Economist's View

Paul Krugman: Class Wars of 2012

The class war isn't over:

Class Wars of 2012, by Paul Krugman, Commentary, NY Times: On Election Day ... Logan International Airport in Boston was running short of parking spaces. Not for cars — for private jets. Big donors were flooding into the city to attend Mitt Romney’s victory party.

They were, it turned out, misinformed about political reality. But the disappointed plutocrats weren’t wrong about who was on their side. This was very much an election pitting the interests of the very rich against those of the middle class and the poor.

And the Obama campaign won largely by disregarding the warnings of squeamish “centrists” and ... stressing the class-war aspect of the confrontation. This ensured not only that President Obama won by huge margins among lower-income voters, but that those voters turned out in large numbers, sealing his victory.

The important thing to understand now is that while the election is over, the class war isn’t. The same people who bet big on Mr. Romney, and lost, are now trying to win by stealth — in the name of fiscal responsibility — the ground they failed to gain in an open election. ...

Consider, as a prime example, the push to raise the retirement age, the age of eligibility for Medicare, or both. This is only reasonable, we’re told — after all, life expectancy has risen... In reality,... it would be a hugely regressive policy change...

Or take a subtler example, the insistence that any revenue increases should come from limiting deductions rather than from higher tax rates. The key thing to realize here is that the math just doesn’t work... So any proposal to avoid a rate increase is, whatever its proponents may say, a proposal that we let the 1 percent off the hook and shift the burden, one way or another, to the middle class or the poor.

The point is that the class war is still on, this time with an added dose of deception. And this, in turn, means that you need to look very closely at any proposals coming from the usual suspects, even — or rather especially — if the proposal is being represented as a bipartisan, common-sense solution. ...

So keep your eyes open as the fiscal game of chicken continues. It’s an uncomfortable but real truth that we are not all in this together; America’s top-down class warriors lost big in the election, but now they’re trying to use the pretense of concern about the deficit to snatch victory from the jaws of defeat. Let’s not let them pull it off.

'Romney is Wall Street’s Worst Bet Since the Bet on Subprime'

This is from a much longer Ezra Klein interview of Chrystia Freeland:

‘Romney is Wall Street’s worst bet since the bet on subprime’, by Ezra Klein: Ezra Klein: You’ve written about the revolt of the very rich against President Obama, and all the money they spent and time they dedicated to defeating him. So what’s the mood in those circles now that they’ve lost?

Chrystia Freeland: There’s a great joke on Wall Street which is that the bet on Romney is Wall Street’s worst bet since the bet on subprime. But I found the hostility towards Obama astonishing. ... On that Tuesday, the big Romney backers I was talking to were sure he was going to win. They were all flying into Logan Airport for the victory party. There’s this stunned feeling of how could we be so wrong, and a feeling of alienation.

The Romney comments to his donors,... I think they accurately reflected the view of a lot of these money guys. It’s the continuation of this 47 percent idea. They believe that Obama has been shoring up the entitlement society, and if you give enough entitlements to enough people, they’ll vote for you.

EK: Here’s my question about those comments. Romney was promising the very rich either a huge tax cut or, if you believe he would’ve paid for every dime and dollar of his cut, protection from any tax increases. He was promising financiers that he would roll back Dodd-Frank and Sarbanex-Oxley. He was promising current seniors that he wouldn’t touch their benefit. How are these not “gifts”?

CF: Let me be clear that I’m not defending any of them. But I think the way it works — and I think Romney’s comments were very telling in this regard — ...they’re absolutely convinced that they’re not asking for special privileges for themselves. They’re convinced that it just so happens that their self-interest coincides perfectly with the collective interest. That’s where you get this idea of the “job creators”. ... If you’ve developed an ideology that what’s good for you personally also happens to be good for everyone else, that’s quite wonderful because there’s no moral tension. ...

EK: ... From my reporting with the White House, I think the president’s view of the economy is that globalization is here and it’s not going away. The economy rewards high skills more than ever. Automatic and computerization and foreign competition are wiping out many middle class jobs, and while some new ones are created, it’s not at all clear that enough are being created. But in his view, he sees more redistribution as very necessary in this context. He thinks that if the economy is going to grow but the gains won’t be broadly shared, then it’s the government’s role to try and redistribute some, though of course not all, or even most, of those gains.

My experience is that the very rich are open to higher taxes in the context of a deficit deal. ... But they don’t like the idea that their money should be redistributed simply because they have too much of it. They don’t like the idea that, so to speak, they didn’t build all of this, and as such, they need to give back in order to make sure it continues. ... They see it as punishing their success.

CF: I completely agree. ...

Paul Krugman: The Twinkie Manifesto

The good old days hold lessons for today:

The Twinkie Manifesto, by Paul Krugman, Commentary, NY Times: The Twinkie ... will forever be identified with the 1950s... And the demise of Hostess has unleashed a wave of baby boomer nostalgia for a seemingly more innocent time.

Needless to say, it wasn’t really innocent. But the ’50s ... do offer lessons that remain relevant in the 21st century. ... Consider the question of tax rates on the wealthy. The modern American right, and much of the alleged center, is obsessed with the notion that low tax rates at the top are essential to growth. ...

Yet in the 1950s ... taxes on corporate profits were twice as large... The best estimates suggest that circa 1960 the top 0.01 percent ... paid an effective federal tax rate of more than 70 percent, twice what they pay today.

Nor were high taxes the only burden wealthy businessmen had to bear. They also faced a labor force with a degree of bargaining power hard to imagine today. In 1955 roughly a third of American workers were union members. In the biggest companies, management and labor bargained as equals...

Squeezed between high taxes and empowered workers, executives were relatively impoverished by the standards of either earlier or later generations. ... Between the 1920s and the 1950s real incomes for the richest Americans fell sharply...

Today, of course, the mansions, armies of servants and yachts are back, bigger than ever — and any hint of policies that might crimp plutocrats’ style is met with cries of “socialism.” ... Surely, then, the far less plutocrat-friendly environment of the 1950s must have been an economic disaster, right? ...

On the contrary,... the high-tax, strong-union decades after World War II were in fact marked by spectacular, widely shared economic growth...

Which brings us back to the nostalgia thing.

There are, let’s face it, some people in our political life who pine for the days when minorities and women knew their place, gays stayed firmly in the closet and congressmen asked, “Are you now or have you ever been?” The rest of us, however, are very glad those days are gone. We are, morally, a much better nation... Oh, and the food has improved a lot, too.

Along the way, however, we’ve forgotten something important — namely, that economic justice and economic growth aren’t incompatible. America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda..., it prospered. And we can do that again.

'Mitt Romney’s Ugly Vision of Politics'

Ezra Klein, then Paul Krugman:

From the 47% to ‘gifts’: Mitt Romney’s ugly vision of politics, by Ezra Klein: During the campaign, Mitt Romney repeatedly promised seniors that he’d restore President Obama’s $716 billion in Medicare cuts. He promised them that, unlike Obama, he wouldn’t permit a single change to Medicare or Social Security for 10 years. ... While the rest of the country was trying to pay down the deficit and prioritize spending, they’d be safe. He also promised the rich that they’d see a lower overall tax rate... Oh, and let’s not forget his oft-stated intention to roll back the Dodd-Frank financial reforms and replace them with…something.

Keep all that in mind when you hear Romney blaming his loss on “the gifts” that Obama reportedly handed out to “the African-American community, the Hispanic community and young people.” Romney was free with the gifts, too, and his promises to seniors and to the rich carried a far higher price tag than any policies Obama promised minorities or the young. But to Romney, and perhaps to the donors he was speaking to, those policies didn’t count as “gifts.”...

Romney really does appear to believe that there’s a significant portion of the electorate that’s basically comprised of moochers. That’s Romney’s political cosmology: The Democrats bribe the moochers with health care and green cards. ...

When Romney thinks he’s behind closed doors and he’s just telling other people like him how politics really works, the picture he paints is so ugly as to be bordering on dystopic. It’s not just about class, but about worth, and legitimacy. His voters are worth something to the economy — they’re producers — and they respond to legitimate appeals about how to best manage the country. The Democrats’ voters are drags on the economy — moochers — and they respond to crass pay-offs. 

Romney doesn’t voice these opinions in public. He knows better. But so did the voters. ...

Paul Krugman:

The Moocher Majority, by Paul Krugman: Lots of people having fun with Mitt Romney’s post-election diagnosis, which is that President Obama played dirty: he won peoples’ votes by — horrors — actually making their lives better...

Gosh. People who will have health insurance under Obama but would have lost it under Romney voted for Obama. What’s wrong with those people?

But as many commentators have pointed out, Romney was just encapsulating the prevalent worldview on the right. Some of us see an increasingly, radically unequal America, with rising inequality actually reinforced by public policy, with tax rates on the rich lower than they have been in many decades and the overall redistributive effect of government down substantially since the 1970s. But the right sees an entitlement epidemic, in which the big problem is that too many people are getting free stuff.

It’s important to understand the roots of this stuff. It began as a deliberate appeal to racism, with explicit condemnation of Those People as welfare moochers. Then it became more coded...

What Mitt Romney is now complaining about is the horrifying reality that ... anti-government rhetoric is turning into a way to lose elections rather than win them.

And I don’t think the Republican party as currently constituted can change this: after 45 years of the Southern strategy, this stuff is what defines the party’s soul.

How will the GOP respond to Romney's loss? With soul-searching or entrenchment? I think the Republican Party will change with time, it has to, and there are younger voices ready to lead the Party to new ground. But the old guard will argue it was the abandonment of traditional principles that caused the loss, and resist the suggestion that the maker-taker, welfare moochers type rhetoric was harmful. The old guard still holds most of the power, and it is not yet ready to step aside.

'The New Poverty Measure is Out, and It’s Grim'

Dylan Mathews on the Census Bureau's "supplementary poverty measure," which is intended to overcome some of the shortcomings of the traditional measure of poverty:

The new poverty measure is out, and it’s grim, by Dylan Matthews: ...In recent years the Census Bureau has begun developing a “supplemental poverty measure”... Today, it released the supplemental figure for 2011. Overall, it’s higher than the official measure, at 16.1 percent, but for some groups, such as children under 18 and blacks, it’s actually lower. By contrast, it’s much higher for the elderly (15.1 percent in the supplemental measure, 8.7 percent in the official one)...

Perhaps the most interesting part of the report is the Census’ measurement of how much various government programs and categories of expenses reduce or increase the supplemental poverty rate, which unlike the official rate, the supplemental measure takes into account. Medical expenses are the main expense contributor to poverty, followed by expenses related to work (such as transportation, supplies, etc.), while Social Security is far and away the most important program for reducing poverty, followed by tax credits like the Earned Income Tax Credit (EITC) or the child tax credit (CTC):

...the Social Security number is especially notable given how much higher the supplemental measure is than the official one for the elderly. It suggests that even with that substantial safety net, the poverty problem among the elderly is much bigger than we thought.

Net Wealth Shock in US, by Net Worth Percentile

Via Amir Sufi on Twitter (@profsufi):

Net Wealth Shock in US, by Net Worth Percentile

[click on figure to enlarge]

• For poor and median households, Great Recession wipes wipes out 20 years of net worth accumulation
• For the rich, only small decline

[Link]

Hurricane Sandy’s Lesson on Preserving Capitalism

We are, as they say, live:

Hurricane Sandy’s Lesson on Preserving Capitalism: With long gas lines and other shortages putting people on edge in the wake of Hurricane Sandy, the usual post-disaster debate over the economics and ethics of price-gouging is underway.  However, while the question of whether it is okay, even desirable, for businesses to raise prices after natural disasters is certainly important, there is a larger lesson that can be drawn from this debate. ...

The lesson is about when support for price-allocation systems -- the heart of capitalism -- breaks down. More here.

'America’s Opportunity Gap'

A few passages from an article by Lane Kenworthy on the inequality of opportunity, and what we might do about it:

America’s opportunity gap, by Lane Kenworthy: ... For all the differences between Democrats and Republicans that were laid bare during the 2012 U.S. presidential campaign, the parties’ standard-bearers, Barack Obama and Mitt Romney, do seem to have agreed on one thing: the importance of equal opportunity. ... It is no accident that both campaigns chose to emphasize equality of opportunity. It has long been at the center of the American ethos. ...

...there is general consensus among social scientists on a few basic points. First, an American born into a family in the bottom fifth of incomes between the mid-1960s and the mid-1980s has roughly a 30 percent chance of reaching the middle fifth or higher in adulthood, whereas an American born into the top fifth has an 80 percent chance of ending up in the middle fifth or higher. (In a society with perfectly equal opportunity, every person would have the same chance...) This discrepancy means that there is considerable inequality of opportunity among Americans from different family backgrounds.

Second, inequality of opportunity has increased in recent decades. ... Third, in a sharp reversal of historical trends, there is now less equality of opportunity in the United States than in most other wealthy democratic nations. ...

So how did the United States get here? Why did it falter where other nations have not? And how can it fix the problem? On the right, a standard proposal is to strengthen families. On the left, a recent favorite is to reduce income inequality. And everyone supports improving education. To know which proposals would work best, it helps to understand the roots of the new opportunity gap. ...

DeLong: Inequality: Living in the Second Gilded Age

Brad DeLong:

Inequality: Living in the Second Gilded Age, by Brad DeLong: A third of a century ago, all of us economists confidently predicted that America would remain and even become more of a middle-class society. The high income and wealth inequality of the 1870-1929 Gilded Age, we would have said, was a peculiar result of the first age of industrialization. Transformations in technology, public investments in education, a progressive tax system, a safety net, and the continued decline in discrimination on the basis of race and sex had made late-20th century America a much more equal place than early 20th century America, and would make early 21st century America even more equal — even more of a middle-class society — still.

We were wrong.

America today is at least as unequal as, and may be more unequal than, it was back at the start of the 20th century when Republicans, such as President Theodore Roosevelt of New York condemned the power wielded by “malefactors of great wealth,” and Democrats such as perennial losing presidential candidate William Jennings Bryant of Nebraska denounced shadowy conspiracies that had somehow manipulated the financial system to rob the typical family of its proper share in America’s prosperity.

