Category Archive for: Income Distribution [Return to Main]

Thursday, February 11, 2016

'Does Inequality Cause Financial Distress?'

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

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

Wednesday, February 03, 2016

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

The beginning of a relatively long discussion:

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

Thursday, January 21, 2016

When Robots Rule the Working World

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

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

Real Median Household Income in the US

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Friday, January 15, 2016

Paul Krugman: Is Vast Inequality Necessary?

Time to put the Gini back in the bottle:

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

Tuesday, January 12, 2016

Three Ways to Help the Working Class

I have a new column:

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

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

Saturday, January 09, 2016

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

From the NBER Digest

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

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

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

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

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

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

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

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

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

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

Friday, January 01, 2016

Paul Krugman: Privilege, Pathology and Power

Our "narcisstocracy?":

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

Wednesday, December 23, 2015

'An Aging Society Is No Problem When Wages Rise'

Dean Baker:

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

Sunday, December 20, 2015

'The Ambivalent Role of China in Global Income Distribution'

Branko Milanovic:

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

Friday, December 18, 2015

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

Dean Baker:

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

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

Thursday, December 17, 2015

'How Socioeconomic Status Impacts Online Learning'

 Are MOOCs the answer to educational inequality?:

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

Monday, December 14, 2015

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

From Vox EU:

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

Monday, November 30, 2015

'Is Balanced Growth Really the Answer?'

Jared Bernstein:

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

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

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

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

There is this, I suppose:

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

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

Paul Krugman: Inequality and the City

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

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

Sunday, November 29, 2015

'Challenging the Oligarchy'

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

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

Thursday, November 19, 2015

Explaining Inequality (Piketty, Murphy, Durlauf Video)

Wednesday, November 18, 2015

'Regional Inequality is Out of Control'

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

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

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

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

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

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

Wednesday, November 11, 2015

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

Robert Reich at Comment is Free:

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

Saturday, November 07, 2015

'Economic Policy Splits Democrats'

Anyone think this is correct?:

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

[That statement will drive Larry Mishel nuts.]

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

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

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

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

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

Friday, November 06, 2015

'Health Inequality'

Health inequality is large and consequential:

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

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

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

Average Life Expectancy by County in 2007

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

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


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

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

Monday, November 02, 2015

'The Rigging of the American Market'

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

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

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

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

Saturday, October 31, 2015

'The Mystery of the Vanishing Pay Raise'

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

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

More here.

Tuesday, October 27, 2015

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

Henry Aaron at Brookings:

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

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

Thursday, October 22, 2015

'Union Power and Inequality'

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

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

Figure 1. Evolution of inequality measures in advanced economies

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

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

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

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

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

Figure 3. Redistribution effect of unions in advanced economies

Jaumotte fig3 21 oct

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

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

Jaumotte fig4 21 oct

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

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

Monday, October 19, 2015

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

Nick Bunker:

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

Saturday, October 17, 2015

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

Branko Milanovic:

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

Thursday, October 15, 2015

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

Via David Dayen on Twitter:

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

Saturday, October 03, 2015

'How Poverty Affects Children’s Brains'

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

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

Friday, October 02, 2015

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

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

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

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

Thursday, October 01, 2015

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

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

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

Wednesday, September 30, 2015

'Jeb Goes Galt'

Paul Krugman:

Jeb Goes Galt: This is amazing:

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

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

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

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

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

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

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

'On the Ethics of Redistribution'

Curious to hear what people think of this:

On the Ethics of Redistribution, by V. V. Chari and Christopher Phelan, The Region, FRB Minneapolis: When evaluating economic inequality, economists frequently employ the ethical principle referred to as behind-the-veil-of-ignorance. Originated by Nobel Laureate John Harsanyi and philosopher John Rawls, this criterion imagines the social contract that would be developed by a society of risk-averse people who don’t yet know where each of them will end up in that society’s distribution of income.1 ...
From behind the veil of ignorance, no individual could know into which country (or economic class) he or she will be born. Behind-the-veil, risk-averse people would therefore want to ensure that people born in rich countries do not adopt policies that hurt people born in poor countries. Nevertheless, analysts almost invariably ignore the effects of domestic tax policy on those in other nations. But consistent use of the behind-the-veil criterion would mean that analysts cannot treat people who live in rich, developed economies differently than they treat people who live in poor, less-developed economies. ...
Increasing world trade is an example of the tension between policies that help those in developing countries versus those that help those lower in the income distribution in developed countries. According to a World Bank Study, in the three decades between 1981 and 2010, the rate of extreme poverty in the developing world (subsisting on less than $1.25 per day) has gone down from more than one out of every two citizens to roughly one out of every five, all while the population of the developing world increased by 59 percent.8 This reduction in extreme poverty represents the single greatest decrease in material human deprivation in history.
But this decrease in extreme poverty in the developing world has coincided with a marked increase in income inequality in the developed world, and the latter has received much more attention, at least from policy analysts in these richer nations.
One possible cause of both trends has been the increase in international trade, which lessens the market value of less-skilled labor in developed countries while increasing its value in developing countries.9 If one uses a behind-the-veil criterion focused only on developed countries, then the increase in trade has made things worse. If instead one considers the entire world, then the trade increase has made the world phenomenally better. ...
We conclude that using the behind-the-veil-of-ignorance criterion to advocate for redistributive policies within developed countries while ignoring the effect of these policies on people in poor countries violates the criterion itself and is therefore fundamentally misguided.
Many economic analysts use social welfare functions in which, implicitly, only the well-being of domestic residents matters. This type of analysis is acceptable as long as the analyst acknowledges that such a social welfare function is not developed from deeper ethical considerations. A giant literature in public finance justifies such social welfare functions by appealing to the veil-of-ignorance. Our point simply is that those who use this criterion should weight the welfare of poor people in Chad, the world’s poorest nation, very heavily. To our knowledge, very little if any of the relevant research does so.

