom, do so at the cost of those on the top. In addition, they destroy many other things including lives, not only of those on the top but also of those on the bottom. ...

It is then not surprising that, short of such massive upheavals that shake the societies to their very core, countries tend to display relatively little positional mobility. ...

I think that we are led to a very somber conclusion here. In societies with slow growth, upward mobility is limited by the lack of opportunities and the solid grip that those who are on the top keep over the chances of their children to remain on the top. It is either self-delusion or hypocrisy to believe that societies with such unevenness of chances will come close to resembling “meritocracies”. But it is also the case that true upward mobility comes with an enormous price tag of lives lost and wealth destroyed.

Thursday, September 15, 2016

Do U.S. Economists Ignore Inequality?

Arjun Jayadev at INET:  

Do U.S. Economists Ignore Inequality?: A thought-provoking report in The Atlantic seeks to explore an apparent paradox in the practice of economics in the United States: Despite the high levels of inequality that many view as a drag on the performance of the U.S. economy — and also the increasingly volatile political effects of that inequality — the report argues that American economists have not been at the forefront of studying the distribution of wealth and income. Most of the cutting edge work has been often led by researchers from different national and cultural backgrounds.
While it’s encouraging to note that many of those cited in the piece as exemplary path-breakers in the field, such Gabriel Zucman, Steven Fazzari, and James K. Galbraith, have been supported by the Institute for New Economic Thinking, it may be overstating the case to say that American economists have not been cognizant of inequality — the widening of the wealth and income gap over the past 30 years has hardly gone unnoticed. Still, it is probably true to suggest that most explanations offered for the phenomenon have cited some combination of differential investments in human capital and/or technological changes as being primary drivers. There have always, of course, been dissenters from this approach, but analyses that identified macroeconomic factors such as weak labor markets or political factors such as the rise of a financial class remained minority views.
What is notable about some of the new research commended by the Atlantic for more boldly tackling the more politically challenging aspects of inequality is that this work has given more central causal weight to macroeconomic policy and factors such as the declining bargaining power of labor vs. capital.
For many years, to cite one example, labor shares and their decline were either treated as an artifact of the way data is collected, or as marginal to economic analysis. In the recent past however, a spate of influential papers have returned to the question of the capital-labor relations and shares of output going to each. Other influential papers have implicated the enormous growth of the financial sector as important features in the landscape of U.S. inequality. The centrality of the balance of political power in shaping income distribution was certainly a feature of U.S. academic economics until the 1980s, and work in this tradition has continued at the margins. But the new research being hailed by the Atlantic is restoring the centrality of such concerns. Economics, and the society it purports to serve, can only benefit from that development.

Monday, September 12, 2016

Labor Compensation and Labor Productivity

Just a quick reminder:

More here: Labor Compensation and Labor Productivity: Recent Recoveries and the Long-Term Trend, B. Ravikumar and Lin Shao, St. Louis Fed

Thursday, September 08, 2016

Drivers of inequality: Trade Shocks Versus Top Marginal Tax Rates

Douglas Campbell and Lester Lusher at VoxEU:

Drivers of inequality: Trade shocks versus top marginal tax rates: Growing wealth inequality has been one of the most pressing political issues since the Great Recession. However, there is a relative lack of consensus on the significant drivers of this trend. This column investigates the contribution of globalization, via international trade, to US wealth inequality. Although trade is found to have had important effects on certain parts of the US labor market in the early 2000s, the growth in US inequality since 1980 can be traced back to Reagan-era tax cuts. ...

Tuesday, August 30, 2016

Rising Wage Inequality Continues

Elise Gould at the EPI:

Rising wage inequality continues to be a defining feature of the U.S. labor market: It’s well documented and widely understood that wage inequality has grown dramatically over the last four decades as productivity and compensation growth have become delinked. Despite an expanding and increasingly productive economy, wages have stagnated for the vast majority. Looking at the most recent data—through the first half of 2016—we see that wage inequality has continued to grow, with top earners faring far better than those in the middle or bottom of the wage scale. First, the data paints a striking picture of growing wage inequality since the last business cycle peak in 2007. Second, average wage growth overall is slow, and any significant real wage growth continues to be driven by low (and below target) inflation—not meaningful acceleration in nominal wage growth. Last, strong payroll employment growth the last couple of months suggests positive future trends for not only wage growth, but also declining unemployment and rising labor force participation. ...

Friday, August 26, 2016

Today’s Inequality Could Easily Become Tomorrow’s Catastrophe

Robert Shiller:

Today’s Inequality Could Easily Become Tomorrow’s Catastrophe: Economic inequality is already a concern, but it could become a nightmare in the decades ahead, and I fear that we are not well equipped to deal with it. ...
One way to judge the likely outcome is to look at what has happened in the past. ...Kenneth Scheve ... and David Stasavage ... looked at 20 countries over two centuries to see how societies have responded to the less fortunate. Their primary finding may seem disheartening: Taxes on the rich generally have not gone up when inequality and economic hardship has increased. ...
Professor Scheve and Professor Stasavage found that democratic countries have not consistently embraced more redistributive tax policies, and most people do not vote strictly in their narrow self-interest. ...
This is consistent with my own survey results, which focused on inheritance taxes. ... Taxing around a third of wealth, more or less, seemed fair to people. And perhaps it is reasonable, in the abstract, yet what will we do in the future if this degree of taxation won’t produce enough revenue to meaningfully help the very poor as well as the sagging middle class? ...
Angus Deaton..., commenting on what he called the “grotesque expansions in inequality of the past 30 years,” gave a pessimistic prediction: “Those who are doing well will organize to protect what they have, including in ways that benefit them at the expense of the majority. ” And Robert M. Solow ... said, “We are not good at large-scale redistribution of income.” ...
No one seems to have an effective plan to deal with the possibility of much more severe inequality, should it develop. ...
Despite past failures, we should not lose hope in our ability to improve the world. ...