Four major and a host of minor factors have driven rising inequality over the past third of a century: ...[continue reading]...

One complaint: It's more than just economics. In my view, Brad doesn't put enough emphasis on the changing political tide over the last few decades, and how that has altered public policy towards institutions such as unions that were able to help workers get a fair share of the output they produce (unions aren't even mentioned in the article). The explanation for rising inequality makes it appear that economics -- factors such as winner-take-all markets in an increasingly globalized world and skill based technical change -- can fully account for the problem. I don't see it that way. Economics surely contributed to the inequality problem, but the idea that those at the top haven't received a penny more than they earned, that their incomes can be explained by economics alone, is hard to defend. Workers incomes have not kept up with productivity -- they did not get a fair share of the output they produced over the last few decades -- and that means some other group got more than it deserves. Given the stagnant incomes at lower levels and widening inequality from growth at the top, it's not hard to think of who that group might be, and it is not the least bit surprising that this just happens to be the group with the largest amount of political influence.

I don't have any problem with the statements made in the article about taxes on the wealthy and educational opportunity for working class households -- we need more of both -- but we also need to reform our institutions so that they work for all of us, not just the (ahem) job creators at the top.

(To be fair, Brad acknowledges that there has been a misallocation of resources with too much going to finance and health care administration, and not enough elsewhere, and he also notes that the political power of the wealthy make it hard to change the tax code. But for the most part his argument about rising inequality relies upon economics, and the political and institutional arguments are not emphasized. Again, I am not quarreling with the economics, I just think the political and institutional factors deserve more weight.)

But this is an old debate with Brad DeLong and others on one side, and Krugman. et. al. on the other, e.g. see here:

To a good neoclassical economist, the statement that the relative price of a factor of production--like the labor of the elite top 1% of America's wage and salary distribution--has risen is the same thing as the statement that the relative productivity of that factor of production has risen. But we need to distinguish between these statements in order to make sense of the ongoing argument between Andrew Samwick on the one hand and Paul Krugman and Mark Thoma on the other.

In a nutshell: Is the statement that there is a higher return to education today merely an assertion that the rich today earn more in relative terms than their counterparts in the past? Or is it also a statement that the rich today are more productive in relative terms than their counterparts in the past?

Andrew Samwick takes the first definition, and concludes that rising inequality is the result of a higher return to education. By his lights, he is clearly correct.

Paul Krugman and Mark Thoma take the second definition and conclude that that rising inequality is not primarily the result of a higher return to education but instead primarily the result of socio-political factors that have raised the relative price of what the rich and well-educated do. And they too have a strong case. Piketty and Saez's latest numbers estimate that top 13,000 American households have multiplied their relative real incomes nearly fivefold since the 1970s. Then they received some 0.6% of national income. Now they receive nearly 2.8% of national income--an average of $25 million each, compared to roughly $5 million each had the relative income distribution remained at its 1970s levels. What are the CEOs, CFOs, COOs, elite Hollywood entertainers, investment bankers, and the very highest levels of professionals doing differently now in their work lives that makes them, in relative terms, worth five times as much as their predecessors of a generation and a half ago?...

Inequality of Income and Consumption

Via an email from Lane Kenworthy, here's more research contradicting the claim made by Kevin Hassett and Aparna Mathur in the WSJ that consumption inequality has not increased (here's my response summarizing additional work contradicting their claim, a claim that is really an attempt to blunt the call to use taxation to address the growing inequality problem):

Inequality of Income and Consumption: Measuring the Trends in Inequality from 1985-2010 for the Same Individuals, by Jonathan Fisher, David S. Johnson, and Timothy M. Smeeding: I. Introduction: Income and Consumption The 2012 Economic Report of the President stated: “The confluence of rising inequality and low economic mobility over the past three decades poses a real threat to the United States as a land of opportunity.” This view was also repeated in a speech by Council of Economics Advisors Chairman, Alan Krueger (2012). President Obama suggested that inequality was “…the defining issue of our time...” As suggested by Isabel Sawhill (2012), 2011 was the year of inequality.

While there has been an increased interest in inequality, and especially the differences in trends for the top 1 percent vs. the other 99 percent, this increase in inequality is not a new issue. Twenty years ago, Sylvia Nasar (1992) highlighted similar differences in referring to a report by the Congressional Budget Office (CBO) and Paul Krugman introduced the “staircase vs. picket fence” analogy (see Krugman (1992)). He showed that the change in income gains between 1973 and 1993 followed a staircase pattern with income growth rates increasing with income quintiles, a pattern that has been highlighted by many recent studies, including the latest CBO (2011) report. He also showed that the income growth rates were similar for all quintiles from 1947-1973, creating a picket fence pattern across the quintiles.

Recent research shows that income inequality has increased over the past three decades (Burkhauser, et al. (2012), Smeeding and Thompson (2011), CBO (2011), Atkinson, Piketty and Saez (2011)). And most research suggests that this increase is mainly due to the larger increase in income at the very top of the distribution (see CBO (2011) and Saez (2012)). Researchers, however, dispute the extent of the increase. The extent of the increase depends on the resource measure used (income or consumption), the definition of the resource measure (e.g., market income or after-tax income), and the population of interest.

This paper examines the distribution of income and consumption in the US using data that obtains measures of both income and consumption from the same set of individuals and this paper develops a set of inequality measures that show the increase in inequality during the past 25 years using the 1984-2010 Consumer Expenditure (CE) Survey.

The dispute over whether income or consumption should be preferred as a measure of economic well-being is discussed in the National Academy of Sciences (NAS) report on poverty measurement (Citro and Michael (1995), p. 36). The NAS report argues:

Conceptually, an income definition is more appropriate to the view that what matters is a family’s ability to attain a living standard above the poverty level by means of its own resources…. In contrast to an income definition, an expenditure (or consumption) definition is more appropriate to the view that what matters is someone’s actual standard of living, regardless of how it is attained. In practice the availability of high-quality data is often a prime determinant of whether an incomeor expenditure-based family resource definition is used.

We agree with this statement and we would extend it to inequality measurement.[1] In cases where both measures are available, both income and consumption are important indicators for the level of and trend in economic well-being. As argued by Attanasio, Battistin, and Padula (2010) “...the joint consideration of income and consumption can be particularly informative.” Both resource measures provide useful information by themselves and in combination with one another. When measures of inequality and economic well-being show the same levels and trends using both income and consumption, then the conclusions on inequality are clear. When the levels and/or trends are different, the conclusions are less clear, but useful information and an avenue for future research can be provided.

We examine the trend in the distribution of these measures from 1985 to 2010. We show that while the level of and changes in inequality differ for each measure, inequality increases for all measures over this period and, as expected, consumption inequality is lower than income inequality. Differing from other recent research, we find that the trends in income and consumption inequality are similar between 1985 and 2006, and diverge during the first few years of the Great Recession (between 2006 and 2010). For the entire 25 year period we find that consumption inequality increases about two-thirds as much as income inequality. We show that the quality of the CE survey data is sufficient to examine both income and consumption inequality. Nevertheless, given the differences in the trends in inequality, using measures of both income and consumption provides useful information. In addition, we present the level of and trends in inequality of both the maximum and the minimum of income and consumption. The maximum and minimum are useful to adjust for life-cycle effects of income and consumption and for potential measurement error in income or consumption. The trends in the maximum and minimum are also useful when consumption and income alone provide different results concerning the measurement of economic well-being. ...

The Myth that Growing Consumption Inequality is a Myth

Kevin Hassett and Aparna Mathur argue that consumption inequality has not increased along with income inequality. That's not what recent research says, but before getting to that, here's their argument:

Consumption and the Myths of Inequality, by Kevin Hassett and Aparna Mathur, Commentary, WSJ: In multiple campaign speeches over the past week, President Obama has emphasized a theme central to Democratic campaigns across the country this year: inequality. ... To be sure, there are studies of income inequality—most prominently by Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California at Berkeley—that report that the share of income of the wealthiest Americans has grown over the past few decades while the share of income at the bottom has not. The studies have problems. Some omit worker compensation in the form of benefits. And economist Alan Reynolds has noted that changes to U.S. tax rules cause more income to be reported at the top and less at the bottom. But even if the studies are accepted at face value, as a read on the evolution of inequality, they leave out too much.

Let me break in here. Here's what Piketty and Saez say about Reynold's work:

In his December 14 article, “The Top 1% … of What?”, Alan Reynolds casts doubts on the interpretation of our results showing that the share of income going to the top 1% families has doubled from 8% in 1980 to 16% in 2004. In this response, we want to outline why his critiques do not invalidate our findings and contain serious misunderstandings on our academic work. ...

Back to Hassett and Mathur

Another way to look at people's standard of living over time is by their consumption. Consumption is an even more relevant metric of overall welfare than pre-tax cash income, and it will be set by consumers with an eye on their lifetime incomes. Economists, including Dirk Krueger and Fabrizio Perri of the University of Pennsylvania, have begun to explore consumption patterns, which show a different picture than research on income.

Let me break in again and deal with the Krueger and Perri Krueger and Perri (2006) paper, which followed the related work by Slesnick (2001):

Has Consumption Inequality Mirrored Income Inequality?: This paper by Mark Aguiar and Mark Bils finds that "consumption inequality has closely tracked income inequality over the period 1980-2007":

Has Consumption Inequality Mirrored Income Inequality?, by Mark A. Aguiar and Mark Bils, NBER Working Paper No. 16807, February 2011: Abstract We revisit to what extent the increase in income inequality over the last 30 years has been mirrored by consumption inequality. We do so by constructing two alternative measures of consumption expenditure, using data from the Consumer Expenditure Survey (CE). We first use reports of active savings and after tax income to construct the measure of consumption implied by the budget constraint. We find that the consumption inequality implied by savings behavior largely tracks income inequality between 1980 and 2007. Second, we use a demand system to correct for systematic measurement error in the CE's expenditure data. ...This second exercise indicates that consumption inequality has closely tracked income inequality over the period 1980-2007. Both of our measures show a significantly greater increase in consumption inequality than what is obtained from the CE's total household expenditure data directly.

Why is this important? (see also "Is Consumption the Grail for Inequality Skeptics?"):

An influential paper by Krueger and Perri (2006), building on related work by Slesnick (2001), uses the CE to argue that consumption inequality has not kept pace with income inequality.

And these results have been used by some -- e.g. those who fear corrective action such as an increase in the progressivity of taxes -- to argue that the inequality problem is not as large as figures on income inequality alone suggest. But the bottom line of this paper is that:

The ... increase in consumption inequality has been large and of a similar magnitude as the observed change in income inequality.

So they are citing what is now dated work. They either don't know about the more recent work, or simply chose to ignore it because it doesn't say what they need it to say.

Okay, back to Hassett and Mathur once again. They go on to cite their own work -- more on that below. One thing to note, however, is that the recent research in this area says the data they use must be corrected for measurement error or you are likely to find the (erroneous) results they find. As far as I can tell, the data are not corrected:

Our recent study, "A New Measure of Consumption Inequality," found that the consumption gap across income groups has remained remarkably stable over time. ...

While this stability is something to applaud, surely more important are the real gains in consumption by income groups over the past decade. From 2000 to 2010, consumption has climbed 14% for individuals in the bottom fifth of households, 6% for individuals in the middle fifth, and 14.3% for individuals in the top fifth when we account for changes in U.S. population and the size of households. This despite the dire economy at the end of the decade.

Should we trust this research? First of all this is Kevin Hassett. How much do you trust the work once you know that? Second, it's on the WSJ editorial page. How much does that reduce your trust? I'd hope the answer is "quite a bit." Third, big red flags when researchers cherry pick start and/or end dates. Fourth, as already noted, recent research shows that the no growth in consumption inequality result is due to measurement error in the CES data. When the data are corrected, consumption inequality mirrors income inequality. They don't say a word about correcting the data.

Next, we get the "but they have cell phones!" argument:

Yet the access of low-income Americans—those earning less than $20,000 in real 2009 dollars—to devices that are part of the "good life" has increased. The percentage of low-income households with a computer rose... Appliances? The percentage of low-income homes with air-conditioning equipment..., dishwashers..., a washing machine..., a clothes dryer..., [and] microwave ovens... grew... Fully 75.5% of low-income Americans now have a cell phone, and over a quarter of those have access to the Internet through their phones.

Before turning to their conclusion, let me note more new research in this area from a post earlier this year, But They Have TVs and Cell Phones!, emphasizing the measurement error problem:

Consumption Inequality Has Risen About As Fast As Income Inequality, by Matthew Yglesias: Going back a few years one thing you used to hear about America's high and rising level of income inequality is that it wasn't so bad because there wasn't nearly as much inequality of consumption. This story started to fall apart when it turned out that ever-higher levels of private indebtedness were unsustainable (nobody could have predicted...) but Orazio Attanasio, Erik Hurst, and Luigi Pistaferri report in a new NBER working paper "The Evolution of Income, Consumption, and Leisure Inequality in The US, 1980-2010" that the apparently modest increase in consumption inequality is actually a statistical error.

They say that the Consumer Expenditure Survey data from which the old-school finding is drawn is plagued by non-classical measurement error and adopt four different approaches to measuring consumption inequality that shouldn't be hit by the same problem. All four alternatives point in the same direction: "consumption inequality within the U.S. between 1980 and 2010 has increased by nearly the same amount as income inequality."

Here's Hassett and Mathur's ending:

It is true that the growth of the safety net has contributed to massive government deficits—and a larger government that likely undermines economic growth and job creation. It is an open question whether the nation will be able to reshape the net in order to sustain it, but reshape it we must. ...

After arguing (wrongly) that consumption has kept pace with income, they say it's only because of the deficit -- but it's not sustainable. So suck it up middle class America, consumption inequality has increased despite the claims of denialists like Hassett, and if they get their way and reduce the social safety net, it will only get worse.