'Are American Schools Making Inequality Worse?'

Education is not the only cause of inequality, but it's part of the problem:

Are American schools making inequality worse?, American Educational Research Association: The answer appears to be yes. Schooling plays a surprisingly large role in short-changing the nation's most economically disadvantaged students of critical math skills, according to a study published today in Educational Researcher, a peer-reviewed journal of the American Educational Research Association.
Findings from the study indicate that unequal access to rigorous mathematics content is widening the gap in performance on a prominent international math literacy test between low- and high-income students, not only in the United States but in countries worldwide.
Using data from the 2012..., researchers from Michigan State University and OECD confirmed not only that low-income students are more likely to be exposed to weaker math content in schools, but also that a substantial share of the gap in math performance between economically advantaged and disadvantaged students is related to those curricular inequalities. ...
"Our findings support previous research by showing that affluent students are consistently provided with greater opportunity to learn more rigorous content, and that students who are exposed to higher-level math have a better ability to apply it to addressing real-world situations of contemporary adult life, such as calculating interest, discounts, and estimating the required amount of carpeting for a room," said Schmidt, a University Distinguished Professor of Statistics and Education at Michigan State University. "But now we know just how important content inequality is in contributing to performance gaps between privileged and underprivileged students."
In the United States, over one-third of the social class-related gap in student performance on the math literacy test was associated with unequal access to rigorous content. The other two-thirds was associated directly with students' family and community background. ...
"Because of differences in content exposure for low- and high-income students in this country, the rich are getting richer and the poor are getting poorer," said Schmidt. "The belief that schools are the great equalizer, helping students overcome the inequalities of poverty, is a myth."
Burroughs, a senior research associate at Michigan State University, noted that the findings have major implications for school officials, given that content exposure is far more subject to school policies than are broader socioeconomic conditions.

Monday, September 28, 2015

'Why We Must End Upward Pre-Distribution to the Rich'

Robert Reich:

Why We Must End Upward Pre-Distribution to the Rich: You often hear inequality has widened because globalization and technological change have made most people less competitive, while making the best educated more competitive.
There’s some truth to this. The tasks most people used to do can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.
But this common explanation overlooks a critically important phenomenon: the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs.
As I argue in my new book, “Saving Capitalism: For the Many, Not the Few” (out this week), this transformation has amounted to a pre-distribution upward. ...

After a large number of examples illustrating how changes in the rules of the game driven by political influence have worked against the economic interests of the working class, he concludes

... The underlying problem, then, is not just globalization and technological changes that have made most American workers less competitive. Nor is it that they lack enough education to be sufficiently productive.
The more basic problem is that the market itself has become tilted ever more in the direction of moneyed interests that have exerted disproportionate influence over it, while average workers have steadily lost bargaining power—both economic and political—to receive as large a portion of the economy’s gains as they commanded in the first three decades after World War II.
Reversing the scourge of widening inequality requires reversing the upward pre-distributions within the rules of the market, and giving average people the bargaining power they need to get a larger share of the gains from growth.
The answer to this problem is not found in economics. It is found in politics. Ultimately, the trend toward widening inequality in America, as elsewhere, can be reversed only if the vast majority join together to demand fundamental change.
The most important political competition over the next decades will not be between the right and left, or between Republicans and Democrats. It will be between a majority of Americans who have been losing ground, and an economic elite that refuses to recognize or respond to its growing distress.

Wednesday, September 23, 2015

'Education Gap Between Rich and Poor Is Growing Wider'

Eduardo Porter:

Education Gap Between Rich and Poor Is Growing Wider, NY Times: ...in the 1970s..., African-American children had nowhere near the same educational opportunities as whites. The civil rights movement, school desegregation and the War on Poverty helped bring a measure of equity to the playing field. Today,... racial disparities in education have narrowed significantly. ... But ...the achievement gaps between more affluent and less privileged children is wider than ever... Today the biggest threat to the American dream is class.
Education is today more critical than ever. ... And yet American higher education is increasingly the preserve of the elite. ... The problem, of course, doesn’t start in college. ...
“If we could equalize achievement from age zero to 14,” Professor [Jane] Waldfogel told me, “that would go a long way toward closing the college enrollment and completion gaps.”
It can be done. Australia, Canada — even the historically class-ridden Britain — show much more equitable outcomes..., yet the strains from our world of increasing income inequality raise doubts about our ability to narrow the educational divide... The ... rich ... are spending hand over fist to ensure that their children end at the front of the rat race. Our public school system has proved no match to the forces reproducing inequality across the generations. ...
Today, the proficiency gap between the poor and the rich is nearly twice as large as that between black and white children. In other words, even as one achievement gap narrowed, another opened wide. ...