Tuesday, August 09, 2016

Bosses Pay: The Right's Problem

Chris Dillow:

Bosses pay: the right's problem: The High Pay Centre said yesterday that FTSE 100 CEOs’ pay rose 10% last year to an average of almost £5.5m. It’s obvious that the left should find this a problem. I want to suggest that it should also be a problem for the right too, for four reasons.
First, high CEO pay is due in at least part to a market failure. ...
Secondly, rising CEO pay, especially when accompanied by a degradation of “middle-class” jobs means we’re shifting from a bourgeois society to a “winner-take-all” one. This has potentially nasty cultural effects. ...
Thirdly, it’s possible – I put it no stronger than that – that high CEO pay is bad for overall productivity. ...
Finally, there’s a danger that rising inequality will produce a nasty backlash. ... Political instability is no friend of business or free markets. ...
My point here is a simple one. There are good reasons why Theresa May has spoken of the “irrational, unhealthy and growing gap” between bosses’ and workers’ pay. It’s because such a gap threatens the values and interests of many conservatives.
Many Marxists are relaxed about this; it just confirms our view that capitalism is a device through which the rich exploit others. Should rightists really also be relaxed? I mean, they can’t all be just hypocritical shills of the rich, can they?

(There is an explanation of each point in the full post.)

Monday, August 01, 2016

What is Inclusive Growth?

Tim Taylor:

What is Inclusive Growth?: "Inclusive growth" is an unquestionably astute rhetorical formulation. Those who use it can support both economic growth and helping the poor in a two-word phrase. But where did the term come from? Does the term have different content from seemingly similar terms like "broad-based growth" or "pro-poor growth"? Or do all these terms mean pretty much the same thing? Most of all, is "inclusive growth" a specific set of policies or just a desirable outcome?

Rafael Ranieri and Raquel Almeida Ramos explore the history of the "inclusive growth" terminology in "Inclusive Growth: Building up a Concept," published in May 2013 by the International Centre for Inclusive Growth (Working Paper #104). A little earlier,  Elena Ianchovichina and Susanna Lundstrom produced a note on "What is inclusive growth?" for the World Bank in a note published on February 10, 2009.

Apparently, the term "inclusive growth" originated in an essay "What is Pro-poor Growth?" by  Nanak Kakwani and Ernesto M. Pernia, which appeared in the Asian Development Review in 2000. They use the term "inclusive" growth only once, and in a way which makes it synonymous with "pro-poor growth." They write: "Broadly, pro-poor growth can be defined as one that enables the poor to actively participate in and significantly benefit from economic activity. It is a major departure from the trickle-down development concept. It is inclusive economic growth."

The reasons why "inclusive growth" or "pro-poor growth" seemed like a new thing back about two decades ago was rooted in how people used to talk about development economics . A common framework at that time was the notion that low-income countries were trapped in poverty, and needed big boost of investment capital to jolt themselves forward into a process of industrialization. The "Kuznets curve" held that a process of economic development first brings a period of greater inequality, as new industries take hold, which would then followed by a period of greater equality as prosperity spreads or diffuses through an economy.

All of these frameworks have been challenged in various ways. It's not clear that low-income countries are in a poverty "trap"--it's just that they have slow growth, which isn't necessarily the same thing. It wasn't clear that industrialization would necessarily diffuse through an economy: for example, Latin American countries had a reasonable degree of growth from the 1960s on, but with persistent and high levels of inequality. By the 1970s, arguments were emerging that poverty itself held back economic development, so rather than seeking development first and hoping it would reduce poverty eventually, a direct approach to improving the nutrition, health, education, and income-earning prospects of the poor could bring development. The greatest economic development success stories from the the 1960s through the 1980s, the East Asian "growth miracle" that saw the take-off of economies like South Korea, Thailand, and Taiwan didn't involve a large rise in inequality, nor did the earlier take-off of Japan's economy. As Ranieri and Ramos note:

Another core reason for the shift of development thinking towards a constructive, or at least not pernicious, relationship between growth and equity was the phenomenal developmental performance of the so-called Asian tigers: Hong Kong, Singapore, South Korea and Taiwan. The East Asian developmental experience, which unfolded over the course of a larger time span but received most attention from the 1970s into the 1980s and early 1990s, decisively challenged the existence of an inescapable trade-off between growth and equity. Combining rapid growth in per capita income with relatively stable and low inequality,  it suggested that “there might be policy measures to foster the benign combination of high growth and rapid poverty reduction” ...

But as the goal of inclusive growth became common, a number of detailed questions emerged. For example, did inclusive growth mean an improvement in the level of standard of living for the poor, or did it mean that the standard of living for the poor needed to be faster than the average for the middle and upper income groups? To what extent did the word "inclusive" apply to the broader middle-class as well as the poor? Does inclusive growth refer to income that includes government transfers, or only to income earned in the market? Does inclusive growth include only private income, or does it also refer to improved provision of government services like education, health services, sanitation and water, or reliable electricity? Should the "inclusiveness" of growth be understood at least partially in terms of institutions for democratic representation and governance?