Hassett and company denied that income inequality was growing for years (notice their attempt to do just that in the first paragraph by citing discredited research from Alan Reynolds), then when the evidence made it absolutely clear they were wrong (surprise!), they switched to consumption inequality. Recent evidence says they're wrong about that too.

The 'Old News' on Inequality and Growth

A professor of sociology at Berkeley, Claude Fischer, says all the recent talk about inequality causing a reducing in growth is "old news":

A cost of inequality: growth, by Claude Fischer: A recent story in The New York Times, back in its business section, had important news about inequality: “Income Inequality May Take Toll on Growth.” A couple of economists at the IMF reported research (here) showing that, across many countries, periods of greater income inequality tend to be followed by slow-downs in economic growth.  ...

This is, actually, old news. About twenty years ago the research literature already showed that inequality probably damped the economy (see pp. 126ff here). But this remains important to repeat – not just because reporting the baleful effects of inequality now has the imprimatur of the IMF, but also because so many people still resist the news; they insist instead on believing the opposite, that inequality stimulates the economy, to the benefit of everyone. And, of course, this insistence has political implications right now. ...

To the extent that facts matter in such a politicized debate, it is becoming increasingly clear that equality rather than inequality is a better policy for economic growth. ...

'The Moral Benefits of Economic Growth'

Just a quick reminder of what can happen "if the majority of the people do not see an improving future":

Is the Financial Sector Worth What We Pay It?, Somewhat Logically: ...Benjamin Friedman holds, in The Moral Consequences of Economic Growth, that “greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy” derive directly from economic growth. He shows that even during stagnation–let alone recession and depression–those values can vanish easily. Brad Delong observes, in reviewing Friedman, that if the majority of the people do not see an improving future, these values are at risk even in countries where absolute material prosperity remains high. Given rising political intransigence and loss of common social purpose in the U.S., and the rise of nationalistic political sentiments in Europe, the effects of increasing stagnation and inequality are becoming more evident... All the data seem to affirm Friedman’s assertion that all societal strata should participate to maximize the moral benefits of economic growth. ...

The idea that the key to future stability and prosperity is to tilt the advantages even more toward the wealthy -- more tax cuts at the top and so on -- is crazy. We've had a boatload of tax cuts at the top already and the benefits have not trickled down as promised -- the benefits were anything but widely shared -- and it would be hard to describe the last few years as prosperous. As a consequence, I think we are already seeing a decline in faith that democracy as an institution that works for all of us rather than an institution that gets captured by powerful, wealthy interests. My eyes have certainly been opened the last few years.

'Ultimately Everything is Attributable to Luck'

James Kwak and Richard Posner argue that it's all due to luck:

Luck, Wealth, and Richard Posner, by James Kwak: I disagree with Richard Posner ... on so many things that I always worry when he seems to agree with me. Did I write something stupid? I wonder.

A friend forwarded me Posner’s latest blog post, “Luck, Wealth, and Implications for Policy,” parts of which sound vaguely like a post I wrote three years ago, “Do Smart, Hard-Working People Deserve To Make More Money?“ ... In that post, I argued that even if differences in incomes are due to things that people ordinarily think of as “merit,” like intelligence and hard work, that doesn’t mean that rich people have a moral entitlement to their wealth, because they didn’t do anything to deserve their intelligence or their propensity to work hard. In summary, “I have little patience for the idea that rich people deserve what they have because they worked for it. It’s just a question of how far back you are willing to acknowledge that chance enters the equation.”

Posner now goes even further than I did: “I think that ultimately everything is attributable to luck, good or bad,” he writes, including the propensity for working hard, a low discount rate, and so on. “In short, I do not believe in free will. I think that everything that a person does is caused by something. . . . If this is right, a brilliant wealthy person like Bill Gates is not ‘entitled’ to his wealth in some moral, Ayn Randian sense.”

He goes on—he is still Richard Posner, after all—to argue that tax policy should be concerned solely with incentive effects. ...

little patience for the idea that rich people deserve what they have because they worked for it

'Closing America’s Jobs Deficit'

Laura Tyson:

...Earnings gains have been especially strong for those with tertiary degrees, while the real wages of high-school educated workers, especially men, have fallen sharply. It is becoming increasingly difficult for workers with low levels of educational attainment to find high-paying jobs ...

The US was the world leader in high school and college graduation rates for much of the twentieth century. Today it ranks in the middle of the OECD countries.

A major factor behind that relative decline has been the US school system’s failure to ensure high-quality education for disadvantaged Americans, particularly children from poor, minority, and immigrant households. ...

As a result of these and other problems, the average American secondary-school student receives inadequate preparation in core subjects..., which in turn reduces college enrollment and completion rates. ... And a recent study by McKinsey suggests that the gaps in educational opportunity and attainment by income impose the equivalent of a permanent recession of 3-5% of GDP on the US economy.

To address the skills gap, the US must boost the educational attainment of current and future workers. That means investing more in education at all levels – in early-childhood education programs, elementary and secondary schools, community colleges, trade-school programs for specific jobs in specific sectors, and financial aid for higher education. Above all, it means addressing the income disparities in educational opportunity and attainment.

'The Burden of the Debt'

This is from a very old post (2/2009):

I saw Senator McCain on CNN talking about how the stimulus package is, essentially, reaching into the pockets of future generations and transferring their wealth to the present generation. He kept talking about how much poorer future generations will be as a result of the debt from the stimulus package (never mind that he voted for tax cuts that would have made the deficit much worse, e.g. "It’s 'generational theft,' said Senator John McCain, just a few days after voting for tax cuts that would, over the next decade, have cost about four times as much.").

So let's look at this and see if the generational theft charge has any foundation or, as is more likely given recent history, it is mostly scare tactics being used in an attempt to manipulate public opinion.

To begin, think about how the government finances, say, $10,000 in deficit spending. To use debt finance (as opposed to raising taxes or printing money), the government will print up a piece of paper - we call it a government bond - and write "IOU $10,000 plus interest" on it. It then trades the "IOU $10,000 plus interest at some point in the future" for $10,000 in cash. Thus, the private sector gives the government $10,000 and gets an IOU (a bond) in return.

Let's suppose the government then takes this money and spends it on a project such as a road that has benefits for a wide segment of the population. The end result, then, is that the money was borrowed from an individual and distributed through government spending (or transfer payments) to a larger segment of the population.

So far, there hasn't been any transfer of resources from the future to the present, only a transfer a resources within the current generation. What about when the bond is paid off, does that transfer resources across generations? Let's suppose it is a 30 year bond, and that the holder passes away and bequeaths it to his or her children. Thus, thirty years from now the bond comes due, and the holder cashes it in and is paid in full. But where does the money come from? The government pays it out of its tax revenue. That is, the government collects the $10,000 plus interest from the future generation, then gives taxes it collects to the bond holder.

But this is a transfer of resources within a generation, not across generations. A whole bunch of people in the future will have to pay higher taxes, and the taxes they pay will go to a smaller number of individuals holding the debt. But across the population the assets and liabilities cancel exactly, there is no net aggregate burden. Liabilities have passed to future generations, but so have the corresponding assets.

Thus, the current generation cannot use government deficits to literally reach into the pockets of future generations and steal their resources. But that doesn't mean that deficits are always harmless. There are three ways that debt can make future generations worse off, the question is whether these are important considerations right now. So let's look at three ways debt can be problematic and see if we should be worried about them in the present environment.

First, financing the debt can cause interest rates to rise. If interest rates rise, investment is lower and that can lower future economic growth. Thus, if this effect is operative and strong, there is a sense in which higher output today is traded for lower growth in the future.

This effect, commonly called crowding out, is worrisome when the economy is running at or near full employment and competition for resources is intense, but right now with interest rates as low as they are and with so much slack in the economy, this is not much of a worry. Government borrowing will not put upward pressure on interest rates, and hence private sector investment - to the extent firms are willing to undertake it in such poor conditions - won't be much affected.

Second, the collection of taxes in the future can cause distortions, and those distortions can lower economic growth. This is simply the usual supply-side economics story. This will likely bring the supply-side fanatics and ideologues out of the woodwork, but I don't believe the evidence supports the claim that these effects are large (e.g. see "Final grade on the Bush tax cuts: Failure to produce jobs"). So there's nothing much to worry about here either.

Third, if we borrow from foreigners rather than ourselves, the debt can impose a net aggregate burden within the US. To see this, use the example above where the government borrows $10,000, but this time let's suppose the money is borrowed from the foreign sector. In this case, we borrow from the foreign sector, and then at some point in the future the debt is paid off and this involves a flow of resources out of the U.S. Because resources flow out of the U.S. instead of simply being redistributed within the U.S., this imposes a net burden.

But there are two important qualifications. If we use the money to build something that provides benefits to current and future generations that exceed the value of the resources flowing out of the country, there is still a net benefit from the transaction. It depends upon what is done with the money. If it is used, for example, to build things like infrastructure and schools, then future generations get a benefit along with a bill, and it is the net effect that matters.

The second qualification is that while we borrow from foreigners, we also hold foreign assets and if you look at the net resource flow, the flow of funds outward from foreigners owning our debt, and the flow inward from our owning foreign assets, the net flow is positive. So overall these transactions do not detract from the living standards of future generations. [Update: I should have also added that these considerations are independent of countercyclical fiscal policy. The value from using countercyclical fiscal policy to enhance economic stability - something that does not necessarily require capital expenditures by the government (e.g. investment in infrastructure) - also needs to be taken into account.]

When you put all of this together, it seems very clear that the Republican opposition is misplaced and, though it's par for the courses they play on, unduly alarmist. But you may not believe me, so let me add two other sources for the same message. ...[adds supporting quotes from Baumol and Blinder's textbook, Dean Baker]...

As noted, most of these points are also made in Baumol and Blinder's textbook, but there are some qualifications to note. First, on the effect of lending to foreigners, see Paul Krugman. Second, on whether its possible to transfer resources across generations, see Simon Wren-Lewis (and the links he provides at the beginning of his comments).

'The American Dream Has Become a Myth'

Spiegel interviews Joe Stiglitz:

'The American Dream Has Become a Myth', Spiegel: ...Spiegel: The US has always thought of itself as a land of opportunity where people can go from rags to riches. What has become of the American dream?

Stiglitz: This belief is still powerful, but the American dream has become a myth. The life chances of a young US citizen are more dependent on the income and education of his parents than in any other advanced industrial country... The belief in the American dream is not supported by the data. ...

Spiegel: We thought that as a rule Americans don't begrudge the rich their wealth, though.

Stiglitz: There is nothing wrong if someone who has invented the transistor or made some other technical breakthrough that is beneficial for all receives a large income. He deserves the money. But many of those in the financial sector got rich by economic manipulation, by deceptive and anti-competitive practices, by predatory lending. They took advantage of the poor and uninformed... They sold them costly mortgages and were hiding details of the fees in fine print.

Spiegel: Why didn't the government stop this behavior?

Stiglitz: The reason is obvious: The financial elite support the political campaigns with huge contributions. They buy the rules that allow them to make the money. Much of the inequality that exists today is a result of government policies.

Spiegel: Can you give us an example?

Stiglitz: In 2008, President George W. Bush claimed that we did not have enough money for health insurance for poor American children, costing a few billion dollars a year. But all of a sudden we had $150 billion to bail out AIG, the insurance company. That shows that something is wrong with our political system. It is more akin to "one dollar, one vote" than to "one person, one vote." ...

Spiegel: So your answer to the inequality problem is to transfer money from the top to the bottom?

Stiglitz: First, transferring money from the top to the bottom is only one suggestion. Even more important is helping the economy grow in ways that benefit those at the bottom and top, and ending the "rent seeking" that moves so much money from ordinary citizens to those at the top. ...

Nothing particularly new here, but I wanted to highlight the point about rent-seeking, anti-competitive practices, etc. once again since I don't think this cause of inequality receives enough attention.

'There Aren’t That Many Takers in America'

I was checking my rss feed after class today, and for some reason -- I don't know what came over me -- I clicked through to a Washington Times article by Ted Nugent:

Mitt Romney was right about the 47 percent

It contains just what you'd expect from both the paper and the writer, things like:

Mitt Romney hit the bull’s-eye with his comments regarding the 47 percent of Americans who do not have any skin in the game as it pertains to paying federal income tax. Facts are facts.

Romney did hit a bull's-eye, I'll agree with that, but he scored for the wrong team. Anyway:

Mr. Romney is not backing down. Good. The truth is the truth and it’s long past time someone said it.

As I’ve written before, for at least the past 50 years the Democratic Party has intentionally engineered a class of political “victims” who have been bamboozled into being dependent on the federal government for their subsistence, including food, housing and now health care. They get this without paying any federal income taxes, and that’s wrong. Something for nothing is always a scam. This is how you buy votes, plain and simple. ...

The Democratic Party exists because it promotes the creation of dependence on Fedzilla. ... No able-bodied American should get anything for free while doing nothing to earn it. ...

Good advice Ted, I hope Romney follows it. Tell the 47% off but good!

Fortunately, the next thing I read was this (see the full post for the calculations being the numbers presented below):

There Aren’t That Many Takers in America, by  Nathan Kelly: ...Mitt Romney said...:“... there are 47% ... who are dependent upon government, who believe that they are victims, who believe that government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you name it.”

The ... discussion of dependence on government is at the heart of the Republican case against Democrats... I attempt to gain some empirical leverage on this question using information ... from 2011 Current Population Survey March Supplement microdata.

Creating a working definition of takers is tricky. ... It’s not a sliding scale. Either you’re a maker or you’re a taker. Since the rhetoric is dichotomous, my strategy for identifying takers will be dichotomous as well.

So who should we count as a pure taker? ... Of the 24.7% of Americans who did not work and received government benefits in 2010, more than 70% are either disabled or retired. 7.7% are not working in order to care for home or family – not a group that family values conservatives typically malign. 12.8% are going to school, which likely indicates at least a degree of taking responsibility for oneself. ...