Friday, September 18, 2015

'The Typical Male U.S. Worker Earned Less in 2014 Than in 1973'

More on income stagnation and inequality:

The typical male U.S. worker earned less in 2014 than in 1973: The median male worker who was employed year-round and full time earned less in 2014 than a similarly situated worker earned four decades ago. And those are the ones who had jobs. ...
What about women? Well, they haven’t closed the pay gap with men, but the inflation-adjusted earnings of the median female worker increased more than 30% between 1973 and 2014... But back to men. Why are wages for the typical male worker stagnating? ... I contacted Larry Katz, the Harvard University labor economist. He identified three factors to explain the stagnation of men’s wages:
1. Although this is not the major factor, workers have been getting more of their compensation in benefits as opposed to the cash wages that the Census tallies. ...
2. Labor’s share of national income has been declining since 2000 and capital’s share has been rising. Labor’s compensation (wages and benefits) has not been keeping pace with productivity growth. ...EPI’s Josh Bivens and Larry Mishel argue, “ This decoupling coincided with the passage of many policies that explicitly aimed to erode the bargaining power of low- and moderate-wage workers in the labor market.”
3. The “most important factor,” Mr. Katz says, is the rise in wage inequality, the gap between the earnings of the best-paid workers and the ones at the middle and the bottom that has been widening steadily since about 1980. Economists differ over how much of this is the result of globalization, technological change, changing social mores, and government policies, but there is no longer much dispute about the fact that inequality is increasing.
... It’s not hard to understand why so many voters ... are drawn to candidates who acknowledge this reality, lambast incumbents for not doing more to address it, and style themselves as outsiders with fresh approaches to one of the nation’s most alarming economic problems.

To me, it's interesting how much the explanation for inequality has shifted away from the "skill-biased technical change" and technological based arguments and towards "changing social mores, and government policies." Even so, I think these types of arguments -- those that explain the decline in bargaining power in wage negotiations -- have more explanatory power than many people acknowledge. But even if we acknowledge that we aren't sure about the degree to which inequality can be explained by market-based versus institutional structure arguments, what seems clear to me is that the market won't solve this problem by itself. There do not appear to be forces within capitalism that necessarily push us toward an equal distribution of income. Thus, there is no assurance that heeding calls for government to get out of the way would help to reduce inequality, and it could make it worse. To me, policies that increase the ability of workers to bargain for a fair share of what they produce holds the most promise for solving the inequality problem (in a way that avoids direct redistribution). How to actually accomplish this is a difficult problem, unions have less power in a world where the threat of moving production to another country is very real (or a region within the US where the laws are more favorable), but at the very least we ought to ensure that new legislation does not make the highly unequal wage bargaining problem any worse (see Scott Walker).

Wednesday, September 16, 2015

'Income Stagnation in 2014'

9464
[Source: EPI]

Thursday, September 10, 2015

'Growing Economic Segregation Among School Districts and Schools'

This is probably not the path to reduced inequality:

Growing economic segregation among school districts and schools: ... Rising income inequality means those at the top have a growing resource advantage. Some high-income families use these resources to pay for housing in particular neighborhoods, resulting in increasing segregation by income between neighborhoods over the past four decades. Residential segregation creates inequalities between neighborhoods, and neighborhood contexts are critical for children’s development. Children who grow up in disadvantaged neighborhoods have worse educational and occupational outcomes later in life. ...
In a recent study, Sean F. Reardon, Christopher Jencks, and I documented trends in economic segregation between schools and school districts. ... We found that segregation by family income between school districts within metropolitan areas rose from 1970 to 2010. Looking only at families with children enrolled in public school from 1990 to 2010, segregation by family income between school districts rose by nearly 20 percent. ...
Segregation of upper-middle-class and affluent families from all others increased the most. In 2010, families with incomes in the top 10 percent of the national income distribution lived in the most homogenous districts, with other affluent families like them. In contrast, we found that poor families have become slightly more integrated by income between school districts. However, given that high-income families have distanced themselves from others, poor families are likely integrating with working-poor or lower-middle-class families rather than the affluent.
We then examined segregation between schools within school districts. Available data limit our investigation to measuring segregation between students that qualify for free lunch and those that do not. We found that segregation based on free lunch eligibility between schools within districts was 10 percent higher in 2010 than 1991. Focusing only on the 100 largest districts in the U.S., segregation by free lunch status between schools increased by 30 percent. Therefore, students increasingly attend school with students whose family incomes are similar to their own. ....
Our findings have serious implications for future inequality. ...

Wednesday, September 09, 2015

'How Rising Inequality Increases Political Polarization'

This research is examines how state-level income inequality impacts political polarization within state legislatures. It's from one of our graduate students, John Voorheis (who will be on the job market at the AEA meetings this year), along with Nolan McCarty at Princeton and Boris Shor at Georgetown (who have very good state level legislator ideology data).

They have some preliminary results, which were presented this at last weekend's APSA meetings (there is a preliminary working paper on SSRN). Here's a thumbnail sketch of the results:

  • They use a simulated instrument for state level inequality to address potential endogeneity between state politics and state income distributions. That allows them to estimate the causal effect of inequality on polarization (a first for this literature).
  • They find robust evidence that increases in state inequality cause increased political polarization (i.e. the ideological distance between Democratic and Republican parties).
  • Inequality affects the mean position of both Democratic and Republican parties, but the effect is larger and more precisely estimated for Democrats.
  • Income Inequality also causes a rightward shift in the average ideology of state legislatures.
  • They conclude that inequality's effect on polarization primarily occurs through moving the moderate wing of the Democratic party to the left; this occurs through replacing moderate Democrats with Republicans, which results in a more liberal Democratic party but a more conservative legislature overall.

