Category Archive for: Income Distribution [Return to Main]

Wednesday, April 02, 2014

'Inequality is Caused by Ideology, not Technology'

John Quiggin:

Inequality is caused by ideology, not technology, by  John Quiggin: I’ve just had an article published at New Left Project, under the title Don’t Blame the Internet for Rising Inequality. Much of it will be familiar, but I want to stress a particular, and I think novel, critique of the idea that skill-intensive technology is responsible for rising inequality

...The real gains over this period have gone to a subset of the top 1 per cent, dominated by CEOs, other senior managers and finance industry operators. This group has nearly quadrupled its real income over the past 30 years...

This is a major problem for the Race Against the Machine hypothesis. Much of the growth in income share of the top 1 per cent occurred before 2000, when the stereotypical CEO was a technological illiterate who had his (sic) secretary print out his emails. Even today, the technology available to the typical senior manager—a PC with access to the Internet, and a corporate intranet with very limited capabilities—is no different to that of the average knowledge worker, and inferior to that of workers in tech-intensive specialties.

Nor does the ownership of capital explain much here. Even for tech-intensive jobs, the capital and telecomm requirements for an individual worker cost no more than $10,000 for a top-of-the-line computer setup (amortized over 3-5 years), and perhaps $1000 a year for a broadband internet connection. This is well within the capacity of self-employed professional workers to pay for themselves, and in fact many professionals have better equipment at home than at work. Advances in information and communications technology thus can’t explain the vast majority of the growth in inequality over the past three decades.

...

Monday, March 31, 2014

Inequality: Echoes of the Past

This sounds familiar:

Should we care about inequality?, by David Stasavage, Monkey Cage, Washington Post: ...As a firm believer that commercial societies would witness an inexorable increase in inequality, [Jean-Jacques] Rousseau in his “Discourse on Political Economy” wrote of the corrupting influence of inequality and “luxury” and of the need to levy taxes on the rich to curb the problem. ...
Rousseau’s text was originally published in Denis Diderot’s famous Encyclopedia as the entry for “Political Economy.” ... Jean-François de Saint-Lambert was commissioned by Diderot to write the article on “Luxury” for the encyclopedia. The interest of such a text was obvious; at the time the pundits of the day were fiercely debating the virtues and vices of “luxury” and its potentially corrupting effect on nations. Take our 21st century debates, substitute the word “inequality” for “luxury,” and you get a sense of the tone.
Saint-Lambert was among the first to move the debate in a new direction. He suggested that luxury itself was not the problem; what mattered was how luxury was generated. If luxury was earned thanks to institutionalized privilege, or by those who had gamed the system, then it would inevitably have a corrupting influence. The effects for the nation would be disastrous. ...
Now in cases where luxury is instead acquired through industriousness, Saint-Lambert argued that it would not have these nefarious effects. ...

Friday, March 28, 2014

'Save Capitalism from the Capitalists by Taxing Wealth'

Thomas Piketty:

Save capitalism from the capitalists by taxing wealth, by Thomas Piketty, Commentary, FT: The distribution of income and wealth is one of the most controversial issues of the day. ...
America ... was conceived as the antithesis of the patrimonial societies of old Europe. ... Until the first world war, the concentration of wealth in the hands of the rich was far less extreme in the US than Europe. In the 20th century, however, the situation was reversed.  ... US income inequality has sharpened since the 1980s, largely reflecting the huge incomes of people at the top. ...
The ideal solution would be a global progressive tax on individual net worth. ... This would keep inequality under control and make it easier to climb the ladder. And it would put global wealth dynamics under public scrutiny. The lack of financial transparency and reliable wealth statistics is one of the main challenges for modern democracies. ...

There's quite a bit more in the article.

Paul Krugman: America’s Taxation Tradition

"Confiscatory taxation" was an "American invention":

America’s Taxation Tradition, by Paul Krugman, Commentary, NY Times: ...Some conservatives argue that focusing on inequality is ... un-American — that we’ve always celebrated those who achieve wealth...
And they’re right. No true American would say this: “The absence of effective State, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power,” and follow that statement with a call for “a graduated inheritance tax on big fortunes ... increasing rapidly in amount with the size of the estate.” 
Who was this left-winger? Theodore Roosevelt, in ... 1910...
The truth is that, in the early 20th century, many leading Americans warned about the dangers of extreme wealth concentration, and urged that tax policy be used to limit the growth of great fortunes. Here’s another example: In 1919, the great economist Irving Fisher ... devoted his presidential address to the American Economic Association largely to warning against the effects of “an undemocratic distribution of wealth.” And he spoke favorably of proposals to limit inherited wealth through heavy taxation of estates.
Nor was the notion of limiting the concentration of wealth, especially inherited wealth, just talk..., “confiscatory taxation of excessive incomes” — that is, taxation ... to reduce income and wealth disparities, rather than to raise money — was an “American invention.”...
Back when Teddy Roosevelt gave his speech, many thoughtful Americans realized ... that the New World was at risk of turning into Old Europe. And they were forthright in arguing that public policy should seek to limit inequality for political as well as economic reasons, that great wealth posed a danger to democracy. ...
You sometimes hear the argument that concentrated wealth is no longer an important issue... But ...... the share of wealth held at the very top ... has doubled since the 1980s, and is now as high as it was when Teddy Roosevelt and Irving Fisher issued their warnings. ...
We aren’t yet a society with a hereditary aristocracy of wealth, but, if nothing changes, we’ll become that kind of society over the next couple of decades.
In short, the demonization of anyone who talks about the dangers of concentrated wealth is based on a misreading of both the past and the present. Such talk isn’t un-American; it’s very much in the American tradition. And it’s not at all irrelevant to the modern world. So who will be this generation’s Teddy Roosevelt?