The bottom line here is that there aren’t that many takers in America. The most restrictive definition pegs the percentage of takers at 2.4%. If we’re willing to include people in households with at least one earner, that number increases to 5.2%. ... But these numbers simply don’t line up with the rhetoric of a massive class of lazy people taking advantage of the rest of us while eating solely at the trough of government.

Finally, it’s worth pointing out that these are really upper-bound estimates. Being a taker involves motives as well as work and benefit status. Takers, so the argument goes, feel no responsibility for themselves and believe that they are entitled “to you name it.” The CPS data don’t allow us to examine motives, but if we could, we would likely find even fewer takers.

Workers have not received their fair share of output in recent decades -- wages have lagged behind increased productivity -- so other groups must have received more than their share. Another definition of "takers" would ask who it was that received more than they contributed, and I think it's pretty clear who that group is. Mitt carries their torch.

Labor's Declining Share of Income and Rising Inequality

Labor's share of income has been declining, and inequality has been increasing. Will these trends continue?:

Labor's Declining Share of Income and Rising Inequality, by Margaret Jacobson and Filippo Occhino, FRB Cleveland: Labor income has declined as a share of total income earned in the United States. This decline was caused by several factors, including a change in the technology used to produce goods and services, increased globalization and trade openness, and developments in labor market institutions and policies.

One consequence of the labor share decline has raised concerns. Since labor income is more evenly distributed across U.S. households than capital income, the decline made total income less evenly distributed and more concentrated at the top of the distribution, and this contributed to increase income inequality. In this Commentary, we look at how the labor share decline has affected income inequality in the past, and we study the likely future path of the labor share and its implications for inequality.

The Decline in Labor’s Share of Income

Household income comes in two types: labor income, which includes wages, salaries, and other work-related compensation (such as pension and insurance benefits and incentive-based compensation), and capital income, which includes interest, dividends, and other realized investment returns (such as capital gains). During the last three decades, labor’s share of total income has declined in favor of capital income (see “Behind the Decline in Labor’s Share of Income” for more detail).

There are a number of ways to measure the share of income that accrues to labor. We look at three different data sources, and each provides broad evidence of the decline. According to data from the Bureau of Economic Analysis, labor’s share of gross national income fluctuated around 67 percent during the 1980s, 1990s, and early 2000s, but it has declined since then and now stands at 63.8 percent.¹ (See figure 1.) According to the Bureau of Labor Statistics, the ratio of compensation to output for the nonfarm business sector fluctuated around 65 percent until the early 1980s and has declined steadily since, from 63 percent during the 1980s and 1990s to 58.2 percent most recently. Finally, a 2011 study of income tax returns and demographic data by the CBO (CBO 2011) finds that labor’s share of income decreased from 75 percent in 1979 to 67 percent in 2007.

These three data sources measure slightly different labor share concepts, which is why their estimated levels are different. But they agree in indicating a significant drop of 3 to 8 percentage points in labor’s share of income since the early 1980s, with the trend accelerating during the 2000s.

Such a decline had implications for the distribution of incomes. Labor income is more evenly distributed across U.S. households than capital income, while a disproportionately large share of capital income accrues to the top income households. As the share that is more evenly distributed declined and the share that is more concentrated at the top rose, total income became less evenly distributed and more concentrated at the top. As a result, total income inequality rose.

Income Inequality

Income inequality is the dispersion of annual incomes across households, relative to the average household income. Inequality affects a variety of other important economic variables, such as the composition of consumption and investment, tax revenue and government spending, government policies, economic mobility, human capital accumulation, and growth. Some economists—most prominently Raghuram Rajan in his book Fault Lines—have suggested that rising income inequality contributed to the debt accumulation and financial imbalances that led to the recent financial crisis. And of course income inequality is the focus of much attention as an indicator, albeit imperfect, of the inequality of lifetime income and welfare across households.

Several indicators suggest that inequality was declining up to the late 1970s, but it has since reversed course. It rose sharply during the 1980s and early 1990s and currently is at near record-high levels. ... [facts and figures on inequality, several measures presented] ...

This is a sizeable effect. More importantly, most of the effect occurred during the last decade, when the decline in the labor share was accelerating. Is this trend going to continue, and how will it affect income inequality going forward?

Future Paths

We use the model described in box 2 to learn about the future path of the labor share. The model decomposes the labor share into its long-run trend and its transitory components, and then it forecasts the future path of the overall labor share. We do all the calculations twice, once with the BEA data and once with the BLS data.

According to our model, the labor share trend has declined since 1980, with an accelerated drop in the 2000s, in both sets of data (figure 4). In the BEA data, the trend declined from levels as high as 69 percent before 1980 to 66.9 percent in 2000, to 64.9 percent today. In the BLS data, the trend declined from levels of approximately 64.5 percent before 1980 to 62.8 percent in 2000, to 59.8 percent today. According to these measures, the trend in the labor share declined 1.5 to 2 percentage points between 1980 and 2000, and then dropped an additional 2 to 3 percentage points, for a total of 4 to 4.5 percentage points.

Our model indicates that the labor share is currently 1 to 1.5 percentage points below its long-run trend level. Part of the decline in the labor share in the past five years was temporary, and it will be reversed as the recovery continues. Going forward, the labor share will pick up and converge to its long-run trend value. This will tend to decrease income inequality, lowering the Gini index by up to 0.5 (0.33 × 1.5) percentage points, as the decomposition in box 1 indicates.

Income inequality will not necessarily decrease though. As shown in box 1, inequality is affected not only by the relative shares of labor and capital income, but also by the concentrations of each. Concentration refers to the way each type of income is distributed across the households that earn it. In particular, concentration indexes measure how concentrated capital or labor income is at the top of the income distribution.

The future path of labor concentration is hard to predict, as it depends on the evolution of the returns to education and of the wage-skill premium. The concentration of capital income, however, is strongly procyclical, rising during recoveries (figure 5), and this suggests that capital income will become more concentrated at the top in the coming years of the recovery, helping to raise income inequality even further. This effect has dominated the dynamics of income inequality during the past two business cycles, so the future path of income inequality will likely be determined by the strength of the recovery and the associated pickup of the concentration of capital income.

...

'This Dynamic All But Guarantees a Permanent Underclass'

Laura Tyson:

The United States is caught in a vicious cycle largely of its own making. Rising income inequality is breeding more inequality in educational opportunity, which results in greater inequality in educational attainment. That, in turn, undermines the intergenerational mobility upon which Americans have always prided themselves and perpetuates income inequality from generation to generation.

This dynamic all but guarantees a permanent underclass.

Redistribution

Via Jared Bernstein, who says of the first graph, "All told, clearly some redistribution here but not anything that would lead to stark divisions between 'makers and takers'":

But tax expenditures go mostly to -- surprise! -- the top of the income distribution:

More here.

'How to Cut the US Deficit'

I really do need to get to jury duty, but one more quick one. Curious to hear what you think about this idea:

How to cut the US deficit by fixing taxes, by Laura Tyson, Commentary, Financial Times: One of the few issues on which Barack Obama and Mitt Romney agree is the need for tax reform. ... But tax reform should not come at the expense of progressivity. Income inequality is greater in the US than in the other developed countries of the OECD. ...

Proponents of greater progressivity often call for an increase in corporate taxes but this would lead to slower growth and fewer jobs. The US ... effective marginal corporate tax rate is one of the highest in the world. ... Of all taxes, corporate income taxes do the most harm to economic growth.

Both Mr Obama and Mr Romney advocate corporate tax reform that lowers the rate and broadens the base. The economic benefits could be significant. ...

A lower rate would stimulate investment, narrow the tax preference for debt over equity financing and weaken the incentives for international companies to move production to lower-tax locations. But lowering the corporate tax rate is expensive – each percentage point reduction would cut revenues by about $120bn over 10 years. ...

A more efficient and progressive way to pay for a lower corporate tax rate would be to increase taxes on dividends and capital gains. This would shift more of the burden towards capital owners and away from labor, which bears the burden in the form of fewer jobs and lower wages. ...

The US economy needs efficient and progressive tax reform and it needs more revenues for deficit reduction. Revenue increases have been a significant component of all major deficit-reduction packages enacted over the past 30 years. ...

'What Poverty Means: Beyond the Antiseptic Numbers'

Tim Taylor quotes Ralph Smith, senior vice-president of the Annie E. Casey Foundation commenting on recent data on poverty:

... There’s an antiseptic quality about the charts and graphs and the PowerPoint that feels to me as if it misses the issue and misses the reality of the lives of the people and the families about whom we speak. ...  I just can’t get to the point where I’m so captured by the data that I miss what these numbers mean for the lives and futures of the families about whom we speak, about the material conditions in which they live, about the aspirations they could hold onto for their kids and for the next generation.

And I will confess a discomfort as I think about the one million children who despite these not-quite-so-bad numbers will be born into poverty next year. One million new entrants into poverty, and what we can predict now. And what we can certify on the day they are born is that more than 50 percent of them will spend half their childhoods in poverty. Twenty-nine percent of them will live in high poverty communities. Ten percent of them will be born low birth weight, a key indicator of cognitive delays and problems in school. Only 60 percent of them will have access to health care that meets the criteria for having a medical home. By age three, fewer than 75 percent of them will be in good or excellent health, and they’ll be three times more likely than their more affluent peers to have elevated blood lead levels.

More than 50 percent of them will not be enrolled in pre-school programs and by the time they enter kindergarten, most of them will test 12 to 14 months below the national norms in language and pre-reading skills. Nearly 50 percent of them will start first grade already two years behind their peers. During the early grades, these children are more likely to miss more than 20 days of school every year starting with kindergarten, and that record of chronic absence will be three times that of their peers. When tested in fourth grade, 80 percent of these children will score below proficient in reading and math. We know now that 22 percent of them will not graduate from high school, and that number rises to 32 percent for those who spend more half of their childhood in poverty. And to no one’s surprise, these sad statistics and deplorable data get even worse for children of color and children who live in communities of concentrated poverty. ...

... it has been remarkable to me during the last few years of sustained high unemployment and families under stress, how much our national political discussion has focused on the merits of different tax levels for those with high incomes, and how little our national political discussion has focused in any concrete way on how to assist the poor, and in particular on how to alter the trajectory of life for children living in poverty.

Well, there has been some discussion -- the poor have been called moochers, implicitly or explicitly, by Republicans. And there has been even more dog-whistling about how Romney and Ryan, if elected, will stop transferring income from the good and wonderful people who earned it to those lousy no-good poor who sit around all day trying to figure out how to get their hands on more of the worthy people's money. I mean really, these people should just borrow money from their families, or better have it given to them as a way to avoid taxes, and use it to go to college or open up a business of some sort -- private equity perhaps.

Thomas Edsall with more of what poverty is like "beyond the antiseptic numbers," and the political environment that works against finding ways to help:

Is Poverty a Kind of Robbery?, by Thomas Edsall, Commentary, NY Times: In her presentation on Sept. 7 at a symposium on inequality at Yale, Alice Goffman, an assistant professor of sociology at the University of Wisconsin, talked about the winter of 2011-2012, which she spent living in Detroit among the very poor. Goffman described some of the effects of extreme poverty by quoting the words of a Detroit resident to whom she gave the pseudonym “Marqueta”:

Your fingers get slow, you know, your whole body slows down. You can’t really do much, you try to put a good face on for the kids, but when they leave you just keep still, keep the covers around you. Almost like you kind of fold into the floor. Like you’re just waiting it out. You don’t really think about too much.… November your stomach is crying at you but by December you know, you start to just shut down…. Around 3 you get up for the kids. Put the space heaters, so they come home and it’s warm in here.

... Underneath the statistics, hidden behind the desolation of the poor in the poorest big city in the United States, lies one of most intractable political dilemmas of our era: Can the Democratic party, the party of the left, address issues of poverty and want in today’s political environment? For example, can they talk about hunger? ...

Can Democrats at least stop the cutbacks, i.e. stop Republicans from cutting social services even further in order to fund tax cuts for the wealthy?:

Looked at through the calculus of contemporary partisan politics, the U.S.D.A. data demonstrates that in 2011 low food security was a problem for just under one in eight whites — a matter of concern but for many white voters, a virtually invisible issue. Very low food security affects the lives of only one in 24 whites.

For African Americans, low food security is a problem affecting one in four, and one in ten experience very low food security. The percentage of Hispanics who experience low food security is higher than the percentage of blacks, although the percentage of Hispanics suffering very low food security is slightly lower.

And:

Democrats have concluded that getting enough votes on Nov. 6 precludes taking policy positions that alienate middle-class whites. In practice this means that on the campaign trail there is an absence of explicit references to the poor — and we didn’t hear much about them at the Democratic National Convention either.

Republicans, in turn, see taking a decisive majority of white votes as their best chance of winning the presidency. The 2012 electorate is likely to be 72% white, according to a number of analyses. In this scenario, Republicans need to get at least 62 percent of the white vote to win, and Democrats need to get 38 percent or more of the white vote.

Update: Via Brad DeLong, Romney explains why he sees no reason to worry about people who rely upon government services (i.e. the people he sees as "moochers"):

There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That that's an entitlement. And the government should give it to them. And they will vote for this president no matter what…. These are people who pay no income tax…. [M]y job is is not to worry about those people ...