John's work was supported by a young scholar grant from the Washington Center for Equitable Growth.

Monday, September 07, 2015

'Support for Redistribution in an Age of Rising Inequality: New Stylized Facts and Some Tentative Explanations'

From the NBER:

Support for Redistribution in an Age of Rising Inequality: New Stylized Facts and Some Tentative Explanations, by Vivekinan Ashok, Ilyana Kuziemko, and Ebonya Washington, NBER Working Paper No. 21529 Issued in September 2015 [open link to earlier version]: Despite the large increases in economic inequality since 1970, American survey respondents exhibit no increase in support for redistribution, in contrast to the predictions from standard theories of redistributive preferences. We replicate these results but further demonstrate substantial heterogeneity by demographic groups. In particular, the two groups who have most moved against income redistribution are the elderly and African-Americans. We find little evidence that these subgroup trends are explained by relative economic gains or growing cultural conservatism, two common explanations. We further show that the elderly trend is uniquely American, at least relative to other developed countries with comparable survey data. While we are unable to provide definitive evidence on the cause of these two groups' declining redistributive support, we offer additional correlations which may offer fruitful directions for future research on the topic. One story consistent with the data on elderly trends is that older Americans worry that redistribution will come at their expense, in particular via cuts to Medicare. We find that the elderly have grown increasingly opposed to government provision of health insurance and that controlling for this tendency explains about 40% of their declining support for redistribution. For blacks, controlling for their declining support of race-targeted aid explains nearly 45% of their differential decline in redistributive preferences (raising the question of why support for race-targeted aid has fallen during a period when black economic catch-up to whites has stalled).

Thursday, September 03, 2015

'The Dangerous Separation of the American Upper Middle Class'

Richard Reeves at Brookings:

The dangerous separation of the American upper middle class: The American upper middle class is separating, slowly but surely, from the rest of society. This separation is most obvious in terms of income—where the top fifth have been prospering while the majority lags behind. But the separation is not just economic. Gaps are growing on a whole range of dimensions, including family structure, education, lifestyle, and geography. Indeed, these dimensions of advantage appear to be clustering more tightly together, each thereby amplifying the effect of the other.
In a new series of Social Mobility Memos, we will examine the state of the American upper middle class: its composition, degree of separation from the majority, and perpetuation over time and across generations. Some may wonder about the moral purpose of such an exercise. After all, what does it matter if those at the top are flourishing? To be sure, there is a danger here of indulging in the economics of envy. Whether the separation is a problem is a question on which sensible people can disagree. The first task, however, is to get a sense of what’s going on.

Skipping the extensive analysis covering:

“We are the 80 percent!” Not quite the same ring as “We are the 99 percent!” ...
Defining the upper middle class...
Upper middle class incomes: on the up...
“Where did you get your second degree?” The upper middle class and education...
Families, marriage and social class...
Voting and Attitudes...

The conclusion is:

Conclusion The writer and scholar Reihan Salam has developed some downbeat views about the upper middle class. Writing in Slate, he despairs that “though many of the upper-middle-class individuals I’ve come to know are good, decent people, I’ve come to the conclusion that upper-middle-class Americans threaten to destroy everything that is best in our country.”
Hyperbole, of course. But there is certainly cause for concern. Salam points to the successful rebellion against President Obama’s plans to curb 529 college savings plans, which essentially amount to a tax giveaway to the upper middle class. While the politics of the reform were badly bungled, it was indeed a reminder that the American upper middle class knows how to take care of itself. Efforts to increase redistribution, or loosen licensing laws, or free up housing markets, or reform school admissions can all run into the solid wall of rational, self-interested upper middle class resistance. This is when the separation of the upper middle class shifts from being a sociological curiosity to an economic and political problem.
In the long run, an even bigger threat might be posed by the perpetuation of upper middle class status over the generations. There is intergenerational ‘stickiness’ at the bottom of the income distribution; but there is at least as much at the other end,  and some evidence that the U.S. shows particularly low rates of downward mobility from the top. When status becomes more strongly inherited, inequality hardens into stratification, open societies start to close up, and class distinctions sharpen.

The Divergence Between Productivity and Pay

From Larry Mishel and Josh Bivens at the EPI:

Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real, by Josh Bivens and Lawrence Mishel: Introduction and key findings Wage stagnation experienced by the vast majority of American workers has emerged as a central issue in economic policy debates, with candidates and leaders of both parties noting its importance. This is a welcome development because it means that economic inequality has become a focus of attention and that policymakers are seeing the connection between wage stagnation and inequality. Put simply, wage stagnation is how the rise in inequality has damaged the vast majority of American workers.

The Economic Policy Institute’s earlier paper, Raising America’s Pay: Why It’s Our Central Economic Policy Challenge, presented a thorough analysis of income and wage trends, documented rising wage inequality, and provided strong evidence that wage stagnation is largely the result of policy choices that boosted the bargaining power of those with the most wealth and power (Bivens et al. 2014). As we argued, better policy choices, made with low- and moderate-wage earners in mind, can lead to more widespread wage growth and strengthen and expand the middle class.