These different concepts of inclusive growth have different policy implications. While it's easy to feel an attraction to the concept of inclusive growth, it's not clear that it offers a growth formula that works. After all, for many low-income countries around the world, it hasn't seemed that their choice was between "inclusive growth" or "noninclusive growth," but rather they were just struggling to have meaningful growth of any kind.

There's no question that the conceptual problems with "inclusive growth" are severe. Rememver, the Ramieri and Ramos working paper is written for what is called the International Policy Center for Inclusive Growth (which in turn seems to be a joint venture between the UN Development Programme and the Brazilian government), and the writers nonetheless conclude:

"[G]overnments and multilateral development institutions speak of inclusive growth and devise and label objectives, strategies and policies accordingly. But there is no clarity about what is actually meant by inclusive growth; definitions vary and tend to be vague. In general, what seems to be implied is that inclusive growth involves improving the lot of underprivileged people in particular and overall making opportunities more plentiful while lessening barriers to the attainment of better living conditions. But exactly what these entail and whether and how they are interconnected is not made clear. As the meaning of inclusiveness determines policy objectives, while it remains unclear, so do the objectives to be sought in designing policies aimed at promoting inclusive growth."

But despite the conceptual confusion, it seems to me that the terminology of "inclusive growth" does capture some important themes. The great problem of economic development is we cannot yet enunciate any compact list of government policies that reliably leads to a growth miracle. Indeed, given the many different circumstances of nations and economies, it may be that no single list exists, and that instead each country must diagnose which economic or institutional constraints are holding it back. Or it may even be that such diagnosis is too faulty to be reliable, and the best a a country can do is to work on basics like education, health, physical infrastructure, rule of law, and hope for best.

But when thinking about either the inputs to the development process or the outputs of the process, the inclusive growth concept can offer a useful reminder.  When thinking about policies to encourage development, it's a reminder that steps which help lower-income people in a direct way are worthwhile, not only because they might help to bring about economic growth but because benefiting those with lower incomes is beneficial in itself. In the general category of policies to help people in a direct way, I would include not just vaccinations and schooling and nutrition, but also policies that help people overcome the hurdles to starting a small business, or that allow people to monitor how public officials are spending money. When judging the results of development efforts, it's a useful reminder to look beyond the images of a huge and flash project like a dam, highway, factory, or mine, and consider the extent to which the project improved the day-to-day lives of lower-income people--whether through jobs and wages or through more affordable goods and services.

To steal a phrase from Ranieri and Ramos, the inclusive growth agenda is to search for a "constructive interaction of declining poverty and inequality and economic growth." That may be an insufficient agenda for economic development, in and of itself, but keep the potential for such constructive interactions in mind is surely worthwhile.

Friday, July 22, 2016

In Defense of Equality (without Welfare Economics)

Branko Milanovic:

In defense of equality (without welfare economics): When I taught recently at the Summer School at Groningen University, I began my lecture on the measurement of inequality by distinguishing between the Italian and English schools as they were defined in 1921 by Corrado Gini...
I put myself squarely in the camp of the “Italians”. Measurement of income inequality is like measurement of any natural or social phenomenon. We measure inequality as we measure temperature or height of people. The English (or welfarist) school believes that the measure of income inequality is only a proxy for a measure of a more fundamental phenomenon: inequality in welfare. The ultimate variable, according to them, that we want  to estimate is welfare (or even happiness) and it is distributed. Income provides only an empirically feasible short-cut to it.
I would have been sympathetic to that approach if I knew how individual utility can be measured. There is, I believe, no way to compare utilities of different persons. ... The only way for the “welfaristas” to solve this conundrum is to assume that all individuals  have the same utility function. This is such an unrealistically bold assumption that I think nobody would really care to defend it...
Now, the welfarst approach continues to be associated with pro-equality policies. Why? Because if all people have the same utility function, then the optimal distribution of income is such that everybody has the same income. ...
My students then asked how I can justify concern with inequality if I reject the welfarist view which is the main ideological vehicle through which equality of outcomes is being justified. (A non-utilitarian, contractarian alternative is provided by Rawls. Yet another alternative, based on equal capabilities—a close cousin to equality of opportunity (of which more below) is provided by Amartya Sen.)
My answer was that I justify concern with income inequality on three grounds.
The first ground is instrumental: the effect on economic growth. ...
The second is political effect. In societies where economic and political  spheres are not separated by the Chinese wall (and all existing societies are such), inequality in economic power seeps and ultimately invades and conquers the political sphere. ...
The third ground is philosophical. As Rawls has argued, every departure from unequal distribution of resources has to be defended by an appeal to a higher principle. Because we are all equal individuals (whether as declared by the Universal Charter of Human Rights or by God), we should all have an approximately equal opportunity to develop our skills and to lead a “good (and pleasant) life”. Because inequality of income almost directly translates into inequality of opportunities, it also directly negates that fundamental equality of all humans.  ...
I have to say here that in addition inequality of opportunity affects negatively economic growth...
My argument, if I need to reiterate it, is: you can reject welfarism, hold that inter-personal comparison of utility is impossible, and still feel very strongly that economic outcomes should be made more equal—that inequality should be limited so that it does not strongly affect opportunities, so that it does not slow growth and so that it does not undermine democracy. Isn’t that enough?