David Ricardo 'On Machinery'

David Ricardo, in the third edition of his Principles (this is from chapter 31, "On Machinery," 1821), reconsiders how the invention of new machinery affects labor:

Ever since I first turned my attention to questions of political economy, I have been of opinion, that such an application of machinery to any branch of production, as should have the effect of saving labour, was a general good, accompanied only with that portion of inconvenience which in most cases attends the removal of capital and labour from one employment to another. It appeared to me, that provided the landlords had the same money rents, they would be benefited by the reduction in the prices of some of the commodities on which those rents were expended, and which reduction of price could not fail to be the consequence of the employment of machinery. The capitalist, I thought, was eventually benefited precisely in the same manner. He, indeed, who made the discovery of the machine, or who first usefully applied it, would enjoy an additional advantage, by making great profits for a time; but, in proportion as the machine came into general use, the price of the commodity produced, would, from the effects of competition, sink to its cost of production, when the capitalist would get the same money profits as before, and he would only participate in the general advantage, as a consumer, by being enabled, with the same money revenue, to command an additional quantity of comforts and enjoyments. The class of labourers also, I thought, was equally benefited by the use of machinery, as they would have the means of buying more commodities with the same money wages, and I thought that no reduction of wages would take place, because the capitalist would have the power of demanding and employing the same quantity of labour as before, although he might be under the necessity of employing it in the production of a new, or at any rate of a different commodity. ...

These were my opinions, and they continue unaltered, as far as regards the landlord and the capitalist; but I am convinced, that the substitution of machinery for human labour, is often very injurious to the interests of the class of labourers.

My mistake arose from the supposition, that whenever the net income of a society increased, its gross income would also increase; I now, however, see reason to be satisfied that the one fund, from which landlords and capitalists derive their revenue, may increase, while the other, that upon which the labouring class mainly depend, may diminish, and therefore it follows, if I am right, that the same cause which may increase the net revenue of the country, may at the same time render the population redundant, and deteriorate the condition of the labourer. ...

That the opinion entertained by the labouring class, that the employment of machinery is frequently detrimental to their interests, is not founded on prejudice and error, but is conformable to the correct principles of political economy.

However, he goes on to say that this shouldn't be viewed as a call to discourage machinery:

The statements which I have made will not, I hope, lead to the inference that machinery should not be encouraged.  ... The employment of machinery could never be safely discouraged in a State, for if a capital is not allowed to get the greatest net revenue that the use of machinery will afford here, it will be carried abroad, and this must be a much more serious discouragement to the demand for labour, than the most extensive employment of machinery; for, while a capital is employed in this country, it must create a demand for some labour; machinery cannot be worked without the assistance of men, it cannot be made but with the contribution of their labour. By investing part of a capital in improved machinery, there will be a diminution in the progressive demand for labour; by exporting it to another country, the demand will be wholly annihilated.

So, in Ricardo's view, it is a choice between the potential for detrimental effects on labor from the use of new machinery versus even worse effects if the machinery is not used at all. His argument can certainly be questioned, at least in some places, but this is not the positive "lift all boats" theory of growth that is often attributed to Ricardo.

'Tax Cuts for Wealthy Linked to Income Inequality'

A report from the Congressional Research Service finds little support for the claim that tax cuts increase economic growth. They do, however, increase inequality:

Report: Tax Cuts for Wealthy Linked to Income Inequality, by Siobhan Hughes, WSJ: Just in time for the year-end debate over extending the Bush tax cuts for high earners: a new report concludes that tax cuts for the rich don’t seem to be associated with economic growth.

The report, from the Congressional Research Service, finds that tax cuts for high earners can be linked to a different outcome: income inequality.

“The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced,” according to the CRS report, circulated on Friday. ...

“As the top tax rates are reduced, the share of income accruing to the top of the income distribution increases; that is, income disparities increase,” government researchers said.

CRS analysts also said that “capital gains and dividends have become a larger share of total income over the past decade and a half while earnings have become a smaller share.” This phenomenon, the researchers said, suggests that labor may grab a larger share of the pie when the top individual and capital-gains tax rates are higher. ...

The implication, of course, is that allowing tax cuts to expire for high income individuals could decrease inequality without harming economic growth.

Inequality and Savings

This is from Oya Celasun of the IMF:

How Inequality Affects Saving Behavior, by Oya Celasun: ...Recent research has focused on the link between income inequality and growth, but less attention has been paid to the link between inequality and savings. So ... our study looked at which types of households drove the aggregate saving rate down before the crisis and those that drove it up afterwards...

Saving patterns before the crisis ...Our key finding is that that households with consistently lower income growth experienced larger declines in their saving rates and a larger rise in their mortgage debt before the crisis. We also find that these types of households contributed significantly to the overall decline in the saving rate. ...

Our results suggest that households with disappointing income growth attempted to preserve their living standards in the boom years by tapping into their housing equity. Their decisions did not anticipate the impending correction in house prices, the weaker economy, and lower incomes. The easy availability of home equity financing allowed households with low income growth to at least temporarily “keep up with the Joneses”... With the subsequent housing crash, those households already suffering from lowest income growth found themselves more vulnerable, with high levels of debt. ...

Saving patterns after the crisis How did households fare after the crisis? We found that those more dependent on housing wealth and those with higher debt levels on the eve of the crisis indeed raised their savings sharply after the crisis. Yet, as this sharp correction started from very depressed and even negative saving rates, these households have not yet made meaningful progress in reducing debt and repairing their balance sheets. Hence, these households may face grim future consumption prospects.

Taken together, our results do suggest that the lower income growth for segments of the income distribution was linked to the drop in saving rates and growing indebtedness of American families. Moreover, households that entered the crisis with a more precarious wealth situation have made limited progress in rebuilding their net worth ... by actively saving out of their incomes. ...

Unless their incomes and house prices pick up robustly, many households will need sustained levels of higher savings to rebuild wealth, making it less likely for the American consumer to drive U.S. growth.

'U.S. Income Gap Rose'

This probably won't be a surprise:

U.S. Income Gap Rose, Sign of Uneven Recovery, by Sabrina Tavernise, NY Times: The income gap between the wealthiest 20 percent of American households and the rest of the country grew sharply in 2011, the Census Bureau reported, as an overwhelming majority of Americans saw no gains from a weak economic recovery in its second full year.

Income for the top fifth of American households rose by 1.6 percent last year, driven by even larger increases for the top 5 percent of households... All households in the middle of the scale saw declines, while those at the very bottom stagnated.

“You’re really struck by the unevenness of the recovery,” said Lawrence Katz, an economics professor at Harvard. “The top end took a whack in the recession, but they’ve gotten back on their feet. Everyone else is still down for the count.”

The numbers helped drive an overall decline in income for the typical American family. Median household income after inflation fell to $50,054, a level that was 8 percent lower than in 2007, the year before the recession took hold. ...

The Census Bureau reported that a standard measure of income inequality, the Gini index, registered the first year-on-year increase since 1993, a surprise for economists who say the measure, which has been rising for some time, usually changes so slowly that a statistically significant rise over the course of one calendar year is rare. ...

Inflation-adjusted median household income fell by 1.5 percent in 2011. During the recovery, about 3 in 5 of the new jobs created have been low-skill and low-wage — taking people off the unemployment rolls and pulling some families out of poverty, but not providing a clear route to the middle class. ...

Recent Developments in CEO Compensation

The Myth of Upward Mobility

The statement "wealth plays an important role in whether children move up or down the socioeconomic ladder in adulthood" made me think of people like Mitt Romney who think they made it all on their own:

Exceptional upward mobility in the US is a myth, EurekAlert: The rhetoric is relentless: America is a place of unparalleled opportunity, where hard work and determination can propel a child out of humble beginnings into the White House, or at least a mansion on a hill.

But the reality is very different, according to a University of Michigan researcher who is studying inequality across generations around the world.

"Especially in the United States, people underestimate the extent to which your destiny is linked to your background. Research shows that it's really a myth that the U.S. is a land of exceptional social mobility," said Fabian Pfeffer, a sociologist at the U-M Institute for Social Research and the organizer of an international conference on inequality across multiple generations being held ... in Ann Arbor.

Pfeffer's own research illustrates this point based on data on two generations of families in the U.S. and a comparison of his findings to similar data from Germany and Sweden. ... He found that parental wealth plays an important role in whether children move up or down the socioeconomic ladder in adulthood. And that parental wealth has an influence above and beyond the three factors that sociologists and economists have traditionally considered in research on social mobility—parental education, income, and occupation.

"Wealth not only fulfills a purchasing function, allowing families to buy homes in good neighborhoods and send their children to costly schools and colleges, for example, but it also has an insurance function, offering a sort of private safety net that gives children a very different set of choices as they enter the adult world," Pfeffer said.

"Despite the widespread belief that the U.S. provides exceptional opportunities for upward mobility, these data show that parental wealth has an important role in shielding offspring from downward mobility and sustaining their upward mobility in the U.S..." ...

'The Decline of the Middle Class'

Barry Ritholtz presents several graphs showing "critical evidence on the decline of the middle class" in recent years, and then remarks:

One final note: Despite the overwhelming data, some people dispute that the middle class has been struggling or that they have suffered any sort of set back in income or purchasing power.

The Brookings Institution’s Scott Winship maintains that “conventional accounts of how the broad middle is doing systematically overstate economic insecurity.” If one wants to argue exactly how far the Middle Class has fallen behind, and make the claim that the MSM has overstated it, well, that is a legitimate debate. I think its a losing argument, but, hey, its hardly incredible to say conventional wisdom overstates something.

On the other hand, the American Enterprise Institute fallaciously makes the less than credible or honest claim that there has been “considerable improvement in material well-being for both the middle class and the poor … over the past three decades.”

This is the sort of statement that you expect from a group that has given up any pretense towards reality. The AEI has moved from intellectually bankrupt to utterly dishonest, and I assume anything I read from them, on any subject, are willful lies, misinformation and propaganda.

As an asset manager, I cannot risk falling into an alternative universe that diverges form reality. That is the sand box AEI plays in. As such, I have been forced to SEQUESTER their nonsense, as their detachment from the real world is an expensive and potentially dangerous money loser for anyone who reads their foolishness. I mostly ignore their idiocy, and suggest you do the same.

'Changing Views of Globalization’s Impact'

Edward Alden of the Council on Foreign Relations:

Changing Views of Globalization’s Impact, by Edward Allen, Commentary, NY Times: ...For decades, economists resisted the conclusion that trade – for all of its many benefits — has also played a significant role in job loss and the stagnation of middle-class incomes in the United States. ...

Rather than focusing on trade, economists argued that other factors – especially “skill-biased technical change,” technological innovation that puts an added premium on skilled workers – played the biggest role in holding down middle-class wages. But now economists are beginning to change their minds. Responding to The Times’s recent survey about the causes of income stagnation, many top economists have cited globalization as a leading cause.

While the evidence is still not conclusive, it is pretty strong. Trade’s effect on jobs and income, which was probably modest through the 1990’s, now seems to be growing much larger. [list and discussion of recent studies]...

The usual rebuttal to these findings is to argue that they stem mostly from manufacturing. And manufacturing, the argument goes, is facing a long-run, secular decline in employment that is largely technology-driven, not unlike the story of agriculture in the 20th century. The job losses in manufacturing may seem as if they have been caused by trade,... but they have actually been caused by technological change.

Through the 1990s, that story was largely plausible. But over the last decade it is not. ... There is no question that over the last decade United States manufacturing has declined, taking away jobs and driving down wages for those who are still employed. Robert Atkinson and colleagues have a useful paper on this topic, showing that the loss of more than five million jobs in manufacturing in a decade was not primarily a technology and productivity story.

The real-world evidence makes it surprising that it has taken economists so long to catch on...

I've expressed pro-trade views in the past, and I still have them. But it's not enough to say, as we do, that the gains from trade are such that (under fairly general conditions) we can make everyone better off and no one worse off. If the actual result is that all the gains go to the top of the income distribution, and all the costs go to the working class -- if the distribution of the gains results in a large class of losers -- then it is much harder to defend. We must find a way to ensure that trade realizes the promise of "lifting all boats" instead of just the yachts.

Who Benefits from QE?

Via Money Supply at the FT, who benefits from QE?:

The rich. That’s according to a Bank of England study, out today, on the distributional effects of quantitative easing.

This from the research:

By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5 per cent of households holding 40 per cent of these assets.

This is not a piece of research that the Bank will have welcomed having to publish, keen as it is to avoid criticism for favouring one group of society over another. But it has been forced to by a fierce debate ... about the impact of the Bank’s money-printing on pensioners and those who are just about to retire. ...

The Bank acknowledges that by pushing down on gilt yields, QE has reduced the annuity rate. However, it also claims the policy has raised the value of bonds and equities held in pension pots. Home-owning pensioners – especially the wealthier among them – are among the big winners from QE and the Bank’s ultra-low interest rates. It is the young and others with few assets who have gained the least from the Monetary Policy Committee’s money printing.

It trickles down, right?

Romney's 'Peculiar' Approach to Tax Fairness

Mitt Romney thinks the correct response to growing inequality is to cut tax rates for the wealthy:

Mitt Romney’s peculiar approach to tax fairness, by Lane Kenworthy: Mitt Romney in a recent Fortune magazine interview: “I indicated as I announced my tax plan that the key principles included the following. First, that high-income people would continue to pay the same share of the tax burden that they do today.”

That’s odd. Sensible debates about tax fairness and tax policy focus on what rate each group should pay, not on what each group’s share of total tax payments (the “tax burden”) should be.

High-income people’s share of tax payments is determined by their average tax rate, their share of total pretax income, and the average tax rate among all taxpayers.

Policy makers have a lot of control over tax rates. They have some, but far less, influence on the share of pretax income that goes to each group. Hence they have limited ability to control the share of total tax payments paid by a particular group.

In the past several decades federal tax rates on the top 1% of Americans have been lowered... If all else stayed the same, that would have reduced the top 1%’s share of total tax payments. But this effect has been dwarfed by the large rise in the top 1%’s share of pretax income, which causes their share of total tax payments to increase. Here’s what the numbers looked like in 1979 and 2007, two years at comparable points in the business cycle (data are from the CBO).

The top 1%’s share of pretax income doubled, from 8.9% to 18.7%. Although the average tax rate they paid fell, their share of total tax payments increased, from 14.2% to 26.2%, because their income share jumped so much.

Consider what the Romney approach would have implied for tax rates paid by the top 1% during the 1979-2007 period. In 1979 their average federal tax rate was 35%; in 2007 it was 28%. Suppose policy makers had promised to keep the top 1%’s share of total tax payments at its 1979 level of 14%. Given the sharp rise in the top 1%’s income share, the average federal tax rate paid by the top 1% would have needed to fall to just 15%.