This paper updates and explains the implications of the central component of the wage stagnation story: the growing gap between overall productivity growth and the pay of the vast majority of workers since the 1970s. A careful analysis of this gap between pay and productivity provides several important insights for the ongoing debate about how to address wage stagnation and rising inequality. First, wages did not stagnate for the vast majority because growth in productivity (or income and wealth creation) collapsed. Yes, the policy shifts that led to rising inequality were also associated with a slowdown in productivity growth, but even with this slowdown, productivity still managed to rise substantially in recent decades. But essentially none of this productivity growth flowed into the paychecks of typical American workers. Second, pay failed to track productivity primarily due to two key dynamics representing rising inequality: the rising inequality of compensation (more wage and salary income accumulating at the very top of the pay scale) and the shift in the share of overall national income going to owners of capital and away from the pay of employees. Third, although boosting productivity growth is an important long-run goal, this will not lead to broad-based wage gains unless we pursue policies that reconnect productivity growth and the pay of the vast majority.

Ever since EPI first drew attention to the decoupling of pay and productivity (Mishel and Bernstein 1994), our work has been widely cited in economic analyses and by policymakers. It has also attracted criticisms from those looking to deny the facts of inequality. Thus in this paper we not only provide an updated analysis of the productivity–pay disconnect and the factors behind it, we also explain why the measurement choices we have made are the correct ones. As we demonstrate, the data series and methods we use to construct our graph of the growing gap between productivity and typical worker pay best capture how income generated in an average hour of work in the U.S. economy has not trickled down to raise hourly pay for typical workers. ...

Key findings from the paper include:

  • For decades following the end of World War II, inflation-adjusted hourly compensation (including employer-provided benefits as well as wages) for the vast majority of American workers rose in line with increases in economy-wide productivity. Thus hourly pay became the primary mechanism that transmitted economy-wide productivity growth into broad-based increases in living standards.
  • Since 1973, hourly compensation of the vast majority of American workers has not risen in line with economy-wide productivity. In fact, hourly compensation has almost stopped rising at all. Net productivity grew 72.2 percent between 1973 and 2014. Yet inflation-adjusted hourly compensation of the median worker rose just 8.7 percent, or 0.20 percent annually, over this same period, with essentially all of the growth occurring between 1995 and 2002. Another measure of the pay of the typical worker, real hourly compensation of production, nonsupervisory workers, who make up 80 percent of the workforce, also shows pay stagnation for most of the period since 1973, rising 9.2 percent between 1973 and 2014. Again, the lion’s share of this growth occurred between 1995 and 2002.
  • Net productivity grew 1.33 percent each year between 1973 and 2014, faster than the meager 0.20 percent annual rise in median hourly compensation. In essence, about 15 percent of productivity growth between 1973 and 2014 translated into higher hourly wages and benefits for the typical American worker. Since 2000, the gap between productivity and pay has risen even faster. The net productivity growth of 21.6 percent from 2000 to 2014 translated into just a 1.8 percent rise in inflation-adjusted compensation for the median worker (just 8 percent of net productivity growth).
  • Since 2000, more than 80 percent of the divergence between a typical (median) worker’s pay growth and overall net productivity growth has been driven by rising inequality (specifically, greater inequality of compensation and a falling share of income going to workers relative to capital owners). Over the entire 1973–2014 period, rising inequality explains over two-thirds of the productivity–pay divergence.
  • If the hourly pay of typical American workers had kept pace with productivity growth since the 1970s, then there would have been no rise in income inequality during that period. Instead, productivity growth that did not accrue to typical workers’ pay concentrated at the very top of the pay scale (in inflated CEO pay, for example) and boosted incomes accruing to owners of capital.
  • These trends indicate that while rising productivity in recent decades provided the potential for a substantial growth in the pay for the vast majority of workers, this potential was squandered due to rising inequality putting a wedge between potential and actual pay growth for these workers.
  • Policies to spur widespread wage growth, therefore, must not only encourage productivity growth (via full employment, education, innovation, and public investment) but also restore the link between growing productivity and the typical worker’s pay.
  • Finally, the economic evidence indicates that the rising gap between productivity and pay for the vast majority likely has nothing to do with any stagnation in the typical worker’s individual productivity. For example, even the lowest-paid American workers have made considerable gains in educational attainment and experience in recent decades, which should have raised their productivity.

...

Tuesday, August 25, 2015

'The Politics of Income Inequality'

I have a new column:

The Politics of Income Inequality: f the policies favored by some Republicans seeking the nomination for president turned into reality, we’d roll back or eliminate our social insurance programs, cut taxes on the wealthy, cut spending even more to slash the deficit, and turn health care over to the private sector. 
The “you’re on your own no matter what bad luck comes your way” society is a desirable outcome according to this view because it creates the correct incentives for people to be gainfully employed and take care of themselves. Never mind that history shows many people won’t prepare for retirement, purchase health care, set aside funds in case of job loss, and so on unless they are forced to do so by government programs, and will thus then end up being an even bigger burden to the rest of society, Those who support these policies appear to believe that this time will somehow be different. 
What do these issues have in common? ...

Sunday, August 23, 2015

Thomas Piketty: New Thoughts on Capital in the Twenty-First Century

[Transcript]

Saturday, August 22, 2015

'Did Socialism Keep Capitalism Equal?'