Thursday, March 27, 2014

'Nafta Still Bedevils Unions'

I still believe international trade makes us better off on net, but there are winners and losers from these agreements and we don't do anywhere near enough to help those who are hurt by these deals -- no wonder they are opposed:

Nafta Still Bedevils Unions, by Annie Lowrey, NY Times: Two decades after its enactment, the North American Free Trade Agreement — better known as Nafta — remains a source of deep disagreement among economists.
Maybe it has led employers to add tens of thousands of jobs. Or perhaps it has caused the loss of 700,000 jobs. Maybe it has been “a bonanza for U.S. farmers and ranchers,” as the United States Chamber of Commerce has said. But perhaps it has depressed wages for millions of working families. Then again, maybe all sides are wrong: “Nafta brought neither the huge gains its proponents promised nor the dramatic losses its adversaries warned of,” wrote Jorge G. Castañeda in an essay for Foreign Affairs this winter. “Everything else is debatable.”
But for labor groups, there is no debate: Nafta hurt American jobs and household earnings. And the sweeping trade agreement cast a shadow that persists today, spurring deep skepticism of the major trade deals the Obama administration is negotiating with Europe and a dozen Pacific Rim countries. ...
On Thursday, the A.F.L.-C.I.O. released a report excoriating Nafta... Among its conclusions: That Nafta increased corporate profits while depressing wages; that its labor-protection provisions have not improved labor conditions on the ground; that its environmental standards have not protected the environment; and that higher trade flows have not meant shared prosperity. ...

'Why the Income Distribution Matters for Macroeconomics'

Atif Mian and Amir Sufi:

Why the Income Distribution Matters for Macroeconomics, by Atif Mian and Amir Sufi: A central argument we have made on this blog and in our book is that the distribution of income/wealth matters a great deal for thinking about the macro-economy. Convincing some of this fact is not easy...
Perhaps the easiest way to see the importance of the income distribution is to examine how households respond to a windfall of cash or wealth. Do they spend the money, or do they save it? And does the spending response to a windfall of cash depend on the income of the household?
The answer is a resounding yes: low income households spend a much higher fraction of cash windfalls than high income households. In the parlance of economics, low income households have a much higher marginal propensity to consume, or MPC, than high income households.
This is one of the most well-established facts in empirical research in macroeconomics. Here is a summary: ...[reviews evidence]...
The implications of the differences in spending propensities across the population are enormous, especially if we believe that inadequate demand explains economic weakness during severe recessions. For example, facilitating debt forgiveness or progressive fiscal stimulus rebates will likely boost spending during the most severe part of a recession.
But perhaps even more interesting are the implications for the secular stagnation hypothesis, which holds that we are in a long-run stagnating economy because of inadequate demand. Is it a coincidence that the secular stagnation hypothesis is being revived exactly when income inequality is accelerating? If a higher share of income goes to the wealthiest households who spend very little of it, then perhaps these two trends are closely related.

Sunday, March 23, 2014

'Secular Stagnation and Wealth Inequality'

Atif Mian and Amir Sufi:

Secular Stagnation and Wealth Inequality, by Atif Mian and Amir Sufi: Alvin Hansen introduced the notion of “secular stagnation” in the 1930s. Hansen’s hypothesis has been brought back to life by Larry Summers...
A brief summary of the hypothesis goes something like this: A normally functioning economy would lower interest rates in the face of low current demand for goods and services... A lower interest rate helps boost demand.
But what if ... real interest rates need to be very negative to boost demand, but prevailing interest rates are around zero, then we will have too much savings in risk-free assets — what Paul Krugman has called the liquidity trap. In such a situation, the economy becomes demand-constrained.
The liquidity trap helps explain why recessions can be so severe. But the Summers argument goes further. He is arguing that we may be stuck in a long-run equilibrium where real interest rates need to be negative to generate adequate demand. Without negative real interest rates, we are doomed to economic stagnation. ...
In our view, what is missing from the secular stagnation story is the crucial role of the highly unequal wealth distribution. Who exactly is saving too much? It certainly isn’t the bottom 80% of the wealth distribution! We have already shown that the bottom 80% of the wealth distribution holds almost no financial assets.
Further, when the wealthy save in the financial system, some of that saving ends up in the hands of lower wealth households when they get a mortgage or auto loan. But when lower wealth households get financing, it is almost always done through debt contracts. This introduces some potential problems. Debt fuels asset booms when the economy is expanding, and debt contracts force the borrower to bear the losses of a decline in economic activity.
Both of these features of debt have important implications for the secular stagnation hypothesis. We will continue on this theme in future posts.

Thursday, March 20, 2014

'Capital Ownership and Inequality'

Atif Mian and Amir Sufi follow up on something noted here a few days ago:

Capital Ownership and Inequality, by Atif Mian and Amir Sufi: Lots of interesting and thought-provoking reactions to our post yesterday on how the gains in U.S. productivity are shared.
One aspect of the debate that is often over-looked is the concentration of financial asset holdings in the U.S. economy. Who owns financial assets such as stocks and bonds in corporations tells us who has a direct claim to the income generated by capital. Here is the distribution of financial asset holdings across the wealth distribution. This is from the 2010 Survey of Consumer Finances:

Houseofdebt_20140319_12

The top 20% of the wealth distribution holds over 85% of the financial assets in the economy. So it is clear that the direct income from capital goes to the wealthiest American households. ...
There is ... the question of incorporating housing wealth in the graph above. How should we think about housing which is more broadly held? But it’s important to have the basic facts established to begin the debate. If you think the above chart is misleading or incorrect in some way, we are happy to hear why. ...

Tuesday, March 18, 2014

'The Most Important Economic Chart'

Atif Mian and Amir Sufi at House of Debt on a subject that has come up here many, many times:

The Most Important Economic Chart, by Atif Mian and Amir Sufi: If you must know only one fact about the U.S. economy, it should be this chart:

ch1_20140317_1

The chart shows that productivity, or output per hour of work, has quadrupled since 1947... This is a spectacular achievement...
The gains in productivity were quite widely shared from 1947 to 1980. ... However, what we want to focus on today is the remarkable separation in productivity and median real income since 1980. While the United States is producing twice as much per hour of work today compared to 1980, a small part of the gain in real income has gone to the bottom half of the income distribution. The gap between productivity and median real income is at an historic all-time high today.
So where are all of the gains in productivity going? Two places: First,... the share of profits has risen faster than wages. Second, the highest paid workers are getting a bigger share of the wages that go to labor. ...
It is not just about inequality... The widening gap between productivity and median income has serious implications for macroeconomic stability and financial crises. Our forthcoming book takes up these issues in more detail.
We will also discuss some of these issues in coming posts.