What does this mean going forward? In pledging to maintain the tax share of the richest Americans at its current level, Mitt Romney is in effect promising that if that group’s pretax income share continues to rise as it has in the past three decades, he will slash their tax rates.

He is also promising that if the share falls, he'll raise tax rates for upper income households. Anyone think he'd really do that?

Are Americans Better Off Than the Dutch? Yes and No.

Dani Rodrik:

Are Americans better off than the Dutch?, by Dani Rodrik: For a lot of questions, comparisons of per-capita GDP yield the correct answer to a first-order of approximation. ... But what about the following question: Are Americans richer than the Dutch? The average income in the U.S. is about 20 percent higher in the U.S. (...adjusting for cost-of-living differences). So our inclination may be to answer in the affirmative. But when average incomes do not differ by a large margin, income distributions do matter a lot. It turns out that the answer to the question depends very much on where in the income distribution we look at.

The following chart shows the average incomes of different income groups in the two countries. In each country, population is split into 20 equally-sized groups (“ventiles”), ranked from the poorest to the richest.

The two distributions cross, roughly at the middle. The bottom 40% or so of the population is better off in the Netherlands, especially as we go lower in the distribution of income. The bottom 5% have nearly double the income in the Netherlands. The top 50%, by contrast, are significantly better off in the U.S.

So are the Americans better off than the Dutch? I cannot tell you. But I can say that per-capita GDP or aggregate productivity numbers cannot answer the question.

By the way, these data on income distribution come via Branko Milanovic. Check his book and web page. ...

'Economic Inequality and Political Power'

I doubt this will surprise anyone, but it's worth noting that recent research finds:

political representation functions reasonably well for the affluent. But the middle-class and the poor are essentially unrepresented (unless they happen to share the preferences of the well-off)

Why are the findings important?:

In a democracy, all citizens—the rich, middle-class, poor alike—must have some ability to influence what their government does. Few people would expect that influence to be identical: those with higher incomes and better connections will always be more influential. But if influence becomes so unequal that the wishes of most citizens are ignored most of the time, a country’s claim to be a democracy is cast in doubt. And that is exactly what I found in my analyses of the link between public preferences and government policy in the U.S.

In addition to the consequences for democracy, I've argued that the political empowerment of the working class is one of the keys to better economic policy:

When we talk about leveling the playing field, it is generally in terms of economic opportunity. However, leveling the political playing field is just as important, and in the past unions provided workers with a powerful voice in the political arena. But unions have largely faded from the scene, leaving workers with very little organized power. Correcting the political imbalance this has created through the renewed political empowerment of the working class must be part of any attempt to improve our response to serious recessions.

But how to make that happen? How does a "renewed political empowerment of the working class" come about?

Monetary Policy and Inequality in the U.S.

I need to read this paper:

Innocent Bystanders? Monetary Policy and Inequality in the U.S., by Olivier Coibion, Yuriy Gorodnichenko, Lorenz Kueng, and John Silvia, NBER Working Paper No. 18170, Issued in June 2012 [open link]: Abstrct We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.

And, part of the conclusion:

VI Conclusion Recent events have brought both monetary policy and economic inequality to the forefront of policy issues. At odds with the common wisdom of mainstream macroeconomists, a tight link between the two has been suggested by a number of people, ranging widely across the political spectrum from Ron Paul and Austrian economists to Post-Keynesians such as James Galbraith. But while they agree on a causal link running from monetary policy actions to rising inequality in the U.S., the suggested mechanisms vary. Ron Paul and the Austrians emphasize inflationary surprises lowering real wages in the presence of sticky prices and thereby raising profits, leading to a reallocation of income from workers to capitalists. In contrast, post-Keynesians emphasize the disinflationary policies of the Federal Reserve and their disproportionate effects on employment and wages of those at the bottom end of the income distribution.

We shed new light on this question by assessing the effects of monetary policy shocks on consumption and income inequality in the U.S. Contractionary monetary policy shocks appear to have significant long-run effects on inequality, leading to higher levels of income, labor earnings, consumption and total expenditures inequality across households, in direct contrast to the directionality advocated by Ron Paul and Austrian economists. Furthermore, while monetary policy shocks cannot account for the trend increase in income inequality since the early 1980s, they appear to have nonetheless played a significant role in cyclical fluctuations in inequality and some of the longer-run movements around the trends. This is particularly true for consumption inequality, which is likely the most relevant metric from a policy point of view, and expenditure inequality after changes in the target inflation rate. To the extent that distributional considerations may have first-order welfare effects, our results point to a need for models with heterogeneity across households which are suitable for monetary policy analysis. While heterogeneous agent models with incomplete insurance markets have become increasingly common in the macroeconomics literature, little effort has, to the best of our knowledge, yet been devoted to considering their implications for monetary policy. In light of the empirical evidence pointing to non-trivial effects of monetary policy on economic inequality, this seems like an avenue worth developing further in future research. ...

Finally, the sensitivity of inequality measures to monetary policy actions points to even larger costs of the zero-bound on interest rates than is commonly identified in representative agent models. Nominal interest rates hitting the zero-bound in times when the central bank’s systematic response to economic conditions calls for negative rates is conceptually similar to the economy being subject to a prolonged period of contractionary monetary policy shocks. Given that such shocks appear to increase income and consumption inequality, our results suggest that standard representative agent models may significantly understate the welfare costs of zero-bound episodes.

Luck vs. Skill

Robert Frank says the role of luck in determining success in the marketplace may be more important than we thought:

Luck vs. Skill: Seeking the Secret of Your Success, by Robert H. Frank, Commentary, NY Times: There may be no topic that more reliably divides liberals and conservatives than the relationship between success and luck. Many conservatives celebrate market success as an almost inevitable consequence of talent and effort. Liberals, by contrast, like to remind us that even talented people who work hard sometimes fall on hard times through no fault of their own. ...

Both ... have important implications for public policy, so it would be good to know more about how important luck actually is. Unfortunately, it’s an inherently tough question to answer. But recent experiments suggest that chance events may influence market outcomes far more heavily than previously thought.

The sociologists Duncan J. Watts, Matthew Sagalnik and Peter Dodds carried out some of these experiments, which Mr. Watts described in his superb 2011 book, “Everything Is Obvious* (*Once You Know the Answer).” Their work focuses on online markets, but it has much broader implications. It suggests that although market success does depend on the quality of a product, the link is extremely variable and uncertain. Even the best contestant in a product category may fail, and even the worst one sometimes wins. And for an overwhelming majority of contestants in the intermediate-quality range, they found success to be largely a matter of chance. ...

We always knew that it was good to be smart and hard-working, and that if you were born or raised with those qualities, you were incredibly lucky, just as you were lucky if you grew up in the United States rather than in Somalia. But the sociologists’ research helps us understand why many people who have those qualities never find much success in the marketplace. Chance elements in the information flows that promote that success are sometimes the most important random factors of all.

Of course, we should keep celebrating the talented, hard-working people who have succeeded in their businesses or careers. But the research provides an important moral lesson: that these people might also do well to remain more humbly mindful of their own good fortune.

It Wasn't a Compositional Shift

Lane Kenworthy corrects the record:

Wage stagnation isn’t due to a compositional shift, by Lane Kenworthy: From the mid-1940s through the mid-1970s, inflation-adjusted wages for Americans in the middle and below rose in sync with the economy. Since then, the median wage has barely budged. Steve Landsburg suggests that worry about this is misplaced, because what looks like wage stagnation actually is an artifact of a compositional shift in our labor force: “There’s been a great influx of lower income groups — women and nonwhites — into the workforce. This creates the illusion that nobody’s progressing when in fact everybody’s progressing.”

It’s true that employment of women and nonwhites has increased relative to that of white males. But that didn’t begin in the late 1970s. It’s been going on for a long time. Here is the trend in the white male share of total employment since the early 1950s:

A compositional shift in employment isn’t what distinguishes the era of wage stagnation from the earlier period of rising wages.

Reich: The Problem Isn’t Outsourcing

On Twitter, Modeled Behavior says:

This should be default liberal position. Recommended RT @MarkThoma: The Problem Isn't Outsourcing... - Robert Reich

However, for my taste, Reich gives in too much to the idea that income flows over the last several decades have followed changes in productivity. But they haven't, increases in the productivity of labor have not translated into corresponding increases in real wages, the gains have gone to the top of the income distribution instead, and it's not clear to me how calling for more a more competitive, more productive workforce will change that. Of course we want labor to be more competitive and more productive, but we also want workers to be rewarded when this happens:

The Problem Isn’t Outsourcing. It’s that the Prosperity of Big Business Has Become Disconnected from the Well-Being of Most Americans, by Robert Reich: President Obama is slamming Mitt Romney for heading companies that were “pioneers in outsourcing U.S. jobs,” while Romney is accusing Obama of being “the real outsourcer-in-chief.”

These are the dog days of summer and the silly season of presidential campaigns. But can we get real, please? The American economy has moved way beyond outsourcing abroad or even “in-sourcing.” Most big companies headquartered in America don’t send jobs overseas and don’t bring jobs here from abroad. That’s because most are no longer really “American” companies. They’ve become global networks that design, make, buy, and sell things wherever around the world it’s most profitable for them to do so.

As an Apple executive told the New York Times, “we don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.” ...

What’s going on? Put simply, America isn’t educating enough of our people well enough to get American-based companies to do more of their high-value added work here. ... Transportation and communication systems abroad are also becoming better and more reliable. In case you hadn’t noticed, American roads are congested, our bridges are in disrepair, and our ports are becoming outmoded.

So forget the debate over outsourcing. The way we get good jobs back is with a national strategy to make Americans more competitive — retooling our schools, getting more of our young people through college or giving them a first-class technical education, remaking our infrastructure, and thereby guaranteeing a large share of Americans add significant value to the global economy.

But big American-based companies aren’t pushing this agenda, despite their huge clout in Washington. They don’t care about making Americans more competitive. They say they have no obligation to solve America’s problems. ...

The core problem isn’t outsourcing. It’s that the prosperity of America’s big businesses – which are really global networks that happen to be headquartered here – has become disconnected from the well-being of most Americans.

Mitt Romney’s Bain Capital is no different from any other global corporation — which is exactly why Romney’s so-called “business experience” is irrelevant to the real problems facing most Americans.

Without a government that’s focused on more and better jobs, we’re left with global corporations that don’t give a damn.

Decoupled and Divided

Paul Krugman:

Decoupled and Divided, by Paul Krugman: And so, predictably, Romney is accusing Obama of “attacking capitalism” and “dividing America” by raising questions about Bain and those hidden tax returns. This is all par for the course; many of us remember how any criticism of Bush was unpatriotic, and if I recall correctly, during the dotcom bubble the Wall Street Journal argued that any skepticism about stock market valuations showed a lack of faith in free markets.

The special Romney twist– aside from the willful misrepresentation of what Obama actually said about business success — is Mitt’s desire to have it both ways. He’s proud of his business record and his success, he says, but at the same time wants us to believe that he had nothing to do with Bain’s actions over a three-year period when he was still its CEO, and is completely unwilling to let us see the tax returns that would tell us something about exactly how he achieved his current wealth. ...

Anyway, just a reminder about what’s really dividing America: the fact that a rising tide no longer raises all boats,... there has been a dramatic decoupling between overall economic growth and the fortunes of the typical family:

 

It’s not an “attack on capitalism” to suggest that growing income disparities and the corresponding failure of most Americans to benefit from rising productivity are problems. Still, what can be done? Well, you can ask the rich to pay somewhat higher taxes, and you can strengthen the safety net — which is what Obama actually advocates. But Romney wants to do the reverse.

So Romney wants us to celebrate the success of people like him, even though their success doesn’t seem to have benefited ordinary families, and even though he stands for policies that would aggravate the gap between a fortunate few and everyone else. And then he accuses Obama of dividing America.

As I've argued many times, the idea that those at the top of the income distribution, particularly the people involved in finance, were paid according to their contribution to national GDP (i.e. their marginal product) is hard to swallow (no matter how often the right tries to jam it down our throats). I understand why those who benefit the most from the way things work now are defending the system tooth and nail, but it seems clear to me that the mechanism that allocates income to various strata of society is broken and in need of repair.

More from Paul Krugman here: Finance Capitalism and here: Thirty Troubling Years.

Summers: Changing Focus to Inequalities in Opportunity

Larry Summers argues that the key to solving the inequality problem is to equalize opportunity, and that "By far the most important step that can be taken to enhance opportunity is strengthening public education." I agree we should try to improve public education, but it will take much more than that to solve the inequality problem (the kinds of things he mentions elsewhere in his argument are a start). We've been trying to improve education for decades and it hasn't solved the inequality problem yet, and it's folly to think some magic education bullet is just around the corner:

Changing focus to inequalities in opportunity, by Lawrence Summers, Commentary, Washington Post: Even if the process proves protracted, the U.S. economy will eventually recover. When it does, issues relating to inequality are likely to replace cyclical issues at the forefront of our economic conversation. ...

The global track record of populist policies motivated by inequality concerns is hardly encouraging. However, passivity in the face of dramatic economic change is equally unlikely to be viable. Perhaps the debate and policy focus needs to shift from inequality in outcomes, where attitudes divide sharply and there are limits to what can be done, to inequalities in opportunity. ...

By far the most important step that can be taken to enhance opportunity is strengthening public education. ... Over the past 40 years, with the strong support of the federal government, the nation’s leading universities have made a major effort to recruit, admit, support and graduate minority students. These efforts will and should continue.

But as things stand, a minority youth with strong test scores is considerably more likely to apply and be admitted to a top school than a low-income student. The leading U.S. institutions must make the kind of focused commitment to economic diversity that they have long mounted toward racial diversity. It is unrealistic to expect that schools that depend on charitable contributions will not be attentive to offspring of their supporters. Perhaps though, the custom could be established that for each “legacy slot” room would be made for one “opportunity slot.”