Branko Milanovic:

Did socialism keep capitalism equal?: This is an interesting idea and I think that it will gradually become more popular. The idea is simple: the presence of the ideology of socialism (abolition of private property) and its embodiment in the Soviet Union and other Communist states made capitalists careful: they knew that if they tried to push workers too hard, the workers might retaliate and capitalists might end up by losing  all.
Now, this idea comes from the fact that rich capitalist countries experienced an extraordinary period of decreasing inequality from around 1920s to 1980s, and then since the 1980s, contradicting what a simple Kuznets curve would imply, inequality went up.  It so happens that the turning  point in 1980s coincides with (1) acceleration of skill-biased technological progress, (2) increased globalization and entry of Chinese workers into the global labor market, (3) pro-rich policy changes (lower taxes), (4) decline of the trade unions, and (5) end of Communism as an ideology. So each of these five factors can be used to explain the increase in inequality in rich capitalist countries.
The socialist story recently received a boost from two papers. ...
 I am not sure that this particular story can alone explain the decline in inequality in the West, and certainly it is a story that one hears less often in the US than in Europe, as the United States  believed itself to be sufficiently protected from the Communist virus (although when you look at the repression in the 1920s and McCarthyism in the 1950s, one is not so sure). But even Solow’s recent mention of the changing power relations between capitalists and workers (the end of the Detroit treaty) as ushering in the period of rising inequality is not inconsistent with this view. In a recent conversation, and totally unaware of the literature, an Italian high-level diplomat explained to me why inequality in Italy increased recently: “in then 1970s, capitalists were afraid of the Italian Communist Party”. So there is, I think, something in the ... story.
The implication is of course rather unpleasant: left to itself, without any countervailing powers, capitalism will keep on generating high inequality and so the US may soon look like South Africa. That’s where I think differently: I think there are, in the longer-term, forces that would lead toward reduction in inequality (and that would not be the return of Communism).

Tuesday, August 18, 2015

'Wealth and Income Distribution: New Theories Needed for a New Era '

More from Joe Stiglitz (along with Ravi Kanbur) on what needs to change in economics:

Wealth and income distribution: New theories needed for a new era, Vox EU: Six decades ago, Nicholas Kaldor (1957) put forward a set of stylized facts on growth and distribution for mature industrial economies. The first and most prominent of these was the constancy of the share of capital relative to that of wealth in national income. At about the same time, Simon Kuznets (1955) put forward a second set of stylized facts -- that while the interpersonal inequality of income distribution might increase in the early stages of development, it declines as industrialized economies mature.

These empirical formulations brought forth a generation of growth and development theories whose object was to explain the stylized facts. Kaldor himself presented a growth model which claimed to produce outcomes consistent with constancy of factor shares, as did Robert Solow. Kuznets also developed a model of rural-urban transition consistent with his prediction, as did many others (Kanbur 2012).

Kaldor-Kuznets facts no longer hold

However, the Kaldor-Kuznets stylized facts no longer hold for advanced economies. The share of capital as conventionally measured has been on the rise, as has interpersonal inequality of income and wealth. Of course, there are variations and subtleties of data and interpretation, and the pattern is not uniform. But these are the stylized facts of our time. Bringing these facts center stage has been the achievement of research leading up to Piketty (2014).

It stands to reason that theories developed to explain constancy of factor shares cannot explain a rising share of capital. The theories developed to explain the earlier stylized facts cannot very easily explain the new trends, or the turnaround. At the same time, rising inequality has opened once again a set of questions on the normative significance of inequality of outcomes versus inequality of opportunity. New theoretical developments are needed for positive and normative analysis in this new era.

What sort of new theories? In the realm of positive analysis, Piketty has himself put forward a theory based on the empirical observation that the rate of return to capital, r, systematically exceeds the rate of growth, g; the famous r > g relation. Much of the commentary on Piketty’s facts and theorizing has tried to make the stylized fact of rising share of capital consistent with a standard production function F (K, L) with capital ‘K’ and labor ‘L’. But in this framework a rising share of capital can be consistent with the other stylized fact of rising capital-output ratio only if the elasticity of substitution between capital and labor is greater than unity, which is not consistent with the broad empirical findings (Stiglitz, 2014a). Further, what Piketty and others measure as wealth ‘W’ is a measure of control over resources, not a measure of capital K, in the sense that that is used in the context of a production function.

Differences between K and W

There is a fundamental distinction between capital K, thought of as physical inputs to production, and wealth W, thought of as including land and the capitalized value of other rents which give command over purchasing power. This distinction will be crucial in any theorizing to explain the new stylized facts. ‘K’ can be going down even as ‘W’ increases; and some increases in W may actually lower economic productivity. In particular, new theories explaining the evolution of inequality will have to address directly changes in rents and their capitalized value (Stiglitz 2014). Two examples will illustrate what we have in mind.

  • Consider first the case of all sea-front property on the French Riviera.

As demand for these properties rises, perhaps from rich foreigners seeking a refuge for their funds, the value of sea frontage will be bid up. The current owners will get rents from their ownership of this fixed factor. Their wealth will go up and their ability to command purchasing power in the economy will rise correspondingly. But the actual physical input to production has not increased. All else constant, national output will not rise; there will only be a pure distributional effect.