Thursday, July 14, 2016

It is More Difficult for Workers to Move Up the Income Ladder

Austin Clemens at Equitable Growth:

New analysis shows it is more difficult for workers to move up the income ladder: Against a rising chorus of concern about increasing income inequality, some economists are pushing back, suggesting that it is not income inequality we should be concerned with but rather income mobility. Income mobility describes the ability of individuals to move up and down the income ladder over some period of time. As long as mobility is healthy, they argue, society can remain egalitarian in the face of inequality, because the poor can move up and the rich down. ...
Equitable Growth grantees Michael D. Carr and Emily E. Wiemers at the University of Massachusetts-Boston used a new dataset to revisit the measurement of earnings mobility, the part of income that comes from work. Their results suggest that lifetime earnings mobility has declined in recent years. ...

Friday, July 01, 2016

U.S. Top One Percent of Income Earners Hit New High in 2015

Emmanuel Saez:

U.S. top one percent of income earners hit new high in 2015 amid strong economic growth: The top 1 percent income earners in the United States hit a new high last year, according to the latest data from the U.S. Internal Revenue Service. ... The latest IRS data show that incomes for the bottom 99 percent of families grew by 3.9 percent over 2014 levels, the best annual growth rate since 1998, but incomes for those families in the top 1 percent of earners grew even faster, by 7.7 percent, over the same period. ...
After a large decline of 11.6 percent from 2007 to 2009, real incomes of the bottom 99 percent of families registered a negligible 1.1 percent gain from 2009 to 2013, and then grew by 6.0 percent from 2013 to 2015. Hence, a full recovery in income growth for the bottom 99 percent remains elusive. Six years after the end of the Great Recession, those families have recovered only about sixty percent of their income losses due to that severe economic downturn.
In contrast, families at or near the top of the income ladder continued to power ahead. ... The share of income going to the top 10 percent of income earners—those making on average about $300,000 a year—increased to 50.5 percent in 2015 from 50.0 percent in 2014, the highest ever except for 2012. The share of income going to the top 1 percent of families—those earning on average about $1.4 million a year—increased to 22.0 percent in 2015 from 21.4 percent in 2014.
Income inequality in the United States persists at extremely high levels, particularly at the very top of the income ladder. ... This ... is unfortunately on par with a long-term widening of inequality since 1980, when the top 1 percent of families began to capture a disproportionate share of economic growth. ...
Policymakers ... need to grasp whether past efforts to raise taxes on the wealthy—in particular the higher tax rates for top U.S. income earners enacted in 2013 as part of the 2013 federal budget deal struck by Congress and the Obama Administration—are effective at slowing income inequality.
The latest data from the IRS suggests the 2013 reforms proved to be fleeting in terms of reducing income inequality. There was a dip in pre-tax income earned by the top one percent in 2013, yet by 2015 top incomes are once again on the rise—following a pattern of growing income inequality stretching back to the 1970s.

Tuesday, June 28, 2016

Productivity, Inequality, and Economic Rents

Jason Furman at ProMarket:

Productivity, Inequality, and Economic Rents: Productivity growth—a necessary (though not sufficient) condition for rising incomes in the long run—has slowed since 1973... At the same time, inequality in the United States is higher and, in recent decades, has risen faster than in other major advanced economies. ...
These dual trends ... have many distinct sources, but insofar as they have some causes in common, there is the potential to address these causes in ways that simultaneously improve efficiency and equity. To this end, the evidence that a rise in rents is contributing to both phenomena is important. ...
The good news is that to the degree that the “rents” interpretation is correct, it suggests that it is possible to reduce inequality and promote productivity growth without hurting efficiency by changing how rents are divided—or even that it is possible to do both while increasing efficiency by acting to reduce rents in the economy. Policies that raise the minimum wage and provide greater support for collective bargaining can help level the playing field for workers in negotiations with employers, in turn changing the way that rents are divided. Measures that would rationalize licensing requirements for employment, reduce zoning and other land-use restrictions, appropriately balance intellectual property regimes, and change the incentives that have led to the expansion of the financial sector as a share of the economy would all help curb excessive rents.
Additional measures that would reduce the scope and unequal distribution of economic rents include the promotion of competition through rulemaking and regulations, as well as the elimination of regulatory barriers to competition. ...
The bad news, however, is that rents have beneficiaries and these beneficiaries fight hard to keep and expand their rents. As a result, political reforms and other steps aimed at curbing the influence of regulatory lobbying are important for reducing the ability of people and corporations to seek rents successfully. Such actions would help ensure that economic growth in the decades ahead is robust, sustainable, and widely shared.

Sunday, June 26, 2016

Property Rights, the Income Distribution, and China

Roger Farmer:

Property Rights, the Income Distribution and China: ...why has the distribution of income, in the United States and Europe, tilted towards capital and away from labor over the past few decades? There is growing evidence that this redistribution is connected with the opening of trade with China. Globalization has lifted a billion Chinese workers out of poverty and it has led to huge income gains for Americans and Europeans at the top of the income and wealth distributions. These gains have not been shared with middle class and working class people in the US and Europe. ...

It is ... possible to conceive of alternative forms of democracy that would provide greater rights to workers. Workers councils, for example, have proved to be relatively successful in Germany. 