Wednesday, March 12, 2014

A Relentless Rise in Unequal Wealth

Eduardo Porter:

A Relentless Rise in Unequal Wealth, by Eduardo Porter, NY Times:  What if inequality were to continue growing years or decades into the future? Say the richest 1 percent of the population amassed a quarter of the nation’s income, up from about a fifth today. What about half? To believe Thomas Piketty of the Paris School of Economics, this future is not just possible. It is likely. In his bracing “Capital in the Twenty-First Century,” which hit bookstores on Monday, Professor Piketty provides a fresh and sweeping analysis of the world’s economic history that puts into question many of our core beliefs about the organization of market economies.

A Response to Another Attack on the Great Gatsby Curve

WCEG:

A response to another attack on the Great Gatsby curve—and can we call it the “line to serfdom” instead? By Carter Price:  Let me apologize up front for this wonky post. In a piece of analysis posted last month, Scott Winship and Donald Schneider attack the Great Gatsby curve, which illustrates the relationship between economic inequality and mobility across countries. Let me first say that I dislike the moniker “Great Gatsby Curve” (apologies to Alan Krueger) because I don’t find it to be a very enlightening description of the effect. Therefore, I propose that we call this relationship the “line to serfdom,” which is not only a more accurate description of the high inequality/low mobility relationship but also an allusion to Friedrich Hayek’s classic tome of Austrian economics, “The Road to Serfdom.” Winship and Schneider make three arguments against a consistent correlation between economic inequality and mobility across countries. Specifically: The Luxembourg Income Study’s Gini Coefficient is a better measure of inequality than the World Bank’s Gini coefficient (Gini coefficient is a measure of the income inequality, with higher numbers indicating a higher concentration of a country’s income among the top earners). Rank correlation coefficients are a better measure of mobility than intergenerational elasticity. Recently released data indicates that the mobility trend has been relatively flat over time in the United States. I’ll address each of these points below ...

Q&A: Thomas Piketty on the Wealth Divide

On inequality:

Q&A: Thomas Piketty on the Wealth Divide: Income inequality moved with astonishing speed from the boring backwaters of economic studies to “the defining challenge of our time.” It found Thomas Piketty waiting for it.
A young professor at the Paris School of Economics, he is one of a handful of economists who have devoted their careers to understanding the dynamics driving the concentration of income and wealth into the hands of the few. He has distilled his findings into a new book, “Capital in the Twenty-First Century,” which is being published this week. In the book, Mr. Piketty provides a sort of unified theory of capitalism that explains its lopsided distribution of rewards.
Eduardo Porter’s Economic Scene column this week discusses Mr. Piketty’s work. Following is the transcript of an email interview he conducted with Mr. Piketty last week, lightly edited for length and clarity. ...

Tuesday, March 11, 2014

Inequality in Capitalist Systems

New column:

Inequality in Capitalist Systems Is Not Inevitable, by Mark Thoma: Capitalism is the best economic system yet discovered for giving people the goods and services they desire at the lowest possible price, and for producing innovative economic growth. But there is a cost associated with these benefits, the boom and bust cycles inherent in capitalist systems, and those costs hit working class households – who have done nothing to deserve such a fate – very hard. Protecting innocent households from the costs of recessions is an important basis for our social insurance programs.
It is becoming more and more evident that there is another cost of capitalist systems, the inevitable rising inequality documented by Thomas Piketty in “Capital in the Twenty-First Century, that our social insurance system will need to confront. ...

Monday, March 10, 2014

Paul Krugman: Liberty, Equality, Efficiency

Reducing inequality "would probably increase, not reduce, economic growth":

Liberty, Equality, Efficiency, by Paul Krugman, Commentary, NY Times: Most people, if pressed on the subject, would probably agree that extreme income inequality is a bad thing... But what can be done about it?
The standard answer in American politics is, “Not much.” Almost 40 years ago Arthur Okun ... published a classic book titled “Equality and Efficiency: The Big Tradeoff,” arguing that redistributing income from the rich to the poor takes a toll on economic growth. Okun’s book set the terms for almost all the debate that followed: liberals might argue that the efficiency costs of redistribution were small, while conservatives argued that they were large, but everybody knew that doing anything to reduce inequality would have at least some negative impact on G.D.P.
But it appears that what everyone knew isn’t true. Taking action to reduce the extreme inequality of 21st-century America would probably increase, not reduce, economic growth.
Let’s start with the evidence..., does reducing inequality through redistribution hurt economic growth? Not according to two landmark studies by economists at the International Monetary Fund...
In short, Okun’s big trade-off doesn’t seem to be a trade-off at all. ...
At this point someone is sure to say ... that we should seek equality of opportunity, not equality of outcomes. That may sound good...; but for those with any reality sense, it’s a cruel joke. Almost 40 percent of American children live in poverty or near-poverty. Do you really think they have the same access to education and jobs as the children of the affluent?
In fact, low-income children are much less likely to complete college than their affluent counterparts, with the gap widening rapidly. And this isn’t just bad for those unlucky enough to be born to the wrong parents; it represents a huge and growing waste of human potential — a waste that surely acts as a powerful if invisible drag on economic growth.
Now, I don’t want to claim that addressing income inequality would help everyone. The very affluent would lose more from higher taxes than they gained from better economic growth. But it’s pretty clear that taking on inequality would be good, not just for the poor, but for the middle class...
In short, what’s good for the 1 percent isn’t good for America. And we don’t have to keep living in a new Gilded Age if we don’t want to.

Sunday, March 09, 2014

'The Federal Reserve and Wealth Inequality'

From the new blog by Atif Mian and Amir Sufi:

The Federal Reserve and Wealth Inequality: The Federal Reserve has a well-defined dual-mandate: stabilize prices and maximize employment. However, in trying to achieve these objectives, the Fed can inadvertently favor some segments of the population more than others. This was indeed the case from the perspective of households’ net worth position during the Great Recession. ...
When the economy slows down and there is a sharp decline in house prices, it is ... debtors’ net worth that is most heavily impacted, and from a recovery standpoint it is the debtors’ net worth that is in most need of repair...
The Federal Reserve may help in boosting the net worth position of households. But does it boost household net worth where it is needed the most? Unfortunately, quite the opposite is true. The Fed directly controls short term interest rates, and hence has the strongest and quickest influence on bond prices. Bond prices are inversely related to interest rates... Those holding long term bonds profited handsomely from the decline in interest rates.
Unfortunately for the macro-economy, the gains in long-term bonds were a unique benefit to creditors. Debtors with a levered claim on house prices remained stuck. This was one of the great limitations of how effective the Federal Reserve could be in the midst of the Great Recession.
Many have placed much blame on the Federal Reserve for increasing wealth inequality. That is unfair — it is not the Fed’s fault that only the very rich hold bonds and other financial assets. But it is true that a by-product of looser monetary policy is a rise in wealth inequality–the Fed was unable during the Great Recession to boost the net worth of debtors.