  • Consider the case where the government gives an implicit guarantee to bail out banks.

This contingent support to income flows from ownership of bank shares will be capitalized into the value of these shares. Of course, there is an equal and opposite contingent liability on all others in the economy, in particular on workers -- the owners of human capital. Again, without any necessary impact on total output, the political economy has created rents for share owners, and the increase in their wealth will be reflected in rising inequality. One can see this without going through a conventional production function analysis. Of course, the rents once created will provide further resources for rentiers to lobby the political system to maintain and further increase rents. This will set in motion a spiral of increasing inequality, which again does not go through the production system at all -- except to the extent that the associated distortions represent a downward shift in the productivity of the economy (at any level of inputs of ‘K’ and labor).

Analyzing the role of land rents in increases in inequality can be done in a variant of standard neoclassical models -- by expanding inputs to include land; but explaining increase in inequality as a result of an increase in other forms of rent will need a theory of rents which takes us beyond the competitive determination of factor rewards.

Differences in inequality: Capital income versus labor income

The translation from factor shares to interpersonal inequality has usually been made through the assumption that capital income is more unequally distributed than labor income. Inequality of capital ownership then translates into inequality of capital income, while inequality of income from labor is assumed to be much smaller. The assumption is made in its starkest form in models where there are owners of capital who save and workers who do not.

These stylized assumptions no longer provide a fully satisfactory explanation of income inequality because: (i) there is more widespread ownership of wealth through life cycle savings in various forms including pensions; and (ii) increasingly unequal returns to increasingly unequally distributed human capital has led to sharply rising inequality of labor income.

Sharply rising inequality of labor income focuses attention on inequality of human capital in its most general sense:

  • Starting with unequal prenatal development of the foetus;
  • Followed by unequal early childhood development and investments by parents;
  • Unequal educational investments by parents and society; and
  • Unequal returns to human capital because of discrimination at one end and use of parental connections in the job market at the other end.

Discrimination continues to play a role, not only in the determination of factor returns given the ownership of assets, including human capital; but also on the distribution of asset ownership.

  • At each step, inequality of parental resources is translated into inequality of children’s outcomes.

An exploration of this type of inequality requires a different type of empirical and theoretical analysis from the conventional macro-level analysis of production functions and factor shares (Heckman and Mosso, 2014, Stiglitz, 2015).

In particular, intergenerational transmission of inequality is more than simple inheritance of physical and financial wealth. Layered upon genetic inequalities are the inequalities of parental resources. Income inequality across parents, due to inequality of income from physical and financial capital on the one hand, and inequality due to inequality of human capital on the other, is translated into inequality of financial and human capital of the next generation. Human capital inequality perpetuates itself through intergenerational transmission just as wealth inequality caused by politically created rents perpetuates itself.

Given such transmission across generations, it can be shown that the long-run, ‘dynastic’ inequality will also be higher (Kanbur and Stiglitz 2015). Although there have been advances in recent years, we still need fully developed theories of how the different mechanisms interact with each other to explain the dramatic rises in interpersonal inequality in advanced economies in the last three decades.1

High inequality: New realities and old debates

The new realities of high inequality have revived old debates on policy interventions and their ethical and economic rationale (Stiglitz 2012). Standard analysis which balances the tradeoff between efficiency and equity would suggest that taxation should now become more progressive to balance the greater inherent inequality against the incentive effects of progressive taxation (Kanbur and Tuomala,1994 ).

One counter argument is that what matters is not inequality of ‘outcome’ but inequality of ‘opportunity’. According to this argument, so long as the prospects are the same for all children, the inequality of income across parents should not matter ethically. What we should aim for is equality of opportunity, not income equality. However, when income inequality across parents translates into inequality of prospects across children, even starting in the womb, then the distinction between opportunity and income begins to fade and the case for progressive taxation is not undermined by the ‘equality of opportunity’ objective (Kanbur and Wagstaff 2015).

Concluding remarks

Thus, the new stylized facts of our era demand new theories of income distribution.

  • First, we need to break away from competitive marginal productivity theories of factor returns and model mechanisms which generate rents with consequences for wealth inequality.

This will entail a greater focus on the ‘rules of the game.’ (Stiglitz et al 2015).

  • Second, we need to focus on the interaction between income from physical and financial capital and income from human capital in determining snapshot inequality, but also in determining the intergenerational transmission of inequality.
  • Third, we need to further develop normative theories of equity which can address mechanisms of inequality transmission from generation to generation.2

References

Bevan, D and J E Stiglitz (1979), "Intergenerational Transfers and Inequality", The Greek Economic Review, 1(1), August, pp. 8-26.

Heckman, J and S Mosso (2014), "The Economics of Human Development and Social Mobility", Annual Reviews of Economics, 6: 689-733.

Kaldor, N (1957), "A Model of Economic Growth", The Economic Journal, 67(268): 591-624.

Kanbur, R (2012), "Does Kuznets Still Matter?" in S. Kochhar (ed.), Policy-Making for Indian Planning: Essays on Contemporary Issues in Honor of Montek S. Ahluwalia, Academic Foundation Press, pp. 115-128, 2012.

Kanbur, R and J E Stiglitz (2015), "Dynastic Inequality, Mobility and Equality of Opportunity", CEPR Discussion Paper No. 10542.