The concept of private property is contingent on rights that are defined and enforced by national governments. Those rights are constantly evolving. When the US founding fathers signed the Declaration of Independence, it was still possible to buy and sell human beings. The idea that a national government would enforce the property rights of a slave owner is, to today's sensibilities, abhorrent. It is entirely possible that a system of property rights that allows a factory owner to close down a large manufacturing plant without consulting the workers whose livelihoods depend on its continued operation, will, in another two hundred years, appear to be equally abhorrent.

[This is part of a discussion of whether intervention in financial markets necessarily leads to an upward redistribution of income.]

Tuesday, June 21, 2016

The Growing Size and Incomes of the Upper Middle Class

New report from Stephen Rose at the Urban Institute:

The Growing Size and Incomes of the Upper Middle Class: ... I found that the upper middle class has grown substantially, from 12.9 percent of the population in 1979 to 29.4 percent in 2014. Further, with the exception of the bottom 6 per cent, real growth occurred throughout the income ladder. However, that growth was unevenly distributed in that people with higher incomes had faster growth than those with lower incomes. Consequently, these findings expand the discussion of rising inequality to focus on more than just the top 1 percent. Indeed, a massive shift has occurred in the center of gravity of the economy. In 1979, the middle class controlled a bit more than 46 percent of all income s, and the upper middle class and rich controlled 30 percent. In contrast, in 2014 the rich and upper middle class controlled 63 percent of all incomes ( 52 percent for the upper middle class and 11 percent for the rich); the middle class share had shrunk to 26 percent; and the shares of the lower middle class, poor, and near - poor had declined by half.

Sunday, June 19, 2016

Competition Policy and Inclusive Growth

At VoxEU:

Competition policy and inclusive growth, by Fabienne Ilzkovitz and Adriaan Dierx: Firms with greater market power can behave monopolistically, and recent research suggests that declining market competitiveness is driving income inequality. While competition authorities already measure the overall impact of their interventions by using customer savings, these measurements do not account for indirect effects of intervention. This column introduces a DSGE model to model competition policy interventions as a negative mark-up shock. Competition policy has a significant and positive impact on growth and jobs, and impacts richer and poorer households differently. Interventions have important redistributive effects that benefit the poorest in society.

Thursday, June 16, 2016

What’s the Right Minimum Wage? Reframing the Debate

At Equitable Growth:

 What’s the right minimum wage? Reframing the debate from ‘no job loss’ to a ‘minimum living wage,’ Working Paper 2016-06, by David Howell, Kea Fiedler, and Stephanie Luce: Abstract The American debate over the proper level of the statutory minimum wage has always reflected the tension between the twin goals of ensuring decent living-wage jobs with maximum job opportunity. The moral and efficiency arguments for a wage floor that can keep a worker above mere subsistence have a long history, dating back at least to Adam Smith. The U.S. federal minimum wage was established by the 1938 Fair Labor Standards Act to ensure a “minimum standard of living necessary for health, efficiency, and general well being of workers” and to do so “without substantially curtailing employment.” In recent years, the best evidence has shown that moderate increases from very low wage floors have no discernible effects on employment, which has strengthened the case for substantial increases in the minimum wage.
But the very strength of this new evidence—research designs that effectively identify employment effects at the level of individual establishments—has contributed to the adoption of a narrow No-Job-Loss (NJL) criterion: that the “right” wage floor is the one that previous research has demonstrated will pose little or no risk of future job loss, anywhere. The economist’s Pareto Criterion—a good policy is one that does no immediate harm to anyone—has replaced the earlier much broader concern with aggregate employment effects, and more generally, with overall net benefits to working families. The explicit moral and efficiency framing of the case for a living wage by earlier generations of economists, advocates, and policy makers has taken a back seat to statistical jousting over which wage floor will pose no risk of job loss (or harm) to anyone.
We think the debate over the proper level of the statutory minimum wage should be reframed from a NJL to a Minimum Living Wage (MLW) standard: the lowest wage a fulltime worker needs for a minimally decent standard of living. This paper illustrates and critiques the recent NJL framing, as well as the usefulness of one metric that has been heavily relied upon for identifying the NJL threshold—the ratio of the wage floor to the average wage (the Kaitz index). We argue that the proper framing of the debate is not over the statistical risk of the loss of some poverty-wage, high-turnover jobs, but rather over the wage floor that establishes a minimally decent standard of living from full-time work for all workers, along with complementary policies that would ensure that any costs of job loss would be more than fully remedied.

Unequal Gains: American Growth and Inequality Since 1700

Peter Lindert and Jeffrey Williamson at VoxEU:

Unequal gains: American growth and inequality since 1700. When did America become the world leader in average living standards? There is little disagreement about how American incomes have grown since 1870, thanks to the pioneering work of Simon Kuznets and many others.  Yet income estimates are weak and sparse for the years before 1870.  In spite of that, our history textbooks imply that the road to world income leadership was paved by the institutional wisdom of the Founding Fathers and those who refined it over the two centuries that followed.  While those institutions were well chosen, in a new book we show that British America had attained world leadership in living standards long before the Founding Fathers built their New Republic (Lindert and Williamson 2016). Furthermore, the road to prosperity was far bumpier than the benign textbook tales of American economic progress imply.
Was income ever distributed as unequally between the rich, middle, and poor as it is today?  As we are constantly reminded, the rise in US inequality over the half century since the 1970s has been very steep. The international research team led by Atkinson et al. (2011) has charted the dramatic 20th century fall and rise of top incomes in countries around the world, including the US.  However, until now evidence was not available for before WWI.  Thus, there is still no history of American income inequality for the two centuries before WWI, aside from a few informed guesses. We now supply that distributional evidence back to 1774.
A new approach with new data
Armed with new evidence, we apply a different approach to the historical estimation of what Americans have produced, earned, and consumed.  National income and product accounting reminds us that we should end up with the same number for GDP by assembling its value from any of three sides – the production side, the expenditure side, or the income side. All previous American estimates for the years before 1929 have proceeded on either the production or the expenditure side. 
We work instead on the income side, constructing nominal (current-price) GDP from free labor earnings, property incomes, and (up to 1860) slaves’ retained earnings (that is, slave maintenance or actual consumption). Our social tables build national income aggregates from details on labor and property incomes by occupation and location for the benchmark years 1774, 1800, 1850, 1860 and 1870. No such income estimates were available for any year before 1929 until now. 
Our unique approach leads to big rewards. One reward is the chance to challenge the production-side estimates using very different data and methods.  As we see below, our estimates are often dramatically different. An even bigger reward is that the income approach exposes the distribution of income by socio-economic class, race, and gender, as well as by region and urban-rural location. 
New findings about American income per capita leadership
America actually led Britain and all of Western Europe in purchasing power per capita during colonial times.  Britain’s American colonies were already ahead by 38% in 1700 and by 52% in 1774, just before the Revolution (Figure 1). Angus Maddison’s (2001) claim that American income per capita did not catch up to that of Britain until the start of the twentieth century is off by at least two centuries. 

Figure 1 Real purchasing power per capita: America versus Britain, 1700-2011

Since the 1770s, America’s big income per capita advantage over Britain has not increased.  The only historical moment in which the US soared well above its colonial lead over Britain and the rest of the world came at the end of WWII.  Since then, the American per capita income lead over Britain has fallen back to colonial levels. 
But note the vulnerability of America’s relative income per capita to costly wars. Fighting for independence may have cut American income per capita by as much as 30% between 1774 and 1790.  The causes seem clear – war damage, mortality and morbidity among young adult males, the destruction of loyalist social networks, a collapse of foreign markets for American exports, hyper-inflation, a dysfunctional financial system, and much more. Then, by 1860, the young republic had regained its big income lead, this time by as much as 46%. This was a period of rapid catching up with and overtaking of Western European per capita incomes, including that of Britain. Fast per capita income growth and even faster population growth made the America the second biggest economy in the world by 1860. However, the US lost most of that big lead (again) during the destructive Civil War decade. It gained the lead back once more by 1900, and briefly lost it (again) in the Great Depression of the 1930s.
American colonists probably had the highest fertility rates in the world, and their children probably had the highest survival rates in the world.  Thus, the colonies had much higher child dependency rates, and family sizes, than did Europe – and even higher than the Third World does today. What was true of the colonies was also true of the young Republic.  It follows that America’s early and big lead in income per capita was exceeded by its early lead in income per worker.
New findings about American inequality
Colonial America was the most income-egalitarian rich place on the planet. Among all Americans – slaves included – the richest 1% got only 8.5% of total income in 1774. Among free Americans, the top 1% got only 7.6%. Today, the top 1% in the US gets more than 20% of total income. Colonial America looks even more egalitarian when the comparison is by region – in New England the income Gini co-efficient was 0.37, the Middle Atlantic was 0.38, and the free South 0.34. Today the US income Gini is more than 0.5, before taxes and transfers. Colonial America was also far less unequal than Western Europe. England and Wales in 1759 had an income Gini of 0.52,and in 1802 it was 0.59. Holland in 1732 had an income Gini of 0.61, and the Netherlands in 1909 had 0.56.  Also, if you agree with neo-institutionalists that economic equality fosters political equality, which fosters pro-growth policies and institutions, then America’s huge middle class is certainly consistent with the young republic’s pro-growth Hamiltonian stance from 1790 onwards. That is, the middle 40% of the distribution got fully 52.5% of total income in New England, the cradle of the revolution!
As Figure 2 shows, it did not stay that way. A long steep rise in US inequality took place between 1800 and 1860, matching the widening income gaps we have witnessed since the 1970s. The earlier rise was not dominated by a surge in the property income share, as argued by Piketty (2014). Rather, this first great rise in inequality was broadly based, with widening income gaps throughout the whole income spectrum – rising urban-rural income gaps, skill premiums, gaps between slaves and the free, North-South income gaps, earnings inequality, and even property income inequality.

Figure 2 Income inequality in America, Britain, and the Netherlands, 1732-2010


From 1870 to WWI, American inequality moved along a high plateau with no big secular changes. Rather, the big drama followed afterwards.  Figure 3 documents that the income share captured by the richest 1% fell dramatically between the 1910s and the 1970s, and the share of the bottom half rose, for almost all countries supplying the necessary data. This ‘Great Leveling’ took place for several reasons. Wars and other macro-shocks destroyed private wealth (especially financial wealth) and shifted the political balance toward the left.  The labor force grew more slowly and automation was less rapid, improving the incomes of the less skilled. Rising trade barriers lowered the import of labor-intensive products and the export of skill-intensive products, favoring the less skilled in the lower and middle ranks. And in the US, the financial crash of 1929-1933 was followed by a half century of tight financial regulation, which held down the incomes of those employed in the financial sector and the net returns reaped by rich investors. We stress that this correlation between high finance and inequality is not spurious. Individuals with skilled financial knowledge have been well rewarded during the two inequality booms, and heavily penalized during the one big leveling (or two, if the 1776-1789 years are included).