Saturday, March 08, 2014

A Top-Heavy Focus on Income Inequality?

This was *not* my favorite article of the day:

A Top-Heavy Focus on Income Inequality, by Sendhil Mullainathan, Commentary, NY Times: I worry about growing income inequality. But I worry even more that the discussion is too narrowly focused. I worry that our outrage at the top 1 percent is distracting us from the problem that we should really care about: how to create opportunities and ensure a reasonable standard of living for the bottom 20 percent.
Our passion about the widening disparity in wealth and income is easy to understand. After all, studies often find that unequal incomes reduce happiness. Of course they do: Jealousy and envy are strong emotions. ...

Friday, March 07, 2014

Paul Krugman: The Hammock Fallacy

We don't do enough to help people escape poverty:

The Hammock Fallacy, by Paul Krugman, Commentary, NY Times: Hypocrisy is the tribute vice pays to virtue. So when you see something like the current scramble by Republicans to declare their deep concern for America’s poor, it’s a good sign, indicating a positive change in social norms. Goodbye, sneering at the 47 percent; hello, fake compassion.
And the big new poverty report from the House Budget Committee, led by Representative Paul Ryan, offers additional reasons for optimism. Mr. Ryan used to rely on “scholarship” from places like the Heritage Foundation. ... This time, however, Mr. Ryan is citing a lot of actual social science research.
Unfortunately, the research he cites doesn’t actually support his assertions. Even more important, his whole premise about why poverty persists is demonstrably wrong.
To understand where the new report is coming from,... recall something Mr. Ryan said two years ago: “We don’t want to turn the safety net into a hammock that lulls able-bodied people to lives of dependency and complacency, that drains them of their will and their incentive to make the most of their lives.” ...
What does scholarly research on antipoverty programs actually say? ... Mr. Ryan would have us believe that the “hammock” created by the social safety net is the reason so many Americans remain trapped in poverty. But the evidence says nothing of the kind.
After all, if generous aid ... perpetuates poverty, the United States — which treats its poor far more harshly than other rich countries, and induces them to work much longer hours — should lead the West in social mobility... In fact,... America has less social mobility...
And there’s no puzzle why: it’s hard for young people to get ahead when they suffer from poor nutrition, inadequate medical care, and lack of access to good education. The antipoverty programs that we have actually do a lot to help people rise. For example, Americans who received early access to food stamps were healthier and more productive... But we don’t do enough... The reason so many Americans remain trapped in poverty isn’t that the government helps them too much; it’s that it helps them too little.
Which brings us back to the hypocrisy issue. It is, in a way, nice to see the likes of Mr. Ryan at least talking about the need to help the poor. But somehow their notion of aiding the poor involves slashing benefits while cutting taxes on the rich. Funny how that works.

Thursday, March 06, 2014

'Redistribution, Inequality, and Sustainable Growth: Reconsidering the Evidence'

A nice summary of some research that I've highlighted before:

Redistribution, inequality, and sustainable growth: Reconsidering the evidence, by Jonathan D Ostry, Andrew Berg, and Charalambos Tsangarides, Vox EU: Rising income inequality looms high on the global policy agenda, reflecting not only fears of its pernicious social and political effects (including questions about the consistency of extreme inequality with democratic governance), but also its economic implications. While positive incentives are surely needed to reward work and innovation, excessive inequality is likely to undercut growth – for example by undermining access to health and education, causing investment-reducing political and economic instability, and thwarting the social consensus required to adjust in the face of major shocks.

Understandably, economists have been trying to understand better the links between rising inequality and the fragility of economic growth. Recent narratives include how inequality intensified the leverage and financial cycle, sowing the seeds of crisis (Rajan 2010), or how political-economy factors – especially the influence of the rich – allowed financial excess to balloon ahead of the crisis (Stiglitz 2012).

But what is the role of policy – and in particular fiscal redistribution – in bringing about greater equality? Conventional wisdom suggests that redistribution would in itself be bad for growth, but by reducing inequality, it might conceivably help growth. Looking at past experience, we find scant evidence that typical efforts to redistribute have on average had an adverse effect on growth. Moreover, faster and more durable growth seems to have followed the associated reduction in inequality.

Disentangling the effects of inequality and redistribution on growth

In earlier work (Berg and Ostry 2011), we documented a robust medium-run relationship between equality and the sustainability of growth. We did not, however, have much to say on whether this relationship justifies efforts to redistribute.

Indeed, many argue that redistribution undermines growth, and even that efforts to redistribute to address high inequality are the source of the correlation between inequality and low growth. If this is right, then taxes and transfers may be precisely the wrong remedy – a cure that may be worse than the disease itself.

The literature on this score remains controversial. A number of papers (e.g. Benabou 2000) point out that some policies that are redistributive – e.g. public investments in infrastructure, spending on health and education, and social insurance provision – may be both pro-growth and pro-equality. Others are more supportive of a fundamental tradeoff between redistribution and growth, as argued by Okun (1975) when he referred to the efficiency ‘leaks’ that come with efforts to reduce inequality.

In a new paper (Ostry et al. 2014), we ask what the historical data say about the relationship between inequality, redistribution, and growth. In particular, what is the evidence about the macroeconomic effects of redistributive policies – both directly on growth, and indirectly as they reduce inequality, which in turn affects growth?

To disentangle the channels, we make use of a new cross-country dataset that carefully distinguishes net (post-tax and transfers) inequality from market (pre-tax and transfers) inequality, and allows us to calculate redistributive transfers for a large number of countries over time – covering both advanced and developing countries. We analyse the behaviour of average growth during five-year periods, as well as the sustainability and duration of growth.