Kanbur, R and M Tuomala (1994), ‘‘Inherent Inequality and the Optimal Graduation of Marginal Tax Rates", (with M. Tuomala), Scandinavian Journal of Economics, Vol. 96, No. 2, pp. 275-282, 1994.

Kuznets, S (1955), "Economic Growth and Income Inequality", The American Economic Review, 45(1): 1-28.

Piketty, T (2014), Capital in the Twenty-First Century, Cambridge Massachusetts: The Belknap Press of Harvard University Press.

Piketty, T, E Saez, and S Stantcheva (2011), “Taxing the 1%: Why the top tax rate could be over 80%”, VoxEU.org, 8 December.

Roemer, J E and A Trannoy (2014), "Equality of Opportunity", in A B Atkinson and F Bourguignon (eds.) Handbook of Income Distribution SET Vols 2A-2B. Elsevier.

Stiglitz, J E, et. al. (2015) "Rewriting the Rules of the American Economy", Roosevelt Institute.

Stiglitz, J E (1969), "Distribution of Income and Wealth Among Individuals", Econometrica, 37(3), July, pp. 382-397. (Presented at the December 1966 meetings of the Econometric Society, San Francisco.)

Stiglitz, J E (2012), The Price of Inequality: How Today’s Divided Society Endangers Our Future, New York: W.W. Norton.

Stiglitz, J E (2014), "New Theoretical Perspectives on the Distribution of Income and Wealth Among Individuals", paper presented to the International Economic Association World Congress, Dead Sea, June and forthcoming in Inequality and Growth: Patterns and Policy, Volume 1: Concepts and Analysis, to be published by Palgrave MacMillan.

Stiglitz, J E (2015), "New Theoretical Perspectives on the Distribution of Income and Wealth Among Individuals: Parts I-IV", NBER Working Papers 21189-21192, May.

Footnotes

1 For early discussions of such transmission processes, see Stiglitz (1969) and Bevan and Stiglitz (1979).

2 Developments in this area are exemplified by Roemer and Trannoy (2014).

Saturday, August 15, 2015

'Marxists and Conservatives Have More in Common than Either Side Would Like to Admit'

Chris Dillow on common ground between Marxists and Conservatives:

Fairness, decentralization & capitalism: Marxists and Conservatives have more in common than either side would like to admit. This thought occurred to me whilst reading a superb piece by Andrew Lilico.

He describes the Brams-Taylor procedure for cutting a cake in a fair way - in the sense of ensuring envy-freeness - and says that this shows that a central agency such as the state is unnecessary to achieve fairness:...

The appropriate mechanism here is one in which there is a balance of power, such that no individual can say: "take it or leave it."

This is where Marxism enters. Marxists claim that, under capitalism, the appropriate mechanism is absent. Marx stressed that ... the labour market is an arena in which power is unbalanced...

Nor do Marxists expect the state to correct this, because the state is captured by capitalists - it is "a committee for managing the common affairs of the whole bourgeoisie."...

Instead, Marx thought that fairness can only be achieved by abolishing both capitalism and the state - something which is only feasible at a high level of economic development - and replacing it with some forms of decentralized decision-making. ...

In this sense, Marxists agree with Andrew: people can find fair allocations themselves without a central agency. ...

Thursday, August 13, 2015

'The Future of Work: Why Wages Aren't Keeping Up'

This is from Robert Solow writing at Pacific Standard magazine:

The Future of Work: Why Wages Aren't Keeping Up: One of the more puzzling and damaging features of the American labor market in the last few decades has been the failure of real (i.e. inflation-adjusted) wages and benefits to keep up with the increase in productivity. ...
The custom is to think of value added in a corporation (or in the economy as a whole) as just the sum of the return to labor and the return to capital. But that is not quite right. There is a third component which I will call “monopoly rent” or, better still, just “rent.” ...
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. ...
Now I would like to connect this hypothesis with another change taking place in the labor market..., the casualization of labor. The proportion of part-time workers has been rising... So are the numbers of workers on fixed-term contracts and independent contractors...
Casual workers have little or no effective claim to the rent component of any firm’s value added... 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.

Thursday, August 06, 2015

'The Declining Impact of U.S. Income Taxes on Wealth Inequality'

Nick Bunker:

The declining impact of U.S. income taxes on wealth inequality: A growing number of papers measuring U.S. wealth inequality and its continuing growth were published over the past year. One of those key papers, by economists Emmanuel Saez of the University of California-Berkeley and Gabriel Zucman of the London School of Economics, finds that the share of wealth held by the top 0.1 percent of families in the United States grew from about 7 percent in the late 1970s to 22 percent in 2012. Yet it’s important to note that Saez and Zucman’s results and similar estimates look at the distribution of wealth before accounting for the impact of taxation. A new paper looks at the post-tax distribution of wealth and finds that the federal income tax system is doing significantly less to reduce wealth inequality than in the past. And there are signs that the federal tax system in recent years might actually be increasing wealth inequality.
The paper by economists Adam Looney at the Brookings Institution and Kevin B. Moore at the U.S. Federal Reserve looks at trends in wealth inequality from 1989 to 2013 using data from the Fed’s Survey of Consumer Finances. ...
Looney and Moore’s analysis is, as they note, the first attempt to analyze trends in post-tax wealth inequality. So their paper is just the beginning of the investigation into this area. But if their results hold up they would have strong implications for how we think about the tax code and wealth inequality.