Figure 3 Income share received by the top 1%, four countries over two centuries

The equality gained in the US during the Great Leveling slipped away after the 1970s.  The rising income gaps were partly due to policy shifts.  The US lost its lead in the quantity of mass education, and its gaps in educational achievement have widened relative to other leading countries. Financial deregulation in the 1980s also contributed powerfully to the rise in the top income shares and also to crises and recessions. A regressive pattern of tax cuts allowed more wealth to be inherited rather than earned. These policy shortfalls are, of course, reversible and without any obvious loss in GDP.
History lessons
American history suggests that inequality is not driven by some fundamental law of capitalist development, but rather by episodic shifts in five basic forces – demography, education policy, trade competition, financial regulation policy, and labor-saving technological change. While some of these forces are clearly exogenous, others – particularly policies regarding education, financial regulation, and inheritance taxation – offer ways to check the rise of inequality while also promoting growth.
Atkinson, A B, T Piketty, and E Saez (2011), “Top Incomes in the Long Run of History,” Journal of Economic Literature 49, 1: 3-71
Lindert, P H, and J G Williamson (2016), Unequal Gains: American Growth and Inequality since 1700, Princeton N.J., Princeton University Press
Maddison, A (2001), The World Economy: A Millennial Perspective, Paris, OECD Development Centre Studies
Piketty, T (2014), Capital in the Twenty-First Century, Cambridge Mass., Belknap Press

Friday, June 10, 2016

The Overinflated Fear of Being Priced Out of Housing

Robert Shiller:

The Overinflated Fear of Being Priced Out of Housing: Rising home prices set off fears that real estate will become even more expensive, making it impossible ever to buy a home in a given city.
It’s easy to understand how such worries spread, but the historical record suggests that these fears are generally exaggerated. ...
There is another wrinkle, however. Demand lately has tilted toward homes in central cities, where land is scarce, rather than in more spacious distant suburbs. This creates imbalances. ... While living space is constrained in the heart of large, high-priced cities like New York, builders elsewhere have usually been able to accommodate people’s demands for cheap large homes roughly where they want them. ...
Given these facts, why do people still worry that home prices are getting out of reach? The answer can’t be found in the housing data. Instead, these fears may reflect anxieties about other issues — like income inequality, globalization and the threat of job losses because of robots and artificial intelligence. In prosperous cities, rising prices may connote economic exclusion.
After all, American society is increasingly divided according to educational attainment and income. In some circles, rarefied home prices may set off worries about being unable to live in choice locations shared with successful people. Home prices may, unfortunately, be viewed as a measurement of success in life rather than merely of floor space, and fear of being priced out of housing may well be rooted in deeper broodings about maintaining a position in the social hierarchy.

Thursday, June 09, 2016

The Problem With Inequality, According to Adam Smith

Dennis Rasmussen at ​The Atlantic

The Problem With Inequality, According to Adam Smith, by Dennis C. Rasmussen, ​The Atlantic: ...Many a scholar has made a career, in recent decades, by pointing out that this view of Smith is a gross caricature. ...
What has received little attention, even by those who approach Smith’s thought from the contemporary left, is that he also identified some deep problems with economic inequality. ... When people worry about inequality today, they generally worry that it inhibits economic growth, prevents social mobility, impairs democracy, or runs afoul of some standard of fairness. ...
None of these problems, however, were Smith’s chief concern—that economic inequality distorts people’s sympathies, leading them to admire and emulate the very rich and to neglect and even scorn the poor. Smith used the term “sympathy” ... to denote the process of imaginatively projecting oneself into the situation of another person, or of putting oneself into another’s shoes. ... And he claimed that, due to a quirk of human nature, people generally find it easier to sympathize with joy than with sorrow, or at least with what they perceive to be joy and sorrow. ...
What’s more, Smith saw this distortion of people’s sympathies as having profound consequences: It undermines both morality and happiness. First, morality. Smith saw the widespread admiration of the rich as morally problematic because he did not believe that the rich in fact tend to be terribly admirable people. On the contrary, he portrayed the “superior stations” of society as suffused with “vice and folly,” “presumption and vanity,” “flattery and falsehood,” “proud ambition and ostentatious avidity.” In Smith’s view, the reason why the rich generally do not behave admirably is, ironically, that they are widely admired anyway...
Smith also believed that the tendency to sympathize with the rich more easily than the poor makes people less happy. ...Smith’s writings ... associated happiness with tranquility—a lack of internal discord—and insisted not only that money can’t buy happiness but also that the pursuit of riches generally detracts from one’s happiness. ... Happiness consists largely of tranquility, and there is little tranquility to be found in a life of toiling and striving to keep up with the Joneses. ...

[See the full article for more, e.g. Smith's ideas on the alleviation of poverty.]