Our key questions are empirical. How big is the ‘big tradeoff’? How does the direct (in Okun’s view negative) effect of redistribution compare to its indirect and apparently positive effect through reduced inequality?

Some striking results on the links between redistribution, inequality, and growth

First, we continue to find that inequality is a robust and powerful determinant both of the pace of medium-term growth and of the duration of growth spells, even controlling for the size of redistributive transfers.

Thus, it would still be a mistake to focus on growth and let inequality take care of itself, if only because the resulting growth may be low and unsustainable. Inequality and unsustainable growth may be two sides of the same coin.

Second, there is remarkably little evidence in the historical data used in our paper of adverse effects of fiscal redistribution on growth.

The average redistribution, and the associated reduction in inequality, seem to be robustly associated with higher and more durable growth. We find some mixed signs that very large redistributions may have direct negative effects on growth duration, such that the overall effect – including the positive effect on growth through lower inequality – is roughly growth-neutral.

Caveats

These findings may suggest that countries that have carried out redistributive policies have actually designed those policies in a reasonably efficient way. However, it does not mean of course that countries wishing to enhance the redistributive role of fiscal policy should not pay attention to efficiency considerations. This is especially important for countries with weak governance and administrative capacity, where developing tax and spending instruments that can allow governments to undertake redistribution efficiently are of the essence. A forthcoming paper by the IMF will delve into these fiscal issues.

Of course, we should also be cautious about drawing definitive policy implications from cross-country regression analysis alone. We know from history and first principles that after some point redistribution will be destructive to growth, and that beyond some point extreme equality also cannot be conducive to growth. Causality is difficult to establish with full confidence, and we also know that different sorts of policies are likely to have different effects in different countries at different times.

Bottom line

The conclusion that emerges from the historical macroeconomic data used in this paper is that, on average across countries and over time, the things that governments have typically done to redistribute do not seem to have led to bad growth outcomes. Quite apart from ethical, political, or broader social considerations, the resulting equality seems to have helped support faster and more durable growth.

To put it simply, we find little evidence of a ‘big tradeoff’ between redistribution and growth. Inaction in the face of high inequality thus seems unlikely to be warranted in many cases.

References

Benabou, R (2000), “Unequal Societies: Income Distribution and the Social Contract”, The American Economic Review, 90(1): 96–129.

Berg, A, J D Ostry, and J Zettelmeyer (2012), “What Makes Growth Sustained?”, Journal of Development Economics, 98(2): 149–166.

Berg, A and J D Ostry (2011), “Inequality and Unsustainable Growth: Two Sides of the Same Coin?”, IMF Staff Discussion Note 11/08.

Okun, A M (1975), Equality and Efficiency: the Big Trade-Off, Washington: Brookings Institution Press.

Ostry, J D, A Berg, and C G Tsangarides (2014), “Redistribution, Inequality, and Growth”, IMF Staff Discussion Note 14/02.

Rajan, R (2010), Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton: Princeton University Press.

Stiglitz, J (2012), The Price of Inequality: How Today's Divided Society Endangers Our Future, W W Norton & Company.

Tuesday, March 04, 2014

'The Real Poverty Trap'

Paul Krugman:

The Real Poverty Trap: Earlier I noted that the new Ryan poverty report makes some big claims about the poverty trap, and cites a lot of research — but the research doesn’t actually support the claims. It occurs to me, however, that the whole Ryan approach is false in a deeper sense as well.
How so? Well, Ryan et al — conservatives in general — claim to care deeply about opportunity, about giving those not born into affluence the ability to rise. And they claim that their hostility to welfare-state programs reflects their assessment that these programs actually reduce opportunity, creating a poverty trap. ...
In fact, the evidence suggests that welfare-state programs enhance social mobility, thanks to little things like children of the poor having adequate nutrition and medical care. And conversely, of course, when such programs are absent or inadequate, the poor find themselves in a trap they often can’t escape, not because they lack the incentive, but because they lack the resources. ...
So the whole poverty trap line is a falsehood wrapped in a fallacy...

Thursday, February 27, 2014

'Little Evidence of a 'Big Tradeoff' Between Redistribution and Growth'

Redistribution does not appear to hinder economic growth:

Treating Inequality with Redistribution: Is the Cure Worse than the Disease?, by Jonathan D. Ostry and Andrew Berg: Rising income inequality looms high on the global policy agenda, reflecting not only fears of its pernicious social and political effects, (including questions about the consistency of extreme inequality with democratic governance), but also the economic implications. While positive incentives are surely needed to reward work and innovation, excessive inequality is likely to undercut growth, for example by undermining access to health and education, causing investment-reducing political and economic instability, and thwarting the social consensus required to adjust in the face of major shocks.
Understandably, economists have been trying to understand better the links between rising inequality and the fragility of economic growth. Recent narratives include how inequality intensified the leverage and financial cycle, sowing the seeds of crisis; or how political-economy factors, especially the influence of the rich, allowed financial excess to balloon ahead of the crisis.
But what is the role of policy, and in particular fiscal redistribution to bring about greater equality? Conventional wisdom would seem to suggest that redistribution would in itself be bad for growth but, conceivably, by engendering greater equality, might help growth. Looking at past experience, we find scant evidence that typical efforts to redistribute have on average had an adverse effect on growth. And faster and more durable growth seems to have followed the associated reduction in inequality. ...
To put it simply, we find little evidence of a “big tradeoff” between redistribution and growth. Inaction in the face of high inequality thus seems unlikely to be warranted in many cases.

Saturday, February 22, 2014

'Winners Take All, but Can’t We Still Dream?'

Robert Frank:

Winners Take All, but Can’t We Still Dream?, by Robert Frank: It’s clear that the lives of many creative artists are being transformed by digital technology. But competing schools of thought cite the very same technology in support of strikingly different conclusions.
One group, for example, says the ability to widely distribute the best performers’ products at low cost portends a world where even small differences in talent command huge differences in reward. That view is known as the “winner take all” theory.
In contrast, the “long tail” theory holds that the information revolution is letting sellers prosper even when their offerings appeal to only a small fraction of the market. This view foresees a golden age in which small-scale creative talent flourishes as never before.
These dueling theories strike close to home. My personal intellectual bets have given me a strong rooting interest in the winner-take-all view. But even the most flint-eyed economist has a romantic side. That part of me wants the long-tail outlook to prevail, and not just because of its hopeful message for underdogs. ...