What about the perpetuation of privilege? Parents always seek to help their children. But there is no reason the estate tax should decrease relative to the economy at a time when great fortunes are increasingly dominant. Nor should we continue to permit tax-planning techniques that are de facto tax cuts only for those with millions of dollars of income and tens of millions in wealth.

These are just a few ideas for advancing equality of opportunity. There are many more. It is an aspiration those of every political stripe should share.

Reich: The Selling of American Democracy

Robert Reich says "You need to make a ruckus":

The Selling of American Democracy: The Perfect Storm, by Robert Reich: Who’s buying our democracy? Wall Street financiers, the Koch brothers, and casino magnates Sheldon Adelson and Steve Wynn. And they’re doing much of it in secret. It’s a perfect storm:

The greatest concentration of wealth in more than a century — courtesy “trickle-down” economics, Reagan and Bush tax cuts, and the demise of organized labor.

Combined with…

Unlimited political contributions — courtesy of Republican-appointed Justices Roberts, Scalia, Alito, Thomas, and Kennedy, in one of the dumbest decisions in Supreme Court history, “Citizens United vs. Federal Election Commission”...

Combined with…

Complete secrecy about who’s contributing how much to whom — courtesy of a loophole in the tax laws that allows so-called non-profit “social welfare” organizations to accept the unlimited contributions for hard-hitting political ads.

Put them all together and our democracy is being sold down the drain.

With a more equitable and traditional distribution of wealth, far more Americans would have a fair chance of influencing politics. ... Alternatively, inequality wouldn’t be as much of a problem if we had strict laws limiting political spending or, at the very least, disclosing who was contributing what. 

But we have an almost unprecedented concentration of wealth and unlimited political spending and secrecy. 

I’m not letting Democrats off the hook. Democratic candidates are still too dependent on Wall Street casino moguls and real casino magnates... But make no mistake. Compared to what the GOP is doing this year, Democrats are conducting a high-school bake sale. ...

You need to make a ruckus. Don’t fall into the seductive trap of cynicism. That’s what the sellers of American democracy are counting on. If you give up on our system of government, they win everything.  

This coming Monday, for example, the Senate has scheduled a cloture vote on the DISCLOSE ACT, which would at least require that outfits like the Chamber of Commerce and Karl Rove’s “Crossroads GPS” disclose who’s contributing what. Contact your senators... If the DISCLOSE ACT is voted down, hold accountable those senators (and, when and if it gets to the House, those House members) who are selling out our democracy for the sake of their own personal ambitions.

I believe the political empowerment of the working class -- replacing, for example, what was lost with the demise of unions -- is the best way to make politicians more responsive to the needs of lower income households. The problem, of course, is how to make this happen.

'Inequality and Redistribution during the Great Recession'

This Economic Policy Paper is from the June 2012 issue of the Minneapolis Fed's The Region. It examines how inequality changed during the Great Recession, and illustrates the value of government intervention (i.e. social insurance) to households in the bottom 20% of the income distribution (though keep this in mind):

Inequality and Redistribution during the Great Recession, by Fabrizio Perri - Consultant, and Joe Steinberg - Research Analyst: Introduction Although there is little doubt that the Great Recession constituted a watershed for overall business cycle dynamics in the United States, the jury is still out on its distributional consequences. Did economic inequality change significantly during the recession? If so, which dimensions—income earnings, wealth and consumption—saw the largest changes? And what impact did government policies, such as taxes and transfer programs, have over this time period on both inequality and economic well-being?

Analyses focused on the first two years of the downturn seem to find no increase in economic inequality; indeed, some report a decline. For example, a recent comprehensive volume (Jenkins et al. 2011) that analyzes income distribution in 21 Organisation for Economic Co-operation and Development (OECD) countries (including the United States) across the Great Recession sees “little change in household income distributions in the two years following the downturn.” Heathcote et al. (2010b) and Petev et al. (2011) study inequality in consumption expenditures in the United States up until 2009 and also find little change (if anything, they find a decline).

A longer-term view, however, suggests that high levels of unemployment and the large drop in housing prices, both of which started during the Great Recession but persisted well after, might have had longer-term adverse distributional consequences. In particular, the recession may have left a significant fraction of the U.S. population with very little wealth (due to the fall in asset prices) and poor labor market prospects (due to high unemployment).

The goal of this paper is to paint a more complete picture of the distributional impact of the Great Recession, including more recent data from 2010 and part of 2011. Most importantly, this paper considers inequality in a wide array of variables, such as earnings, disposable income, consumption expenditures and wealth, and looks at inequality for all of these variables at different sections of the economic distribution.

Our first finding is that during and after the Great Recession, the bottom of the U.S. earnings distribution has fallen dramatically. This is the result of historically high unemployment and nonparticipation. In terms of earnings, the bottom 20 percent of the U.S. population has never done so poorly, relative to the median, during the whole postwar period. We also show that this group experienced rapidly declining wealth.

Despite this, we find that inequality in disposable income and consumption did not increase at either the top or bottom of the distribution, confirming the findings of other studies. In other words, the same bottom 20 percent of the earnings distribution that fared so poorly during the Great Recession in terms of earnings and wealth is in pretty much the same relative position in terms of disposable income and consumption in 2010, after the recession officially ended, as it was in 2006, before the start of the recession.

Such a divergence of trends in earnings and disposable income at the bottom of the distribution is unprecedented in U.S. history, and we show that it is mainly due to government transfers and taxes, as opposed to private components of unearned income.

We conclude our study using panel analysis (i.e., following a specific set of households through time) to better assess the role of government taxes and transfers. This allows us to distinguish between the experience of a given section of the income distribution (e.g., the bottom 20 percent of the distribution, whose members change each period) and the experience of a fixed group of households (e.g., those households that were at the bottom 20 percent of the distribution in 2006 but whose position may have changed by 2010. If the “Smiths,” say, were in the bottom fifth in 2006, we use panel analysis to understand where the Smiths ended up later on).

Our main finding is that although the bottom 20 percent of the earnings distribution experienced constant disposable income or consumption expenditures despite earnings losses, individual households that face earnings losses and enter the bottom 20 percent group do suffer significant losses in disposable income and small losses in consumption.

Our main substantive conclusion is that government redistribution in the Great Recession was at historical highs and partially shielded households from experiencing large declines in disposable income and consumption expenditures. The same households, though, have experienced losses in net wealth, and this might make them more vulnerable to further or more persistent earnings declines in the future.

We believe our analysis provides useful data to inform the policy debate about whether or not, looking forward, the government should take a more aggressive role in providing assistance for households that experience earnings losses. ...

Stiglitz: Much of What Goes on in the Financial Sector is Rent-Seeking

An interview with Joe Stiglitz:

Why does growing inequality matter? ...

We care about inequality partly because we pay a high price in terms of our economic performance. We care about it also because of the impact that it has in every other aspect of our society -- our democracy, our rule of law, our sense of identity or a land of opportunity -- because we aren't anymore.

The people at the top are not the people who made the most contributions to our society. Some of them are. But a very large proportion (is) simply people I describe as rent-seekers -- people who have been successful in getting a larger share of the pie rather than increasing the size of the pie.  ...[W]e don't understand the extent to which our economy has really become a rent-seeking economy.

How has the financial sector contributed to the growing inequality?

Much of what goes on in the financial sector is this kind of rent-seeking.

The most dramatic example was the predatory lending and the abusive credit card practices, which took money from people on the bottom and the middle often in a very deceptive way, sometimes in a fraudulent way, and moved it to the top....

There is another example where the financial sector has been particularly bad. They pushed for laws like our bankruptcy laws that gave priority to derivatives. In bankruptcy, derivatives got protected and workers and everybody else has to swallow their losses. That encourages more risk-taking.

At the same time, they pushed for laws that made it more difficult for ordinary Americans to discharge their debt and (were) particularly bad for students who can't discharge their debt no matter what happens, no matter how they have been deceived by the schools, even in the event of bankruptcy. ...

How else can the government act to reverse this trend in inequality?

Inequality in the United States has many dimensions; too much money at the top, many people in poverty, the hollowing out of the middle class. And each of these requires its own solution.

We have to have a more progressive tax structure. And what is interesting to realize is that our tax structure not only is unfair, but actually distorts our economy. It lowers growth and increases inequality. If you tax speculation at less than half the rate you tax people who work for a living, what you do is you encourage speculation. You weaken the economy. Speculative activities are activities associated with high levels of inequality. And that way you increase inequality. We tax in a sense a lot of the rent-seeking activities at a lower rate because they get under the rubric of the capital gains tax. ...

Private In-Equity: How Outsourcing affected Wage Standards

This is from Arin Dube:

Private In-Equity: How Outsourcing affected Wage Standards

Arindrajit Dube
Assistant Professor
Dept. of Economics
University of Massachusetts Amherst

There is renewed interest in the issue of onshore outsourcing or subcontracting as we evaluate the societal implications of the private equity model exemplified by Bain Capital. Yes, that would be the Bain Capital that is the main source of earned income for candidate Romney.  Writing on this topic, Paul Krugman recently reported some relevant findings from my research in his blog as well as his column. I thought it would be useful to share some more details from that research that was jointly conducted with Ethan Kaplan.

Over the past 3 decades, a rising share of work that used to be done “in-house” has been outsourced to outside contractors. Sometimes, the exact same work is being done at the same physical location—but by someone with a different employer of record. So what is the point of re-labeling people as outsourced workers as opposed to in-house employees? After all, a janitor cleaning the floor of your building after work hours is doing the same job whether they wear a uniform with a contractor logo or that of your company.  Yet, we have seen companies spin off work that is outside of their “core competencies” to such outside contractors.  While the idea of “core competency” makes us think of knowledge and efficiency, it is also plausible that the primary motivation for companies is to spin off low-wage work to contractors who could—and would—pay lower wages and benefits.    

In our research, we specifically considered two occupations where the contracting status was easy to identify using the data: security guards and janitors. These two occupations also saw extensive contracting out during the 1980s and 1990s.  We found that subcontracted employees earned lower compensation than their in-house counterparts (between 7 and 12 percent for janitors and 13 and 26 percent for security guards depending on the specification).  The evidence for wage reduction held even as we considered individuals within the same occupation switching jobs between in-house and outsourced varieties.

Interestingly, we found that the main impact of outsourcing was to reduce “good jobs” within these occupations: janitors and security guards in the upper half of their respective wage distributions saw substantial reduction in wages due to outsourcing.  The pictures below shows the actual occupational wage distributions in 1983 and 2000, as well as “counterfactual” ones had the level of outsourcing remained constant. The story that these pictures tell is one where good in-house janitorial and security jobs were replaced with worse subcontracted jobs: the top quartile of these service jobs saw the greatest reduction in wages (typically above 15%) due to the growth in outsourcing.  

[click on figure for larger version]

Finally, we found that industries and areas that were outsourcing tended to be those who historically paid better wages and benefits. This is exactly the pattern you would expect if companies outsourced primarily to cut pay for these workers—for instance to break previous implicit contracts without upsetting their “core” workforce or changing company wages and benefit norms.

There were many factors behind the fall in the wages of low-credentialed workers during the 1980s and 1990s. Our research suggests that one of those factors was change in institutional arrangements—such as outsourcing—which further reduced the bargaining position of workers in low-wage occupations. To the extent that companies were rescued—and profits restored—by breaking implicit contracts on wages and benefits, we should rightfully be wary of the societal value of such practices.

Paul Krugman: Off and Out With Mitt Romney

Mitt Romney's record in the business world -- a cornerstone of his campaign -- should be a cause for concern rather than comfort:

Off and Out With Mitt Romney, by Paul Krugman, Commentary, NY Times: In a better America, Mitt Romney would be running for president on the strength of his major achievement as governor of Massachusetts... In reality, however, Mr. Romney is ... bitterly denouncing the Supreme Court for upholding the constitutionality of his own health care plan. His case for becoming president relies, instead, on his claim that, having been a successful businessman, he knows how to create jobs.

This, in turn, means that ... the nature of that business career is fair game. ... Was ... what was good for Bain Capital, the private equity firm that made him rich, ... also ... good for America?

And the answer is no..., the tools of macroeconomic policy — interest rates, tax rates, spending programs — have no counterparts on a corporate organization chart. Did I mention that Herbert Hoover ... was a great businessman...?

In any case, however,... Bain didn’t build businesses; it bought and sold them. Sometimes its takeovers led to new hiring; often they led to layoffs, wage cuts and lost benefits. On some occasions, Bain made a profit even as its takeover target was driven out of business. ... And then there’s the business about outsourcing.

Two weeks ago, The Washington Post reported that Bain had invested in companies whose specialty was helping other companies move jobs overseas. The Romney campaign went ballistic... What was more interesting was the campaign’s insistence that The Post had misled readers by failing to distinguish between “offshoring” — moving jobs abroad — and “outsourcing,”... having an external contractor perform services that could have been performed in-house.

Now, if the Romney campaign really believed in ... free-market principles, it would have defended the right of corporations to do whatever maximizes their profits, even if that means shipping jobs overseas. Instead..., the campaign effectively conceded that offshoring is bad but insisted that outsourcing is O.K....

That is, however, a very dubious assertion... Why, for example, do many large companies now outsource cleaning and security...? Surely the answer is, in large part, that outside contractors can hire cheap labor that isn’t represented by the union and can’t participate in the company health and retirement plans. ...

[I]f Bain got involved with your company, one way or another, the odds were pretty good that even if your job survived you ended up with lower pay and diminished benefits. In short, what was good for Bain Capital definitely wasn’t good for America. And ... the Obama campaign has every right to point that out.