Thursday, May 26, 2016

Study Dispels Myth about Millionaire Migration in the US

From the American Sociological Association

Study dispels myth about millionaire migration in the US., EurekAlert: The view that the rich are highly mobile has gained much political traction in recent years and has become a central argument in debates about whether there should be "millionaire taxes" on top-income earners. But a new study dispels the common myth about the propensity of millionaires in the United States to move from high to low tax states.
"The most striking finding in our study is how little elites seem willing to move to exploit tax advantages across state lines," said Cristobal Young, an assistant professor of sociology at Stanford University and the lead author of the study. ...
In any given year, Young and his fellow researchers found that roughly 500,000 individuals file tax returns reporting incomes of $1 million or more (constant 2005 dollars). From this population, only about 12,000 millionaires change their state each year. The annual millionaire migration rate is 2.4 percent, which is lower than the migration rate of the general population (2.9 percent). The highest rates of migration are seen among low-income tax filers: migration is 4.5 percent among people who earn around $10,000 a year. ...
The study finds that family responsibilities are a key factor that limit migration among top-income earners. "Very affluent people are much more likely to be married and to have school-age children, which makes moving more difficult," Young said. ...
While millionaire migration is extremely limited, there is a grain of truth in the worries about millionaire tax flight, the study finds. "When millionaires do migrate, they are more likely to move to a state with a lower tax rate, and that state is almost always Florida," Young said. ...
"My guess is that if Florida established a 'millionaire tax,' elites would still find Florida appealing because of its climate and geography -- and patterns of elite migration wouldn't really change," Young said. ...
The study also looked at the millionaire population along the borders between states with different tax rates. "In these narrow geographic regions, you would expect millionaires to cluster on the low tax side of the border, but we see very weak evidence of this," Young said.
As for policy implications, Young said "millionaire taxes" result in minimal tax flight among millionaires and help states raise revenue to improve education, infrastructure, and public services, while reducing inequality.
"Our research indicates that 'millionaire taxes' raise a lot of revenue and have very little downside," Young said.

Friday, May 20, 2016

Paul Krugman: Obama’s War on Inequality

Elections matter:

Obama’s War on Inequality, by Paul Krugman, NY Times: There were two big economic policy stories this week that you may have missed... Each tells you a lot about both what President Obama has accomplished and the stakes in this year’s election. ...
Donald Trump... — who has already declared that he will, in fact, slash taxes on the rich... — once again declared his intention to do away with Dodd-Frank... Just for the record, while Mr. Trump is sometimes described as a “populist,” almost every substantive policy he has announced would make the rich richer at workers’ expense.
The other story was about a policy change achieved through executive action: The Obama administration issued new guidelines on overtime pay, which will benefit an estimated 12.5 million workers. ...
Now, America isn’t about to become Denmark... But more has happened than you might think.
Most obviously, Obamacare provides aid and subsidies mainly to lower-income working Americans, and it pays for that aid partly with higher taxes at the top. That makes it an important redistributionist policy — the biggest such policy since the 1960s.
And between those extra Obamacare taxes and the expiration of the high-end Bush tax cuts... the average federal tax rate on the top 1 percent has risen quite a lot. In fact, it’s roughly back to what it was in 1979, pre-Ronald Reagan, something nobody seems to know. ...
Dodd-Frank actually has put a substantial crimp in the ability of Wall Street to make money hand over fist. It doesn’t go far enough, but it’s significant enough to have bankers howling, which is a good sign.
And while the move on overtime comes late in the game, it’s a pretty big deal, and could be the beginning of much broader action.
Again, nothing Mr. Obama has done will put more than a modest dent in American inequality. But his actions aren’t trivial, either.
And even these medium-size steps put the lie to the pessimism and fatalism one hears all too often on this subject. No, America isn’t an oligarchy in which both parties reliably serve the interests of the economic elite. Money talks on both sides of the aisle, but the influence of big donors hasn’t prevented the current president from doing a substantial amount to narrow income gaps — and he would have done much more if he’d faced less opposition in Congress.
And in this as in so much else, it matters hugely whom the nation chooses as his successor.

Wednesday, May 18, 2016

Worlds of Inequality

Travel day -- will post more later if and when I can.

This is a review of Branko Milanovic's "Global Inequality: A New Approach for the Age of Globalization" by Miles Corak:

Worlds of Inequality, The American Prospect: This book begins by posing a question: “Who has gained from globalization?” Many thoughtful Americans have the confidence to answer in a sentence. The gains have been captured by the top 1 percent. And the book ends with another question: “Will inequality disappear as globalization continues?” Many might be just as quick to answer: Of course not, the rich will get richer! But life is not so simple. Between these two questions Branko Milanovic offers us not just a plethora of facts about income inequality that will surely make his readers think twice. More importantly, he shows us the power of bringing the facts into focus by putting a new lens over these pressing issues—a global perspective. ...
The most striking fact that motivates his book is a graph that the Twittersphere has already termed “the elephant curve.” This is the one-sentence, or rather one-picture, answer to the first question: “The gains from globalization are not evenly distributed.” ...
Clearly evident are the rise of a global middle class, in some important measure reflecting the great march out of poverty in China, and the equally amazing rise in the incomes of the top 1 percent globally. The winners of globalization were many people who three decades ago were dirt-poor, and though a big percentage increase in a very low income still amounts to a rather low income by the standards of the average person in the rich countries, it is a major movement in the right direction. But the great winners of globalization were also a relatively few people in the already-rich countries, a global plutocracy who also experienced income gains of over 50 percent, but from a much higher starting point. Both of these changes are without precedent in the history of humanity.

But the elephant curve also shows that even though some have gained, others have not seen their prospects improve at all—indeed, probably leading lives of more insecurity and more worry, not just about their prospects but also the prospects of their children. The big losers in these global income sweepstakes have been middle- and lower-income people of the rich countries...

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.