Sunday, February 16, 2014

'It's Not Just Talent and Hard Work'

Two responses to Greg Mankiw's assertion that the income of the wealthy is deserved:

Paul Krugman:

Iron Men of Wall Street: Greg Mankiw has written another defense of the 0.1 percent — and this one is kind of amazing. ... Mankiw invokes the strong role of financial fortunes in U.S. inequality to argue that the incomes are deserved...
Has Greg been living in a cave since 2006? We’re now in the seventh year of a slump brought on by Wall Street excess; the wizardly job of “allocating the economy’s investment resources” consisted, we now know, largely of funneling money into a real estate bubble, using fancy financial engineering to create the illusion of sound, safe investment. We also know that there is a real question whether hedge funds, in particular, actually destroy value for their investors.
One more thing: Mankiw argues that our tax system is fair because the top 0.1 percent pays a higher share of income in federal taxes than the middle class. This neglects the partial offset of this progressivity by regressive state and local taxes. But surely the main point is that to the extent that taxes on the 0.1 percent are high (they aren’t really, in historical context) that’s largely because Mitt Romney lost the 2012 election... It’s kind of funny to claim that our system is fair thanks to policies that you and your friends tried desperately to kill. ...

Dean Baker:

Inequality By Design: It's Not Just Talent and Hard Work: Greg Mankiw is out there defending the 1 percent again. He put forward the argument that the big bucks are simply their just desserts; the rewards for exceptional skill and hard work.
His opening act is Robert Downey Jr. who apparently got $50 million for his starring role in a single movie. This is a great place to start. There's no doubt that Robert Downey is an extremely talented actor, but of course there have been many actors over the years who have put in great performances for much less money. How is that Downey could earn so much more than a great actor from the 50s, 60s, or 70s? ...
In fact, a big part of the reason that Downey can collect huge paychecks is the extension and strengthening of copyrights. The United States has lengthened the period of copyrights from 28 years, with an option for a 28 year renewal, to 75 years in the 1976, and then to 95 years in 1998. 
It also has stepped up copyright enforcement, imposing stiff fines on people who use the Internet to make unauthorized copies of copyrighted material. ... It is only because of government intervention in the form of copyright monopolies that he is able to collect $50 million. ...
So is Downey worth his $50 million, perhaps given the structure we have, but we could easily have a different structure which could quite possibly be a more efficient way to support and distribute creative work. (Here's my scheme.) ...
Then we get to the CEOs who Mankiw tells us get high pay because of what they contribute to their companies and the economy. If this is the case, how do we explain CEO's of companies like Lehman, Bear Stearns, and AIG walking away with hundreds of millions of dollars even though they drove their firms into bankruptcy? ... How do we explain the fact that CEOs of incredibly successful companies in Europe, Japan, and South Korea make on average around a tenth as much as our crew does?
That one doesn't seem to fit the just desserts story. The more likely explanation is the Pay Pals story, where the company's board of directors are paid off by CEOs to look the other way as they pilfer the company. ...
And then there is the financial sector where Mankiw tells us that the extraordinary pay is compensation for the volatility of paychecks. That's interesting, except the vast majority of comparably talented and hardworking people would be happy to get the pay the finance folks get in the bad years. Much of the big money on Wall Street stems from highly leveraged bets that beat the market by seconds or even milliseconds. This provides as much value to the economy as insider trading...
It would be interesting to see what would happen to the big fortunes in the financial sector if it had to pay a small transaction fee, effectively subjecting it to the same sort of sales tax that is paid in almost every other sector of the economy. It would also be interesting to see what would happen to the private equity folks if they lost the opportunity for the tax gaming that is their bread and butter....
If the 1 percent are able to extract vast sums from the economy it is because we have structured the economy for this purpose. It could easily be structured differently, but the 1 percent and its defenders aren't interested in changing things. And the 1 percent and its defenders have a great deal of influence on the direction of economic policy.

Thursday, February 13, 2014

'The Econometric Evidence More or Less Supports' Ranting Leftists

Paul Krugman:

... So, if you were a ranting leftist, you might say that political attitudes are shaped by class, and that ideological justifications for high inequality are just a veil for class interest. You might also say that “sound” economic policies are really just policies that redistribute income upwards. And it turns out that the econometric evidence more or less supports your rant.

More here.

Tuesday, February 11, 2014

'Enslave the Robots and Free the Poor'

Martin Wolf on the "rise of intelligent machines":

Enslave the robots and free the poor, by Martin Wolf, Commentary, FT: ...we must reconsider leisure. For a long time the wealthiest lived a life of leisure at the expense of the toiling masses. The rise of intelligent machines makes it possible for many more people to live such lives without exploiting others. Today’s triumphant puritanism finds such idleness abhorrent. Well, then, let people enjoy themselves busily. What else is the true goal of the vast increases in prosperity we have created?
...we will need to redistribute income and wealth. ... The revenue could come from taxes on bads (pollution, for example) or on rents (including land and, above all, intellectual property). Property rights are a social creation. The idea that a small minority should overwhelming benefit from new technologies should be reconsidered. ...

'Inequality and Indignity'

Paul Krugman:

Inequality and Indignity: ... Let’s talk ... about dignity.
It’s all very well to talk vaguely about the dignity of work; but the idea that all workers can regard themselves as equal in dignity despite huge disparities in income is just foolish. When you’re in a world where 40 money managers make as much as 300,000 high school teachers, it’s just silly to imagine that there will be any sense, on either side, of equal dignity in work. ...
Now, one way to enhance the dignity of ordinary workers is through, yes, entitlements: make it part of their birthright, as American citizens, that they get certain basics such as a minimal income in retirement, support in times of unemployment, and essential health care.
But the Republican position is that none of these things should be provided, and that if somehow they do get provided, they should come only at the price of massive government intrusion into the recipient’s personal lives — making sure that you don’t take advantage of health reform to work less, requiring that you undergo drug tests to receive unemployment benefits or food stamps, and so on.
In short, while conservatives may preach the dignity of work, their actual agenda is to deny lower-income workers as much dignity — and personal freedom — as possible.