Mismeasuring Poverty

Mark Levinson:

Mismeasuring Poverty, by Mark Levinson, American Prospect: The “facts” about poverty can be deceiving. In her magisterial book Behind the Beautiful Forevers, Katherine Boo tells the stories of the inhabitants of a Mumbai slum on the edge of a sewage lake who lack jobs, housing, running water, health care, education, and police protection. It is not unusual to see rats and frogs fried for dinner, feet covered with black fungus, and maggots breeding in wounds wrought by trash-picking. Yet, Boo writes, “almost no one in the slum was considered poor by official Indian benchmarks. … [They] were thus part of one of the most stirring success narratives in the modern history of global market capitalism.” Some success.

 Our government’s own count of the poor, while not denying their existence, also minimizes their number—not by undercounting them (though that’s a factor, too) but by setting the poverty bar so low that tens of millions of poor Americans are not accounted for. This miscategorization not only paints a picture of a more prosperous America than in fact exists. It also excludes large numbers of the poor from assistance that they need and might otherwise obtain.

In fact, the poor are with us today in greater numbers than we have seen since we started keeping track over half a century ago. If we counted them by the standards that most other industrialized democracies employ, their numbers would increase by a third—from 46 million to roughly 69 million. To understand how that can be, it is important to grasp the way we define poverty and what that definition has to do with economic hardship. ...[continue reading]...

Where is Poverty in the National Agenda?

Daniel Little wonders why poverty isn't a more prominent concern:

Where is poverty in the national agenda?, by Daniel Little: Our elected officials are charged to do their best to create legislation and policies that work best to secure the important life interests of all citizens. Can we take that as a shared assumption? This is how we want it to work, and we feel morally offended when legislators substitute their own wants and opinions for those of the public.

If this is a fair description of the role obligations connected to elected office, then there are some important discrepancies that arise when we look at the actual work that legislators do, both nationally and at the state level. For example, a striking number of legislators bring their own personal and religious convictions into their work. Legislators all too often attempt to draft legislation that furthers their moral opinions on issues like stem cell research, gay marriage, abortion, and even birth control. But given that reasonable and morally grounded people disagree about these issues, how could they possibly be the legitimate object of legislation? Legislation needs to be designed to treat all citizens equally and fairly, so how can the personal moral or religious opinions of the legislator ever be a legitimate foundation for legislation? How is it any different from a legislator who tries to steer a highway project over a particular piece of land in order to favor his own business interests? In each case the legislator is substituting a personal interest for the public interest as a foundation for legislation.

Or how about this puzzle: every state in the country has serious problems of poverty and discrimination. That means that every state has a percentage of its citizens who live under demeaning and impoverishing circumstances. And in many cases this current fact derives from a past history of segregation, discrimination, and unfair treatment. These problems are urgent and pressing. If the responsibility of legislators is to identify and address urgent, pressing problems, they ought to be intensely interested in poverty, discrimination, and racial disparities. So why is it that virtually all governors and state legislators continue to ignore these facts -- even when their own departments of human services are fully able to document the human results of these facts about poverty? Why is it virtually impossible for elected officials to address the facts of racial inequality in American cities? Can we imagine a legislature in Illinois, New York, Florida, or Michigan undertaking a serious debate to decide how best to address racial disparities in the state? And yet -- doesn't the fact that legislators are responsible for preserving and enhancing the quality of life of all citizens simply require honesty and action about these facts?

There seem to be a couple of reasons why that kind of honest debate does not occur. One is the position of relative privilege from which elected officials are usually drawn. It is possible to lose sight of unpleasant truths about your own society when they don't really impinge on your own daily life. And it is possible to tell a story of "progress and problem solving" that succeeds in papering over the unpleasant truths.

Another possible interpretation is a regrettable hard-heartedness that many people have in the face of poverty. "There is nothing to be done; the poor bring their deprivation upon themselves; the poor are different from the rest of us." These attitudes are all too common in our politics, and they often get intertwined with a long history of racialized thinking as well.

I think there is another possibility as well that has more to do with "problem cognition". An honest politician may accurately perceive the human cost of persistent poverty, and he/she might also have a sincerely empathetic response to these perceptions. But this politician may be wedded to a particular theory of social change that leads him or her to discount the systemic features of the poverty he sees. For example, the "jobs, jobs, jobs" mantra may push out other more nuanced theories about how poverty and the inequalities of race can be addressed. If you think that the cause of poverty is simply the unemployment rate, then you may feel justified in ignoring race and paying attention to business growth. but this is a mistake. Racial disparities and inter-generational poverty are created by specific, durable institutions, and they can only be attacked on the basis of intelligent and specific strategies. Trickle-down economics doesn't work for specific segments of America's population.

So how can disadvantaged Americans get the sustained attention of their legislators? How can poverty, segregation, and discrimination get the place on the public agenda they deserve to have? The classic answer offered by American politics is simple: mobilize, elect some legislators if your own, and find ways of challenging those legislators who continue to ignore your issues. There's just one problem with this: there isn't much history of success in the US for poor people's movements. I suppose specialists could offer some reasons for why that would be true -- poor people don't vote, poor people are distributed in small numbers over numerous districts, poor people can be misled by political rhetoric too -- but it's hard too think of parties or majorities who have paid serious attention to poor people's issues. (How much political influence does the homeless guy selling the homeless people's newspaper on Main Street really have?)

So getting government and elected officials to place poverty on the action agenda is hard work, and the officials themselves are unlikely to lead the way. This implies -- to me anyway -- that anti-poverty, anti-racism organizations will need to take the lead. There are such organizations in every city. Are there ways for them to gain more influence?

Stiglitz: America is No Longer a Land of Opportunity

The inequality problem won't solve itself:

America is no longer a land of opportunity, by By Joseph Stiglitz, Commentary, FT: US inequality is at its highest point for nearly a century. ... One might feel better about inequality if there were a grain of truth in trickle-down economics. But the median income of Americans today is lower than it was a decade and a half ago... Meanwhile, those at the top have never had it so good. ...

Markets are shaped by the rules of the game. Our political system has written rules that benefit the rich at the expense of others. ... There is good news in this: by reducing rent-seeking ... and the distortions that give rise to so much of America’s inequality we can achieve a fairer society and a better-performing economy. ...

America used to be thought of as the land of opportunity. Today, a child’s life chances are more dependent on the income of his or her parents than in Europe, or any other of the advanced industrial countries for which there are data. ...

We can once again become a land of opportunity but it will not happen on its own... The country will have to make a choice: if it continues as it has in recent decades, the lack of opportunity will mean a more divided society, marked by lower growth and higher social, political and economic instability. Or it can recognize that the economy has lost its balance. The gilded age led to the progressive era, the excesses of the Roaring Twenties led to the Depression, which in turn led to the New Deal. Each time, the country saw the extremes to which it was going and pulled back. The question is, will it do so once again?

"The Age of Equality"

The history of the "widely accepted compromise between aggregate prosperity and distributional equality":

The Age of Equality, by Richard Pomfret, Vox EU: Economic reporting in the media frequently appears superficial since important economic processes may take decades for their consequences to work through, whereas media typically need fresh daily or weekly news. Economic history provides an antidote to this rush-to-judgement (e.g. Frindlay and O’Rourke 2008, Eichengreen and Irwin 2009).

It is in this spirit that my new book, The Age of Equality, argues that we are still experiencing the long-term consequences of the industrial revolution of the 1700s, and that the current state of that process involves a widely accepted compromise between aggregate prosperity and distributional equality.

Unlike political revolutions that can be dated to 1789 or 1917, the industrial revolution does not have a precise date. However, by the early 1800s it had clearly taken hold in parts of northwest Europe. The new industrial production involved factories with division of labour (exemplified by Adam Smith’s pin factory on the UK’s £20 banknotes) which employed increasingly capital-intensive techniques and applied the results of scientific, or at least casual empirical, observation. It was associated with risk-taking entrepreneurs and mobile workers, who responded to price incentives and were rewarded if they made the right decisions. The process was opposed by those enjoying privileges in the pre-industrial economy, e.g. inherited monarchs with absolute power, landowners with serfs or guild members.

Countries adopting the new system enjoyed unprecedented long-term economic growth. They sought and won global markets for their products so that they could expand the division of labour and capital-intensity of their factories, and they established global empires. Success was no secret. The new system spread across Europe, regions settled by Europeans, and a few other places (notably Japan).

Change was resisted by the ancien régime or by imperial rulers. The 1800s were an Age of Liberty because successful economies were those in which people enjoyed sufficient freedom to respond to economic incentives. The pressure to allow such freedom culminated in the 1910s, with the collapse of the great dynastic empires centred in Saint Petersburg, Vienna, Berlin, Constantinople and Peking.

Opposition to unbridled capitalism

Yet, even as living standards increased, opposition to unbridled capitalism strengthened. In all of the high-income countries there is evidence of income inequality peaking around the first decade of the twentieth century.

• In the US, progressives pushed to reduce the power of the rich by antitrust legislation and to protect the poor by social policies.
• In Europe, socialists’ challenge to capitalism was more fundamental.

The great experiment of the twentieth century was a competition between economic systems over which could best balance prosperity and equality.

The principal challenger was the Soviet centrally planned economy. The success of planning in mass-producing a standardised good was highlighted by the Red Army’s successes in 1938-9 against Japan and in the 1941-5 war against Germany. Central planning was also successful in mobilising resources for a specific goal (e.g. sputnik, the first man in space, or winning Olympic medals) and to satisfy basic needs (e.g. housing, education and healthcare).

Central planning was less successful at continuously improving workplace productivity once the initial enthusiasm for Communism or wartime patriotism had ebbed, or in meeting diversified consumer wants once basic needs had been satisfied. Most of all the central planning was hopeless in allocating capital so that diminishing returns were offset by technical change. The clearest statistical indicator of economic failure is the increasing incremental capital-output ratio (i.e how much capital is needed to generate a one unit flow of output) in the Soviet Union from a normal 3-4 in the 1950s to 15 in the early 1980s. By then the economic failure of central planning was obvious to all.

Capitalism’s mixed fortunes

The market-based economies experienced mixed fortunes in the first half of the twentieth century. Memories were dominated by the depression of the 1930s, which fuelled demands for reduced inequality. However, Europe enjoyed economic growth over the years 1919-39, and for North America the 1920s were a period of prosperity and innovation.
Henry Ford extended the productivity of the factory system by combining interchangeable parts with the assembly line, bringing down the price of a car to the extent that by 1929 over 23 million cars were in use in the US, for a population of 123 million. Ford, however, lost its premier position in the 1930s to General Motors, which adopted assembly line production and offered a choice of models and colours.

The interwar period also saw the spread of vacuum cleaners, which required novel marketing to convince housewives of their value; of refrigerators, whose value was augmented by Clarence Birdseye patenting an effective frozen food technology, and of washing machines, whose use was increased by the innovation of laundromats. These durable consumer goods were all items that central planning was poor at producing in a range of attractive models accessible to a mass market.

The 1989 watershed

By 1989 the victory of market-based economic system was clear, but the winner was not pure capitalism. Governments intervened not just in the classic roles of supplying law and order and public goods, but also to provide greater equality of opportunity and outcome. In a market economy people are rewarded according to the value of their marginal product, but this is low for the old, the sick, or the handicapped People may lose their source of income for reasons beyond their control, and require time to search for the best new source of income. The children of rich parents get a better start in life through better nutrition, healthcare and education. In all of these areas, governments intervene. The relative focus on equality of outcome and equality of opportunity vary, but the desirability of intervention is no longer a matter of serious disagreement.

On a global scale, the gross inequalities of the early 1900s have been eroded. In the mid-1900s empires were dissolved and modernising governments came to power. Influenced by Soviet success, most regimes adopted economic systems with a heavy state hand, which succeeded initially in mobilising resources, but whose limitations were clear by the 1970s. In the final quarter of the twentieth century, country after country adopted more market-based systems and integrated into the global economy. These emerging economies included some of the world’s most populous countries, i.e. China, Mexico, India, Brazil, Indonesia and many more.

Emerging economies: Mixed models

The emerging economies are clearly market-based, but none embraces pure capitalism. Even Hong Kong, the most capitalist economy even while a colony, provided efficient social services and universal public education and healthcare. By the early 2000s, the market economy, and associated pressures for liberty and equality, held undisputed status as the desirable economic system.

This is not the end of history. Debates, rightly, rage in democratic market economies about the appropriate balance between market-driven prosperity and state-mediated equality. In the US the current focus is on healthcare, and in Europe and Australasia on funding for tertiary education. In all countries, aging populations and archaic pension rights pose serious challenges.

At a global level, tensions between established and emerging powers, unlike in 1914-45, cannot be settled by total war. The presence of weapons of mass destruction, cross-border environmental issues and global warming, the responsibility to protect citizens from barbaric governments and the dangers of rogue states all point to the need for international cooperation. The WTO with its almost universally agreed, and abided by, rules for trade despite the lack of serious enforcement mechanisms is an example of imperfect, but functioning, mutually beneficial cooperation. Governance of other multilateral institutions established in the 1940s (the UN, IMF and World Bank) clearly requires reform, while some global and regional problems may require novel institutions. Initiatives like the Svalbard Global Seed Bank, which is supported by regimes as varied as Zimbabwe, North Korea and Syria, provide insurance against inadequate crop biodiversity. The twenty-first century will be the Age of Fraternity because cooperation will be required in the global economy, even though the process may be slow and uneven.

What are the implications for the nearer future? Politicians who rail against socialism or the market always adopt a more moderate stance after they come into office – not because they are cowed by outside forces, but because this is what their electorates want. At any point in time, some voters will be animated by encroachments of the state or by market-generated excesses, but these cannot plausibly be seen as appeals for unfettered capitalism or central planning. The reality is of choices within a narrow band whose limits have been determined by a quarter millennium of economic history.

References

Pomfret, Richard (2011). The Age of Equality: The Twentieth Century in Economic Perspective, Harvard University Press.

Findlay, Ronald and Kevin H O’Rourke (2008), “Lessons from the history of trade and war”, VoxEU.org, 10 March.

Eichengreen, Barry and Douglas Irwin (2009), “The protectionist temptation: Lessons from the Great Depression for today”, VoxEU.org, 17 March.