Saturday, February 08, 2014

Job Polarization and Middle-Class Workers’ Wages

The decline of the middle class:

Job polarization and the decline of middle-class workers’ wages, by Michael Boehm, Vox EU: The decline of the middle class has come to the forefront of debate in the US and Europe in recent years. This decline has two important components in the labour market. First, the number of well-paid middle-skill jobs in manufacturing and clerical occupations has decreased substantially since the mid-1980s. Second, the relative earnings for workers around the median of the wage distribution dropped over the same period, leaving them with hardly any real wage gains in nearly 30 years.
Job polarization and its cause
Pioneering research by Autor, Katz, and Kearney (2006), Goos and Manning (2007), and Goos, Manning, and Salomons (2009) found that the share of employment in occupations in the middle of the skill distribution has declined rapidly in the US and Europe. At the same time the share of employment at the upper and lower ends of the occupational skill distribution has increased substantially. Goos and Manning termed this phenomenon “job polarization” and it is depicted for US workers in Figure 1.

Figure 1. Changes in US employment shares by occupations since the end of the 1980s

Polar1

Notes: The chart depicts the percentage point change in employment in the low-, middle- and high-skilled occupations in the National Longitudinal Survey of Youth (NLSY) and the comparable years and age group in the more standard Current Population Survey (CPS). The high-skill occupations comprise managerial, professional services and technical occupations. The middle-skill occupations comprise sales, office/administrative, production, and operator and laborer occupations. The low-skill occupations include protective, food, cleaning and personal service occupations.
In an influential paper, Autor, Levy, and Murnane (2003) provide a compelling explanation: they found that middle-skilled manufacturing and clerical occupations are characterized by a high intensity of procedural, rule-based activities which they call “routine tasks”. As it happens, these routine tasks can relatively easily be coded into computer programs.
Therefore, the rapid improvements in computer technology over the last few decades have provided employers with ever cheaper machines that can replace humans in many middle-skilled activities such as bookkeeping, clerical work and repetitive production tasks. These improvements in technology also enable employers to offshore some of the routine tasks that cannot be directly replaced by machines (Autor 2010).
Moreover, cheaper routine tasks provided by machines complement the non-routine abstract tasks that are intensively carried out in high-skill occupations. For example, data processing computer programs strongly increased the productivity of highly-skilled professionals. Machines also do not seem to substitute for the non-routine manual tasks that are intensively carried out in low-skill occupations. For example, computers and robots are still much less capable of driving taxis and cleaning offices than humans. Thus, the relative economy-wide demand for middle-skill routine occupations has declined substantially.
This routinization hypothesis, due to Autor, Levy, and Murnance, has been tested in many different settings and it is widely accepted as the main driving force of job polarization.
The effect of job polarization on wages
Around the same time as job polarization gathered steam in the US, the distribution of wages started polarizing as well. That is, real wages for middle-class workers stagnated while earnings of the lowest and the highest percentiles of the wage distribution increased. This is depicted in Figure 2.

Figure 2. Percentage growth of the quantiles of the US wage distribution since the end of the 1980s

Polar2

Notes: The chart depicts the change in log real wages along the quantiles of the wage distribution between the two cohorts for the NLSY and the comparable years and age group in the CPS.

It thus seems natural to think that the polarization of wages is just another consequence of the declining demand for routine tasks. However, there exists some evidence that is not entirely consistent with this thought: virtually all European countries experienced job polarization as well, yet most of them haven’t seen wage polarization but rather a continued increase in inequality across the board. Moreover, other factors that may have generated wage polarization in the US have been proposed (e.g. an increase in the minimum wage, de-unionization, and ‘classical’ skill-biased technical change).

In my recent paper I try to establish a closer link between job polarization and workers’ wages (Boehm 2013). In particular, I ask three interrelated questions:

  • First, have the relative wages of workers in middle-skill occupations declined as should be expected by the routinization hypothesis?
  • Second, have the relative wage rates paid per ‘constant unit of skill’ in the middle-skill occupations dropped with polarization?
  • Third, can job polarization explain the changes in the overall wage distribution?

I answer these questions by analyzing two waves of a representative survey of teenagers in the US carried out in 1979 and 1997. The survey responses provide detailed and multidimensional characteristics of these young people that influence their occupational choices and wages when they are 27 years old in the end of the 1980s and the end of the 2000s.

Using these characteristics, I compute the probabilities of workers in the 1980s and today choosing middle-skill occupations and then compare the wages associated with these probabilities over time. My empirical strategy relies on predicting the occupations that today’s workers would have chosen had they lived in the 1980s and then comparing their wages to those of workers who actually chose these occupations at that time.

The results from this approach show a substantial negative effect of job polarization on middle-skill workers. The positive wage effect associated with a 1% higher probability of working in high-skill jobs (compared to middle-skill jobs) almost doubled between the 1980s and today. The negative wage effect associated with a 1% higher probability of working in low-skill services jobs compared with middle-skill jobs attenuated by over a third over the same period.

I find similar results when controlling for college education, which is arguably a measure of absolute skill. This suggests that it is indeed the relative advantage in the middle-skill occupations for which the returns in the labor market have declined.

In the next step of my analysis, I estimate the changes in relative market wage rates that are offered for a constant unit of skill in each of the three occupational groups. Again, the position of the middle-skill occupations deteriorates substantially: the wage rates paid in the high-skill occupations increased by 20% compared to the middle while the wage rate in the low-skill occupations rose by 30%. This decline in the relative attractiveness of working in middle-skill occupations is consistent with the massive outflow of workers from these jobs.

Finally, I check what effect the changing prices of labour may have had on the overall wage distribution and whether they can explain the wage polarization that we observe in the US. Figure 3 shows that the change in the wage distribution due to these price effects reproduces the overall distribution reasonably well in the upper half while it fails to match the increase of wages for the lowest earners compared to middle earners.

Figure 3. Actual and counterfactual changes in the US wage distribution

Polar3

Notes: The chart plots the actual and counterfactual changes in the wage distribution in the NLSY when workers in 1980s are assigned the estimated price changes in their occupations.
At first glance, this is surprising given the strong increase in relative wage rates for low-skill work and the increase in the wages of workers in low-skill occupations. The reason is that these workers now move up in the wage distribution, which lifts not only the (low) quantiles where they started out but also the (middle) quantiles where they end up. The inverse happens for workers in middle-skill occupations but with the same effect on the wage distribution.
Conclusions
Despite the above findings, my paper does not provide the last word about the effect of job polarisation on the bottom of the wage distribution. This is because, for example, my estimates do not take into account potential additional wage effects from workers moving out of the middle-skill occupations into low-skill occupations. Therefore, we cannot yet finally assess the role that job polarisation versus policy factors (such as the raise of the minimum wage) played on the lower part of the wage distribution in the US.
However, what emerges unambiguously from my work is that routinization has not only replaced middle-skill workers’ jobs but also strongly decreased their relative wages. Policymakers who intend to counteract these developments may want to consider the supply side: if there are investments in education and training that help low and middle earners to catch up with high earners in terms of skills, this will also slow down or even reverse the increasing divergence of wages between those groups. In my view, the rising number of programs that try to tackle early inequalities in skill formation are therefore well-motivated from a routinization-perspective.
References
Acemoglu, D and D H Autor (2011), “Skills, Tasks and Technologies: Implications for Employment and Earnings”, in Handbook of Labor Economics edited by Orley Ashenfelter and David Card, Vol. 4B, Ch. 12, 1043-1171.
Autor, D H (2010), "The polarization of job opportunities in the US labour market: Implications for employment and earnings", Center for American Progress and The Hamilton Project.
Autor, D H and D. Dorn (2013), “The Growth of Low-Skill Service Jobs and the Polarization of the US Labor Market”, The American Economic Review, 103(5), 1553–97.
Autor D H, L F Katz, and M S Kearney (2006), "The Polarization of the US Labor Market", The American Economic Review 96.2, 189-194.
Autor D H, F Levy and R Murnane (2003), ‘The Skill Content of Recent Technological Change: An Empirical Exploration’, Quarterly Journal of Economics 118(4): 1279-1333.
Boehm, M J (2013), “The Wage Effects of Job Polarization: Evidence from the Allocation of Talents”, Working Paper.
Goos, M and A Manning (2007), "Lousy and lovely jobs: The rising polarization of work in Britain", The Review of Economics and Statistics 89.1, 118-133.
Goos M, A Manning and A Salomons (2009), “Explaining Job Polarization in Europe: The Roles of Technology, Globalization and Institutions”, American Economic Review Papers and Proceedings 99(2): 58-63
Michaels G, A Natraj, and J Van Reenen (2013), “Has ICT Polarized Skill Demand? Evidence from Eleven Countries over 25 Years”, forthcoming in Review of Economics and Statistics; earlier version available as CEP Discussion Paper No. 987 (http://cep.lse.ac.uk/pubs/download/dp0987.pdf).
Spitz-Oener, A (2006), "Technical change, job tasks, and rising educational demands: Looking outside the wage structure", Journal of Labor Economics 24.2, 235-270.
References
1 This figure and the ones below are based on two representative samples for 27 year old males in the United States (the National Longitudinal Survey of Youth (NLSY) and the Current Population Survey (CPS)). For qualitatively similar statistics on all prime age workers, refer to Acemoglu & Autor (2011).
2 Examples of tests of the routinization hypothesis include Michaels et al (2013) who find that industries with faster growth of information and communication technology had greater decreases in the relative demand for middle educated workers; Spitz-Oener (2006) who shows that job tasks have become more complex in occupations that rapidly computerized; and Autor and Dorn (2013) who show that local labour markets that specialised in routine tasks adopted information technology faster and experienced stronger job polarisation.
3 For the details of this estimation, please refer to the paper.

Thursday, February 06, 2014

'Why Thomas Jefferson Favored Profit Sharing'

David Cay Johnston:

Why Thomas Jefferson Favored Profit Sharing, by David Cay Johnston: President Obama's State of the Union speech last week focused on America's severe and growing inequality, but he stopped short of repeating the Founding Fathers' many warnings that this condition could doom American democracy.
The founders, despite decades of rancorous disagreements about almost every other aspect of their grand experiment, agreed that America would survive and thrive only if there was widespread ownership of land and businesses. ...

Wednesday, February 05, 2014

'The One Percent'

Robert Solow:

"Correspondence: The One Percent: Robert Solow, N. Gregory Mankiw, Richard V. Burkhauser, and Jeff Larrimore." Journal of Economic Perspectives, 28(1): 243-248: The cheerful blandness of N. Gregory Mankiw’s “Defending the One Percent” (Summer 2013, p p . 2 1 – 3 4 ) may divert attention from its occasional unstated premises, dubious assumptions, and omitted facts. I have room to point only to a few such weaknesses; but the One Percent are pretty good at defending themselves, so that any assistance they get from the sidelines deserves scrutiny...

There is also a response from Mankiw, and additional discussion from Burkhauser and Larrimore.

Tuesday, February 04, 2014

'Where is the Land of Opportunity? Intergenerational Mobility in the US'

Raj Chetty, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez, the authors of the economic mobility study we've heard so much about lately, explain their findings:

Where is the land of opportunity? Intergenerational mobility in the US, by Raj Chetty, Nathaniel Hendren, Patrick Kline, Emmanuel Saez, Vox EU: The US is often hailed as the land of opportunity, a society in which a child's chances of success depend little on her family background. Is this reputation warranted? An extensive empirical literature on intergenerational mobility, reviewed by Solon (1999), Grawe and Mulligan (2002), and Black and Devereux (2011), has compared mobility across countries and have found that relative mobility is lower in the US than in other developed countries. In new research (Chetty et al. 2014) we show that this question does not have a clear answer because there is substantial variation in intergenerational mobility across areas within the US. The US is better described as a collection of societies, some of which are `lands of opportunity’ with high rates of mobility across generations, and others in which few children escape poverty.
New evidence on intergenerational mobility
We present a new portrait of social mobility in the US by compiling statistics from millions of anonymous earnings records. Our core sample consists of all children in the US born between 1980-82, whose income we measure in 2011-12, when they are approximately 30 years old.
Using these income data, we calculate two measures of intergenerational mobility. The first, relative mobility, measures the difference in the expected economic outcomes between children from high-income and low-income families. The second, absolute upward mobility, measures the expected economic outcomes of children born to a family earning an income of approximately $30,000 (the 25th percentile of the income distribution).
We construct measures of relative and absolute mobility for 741 “commuting zones” in the US. Commuting zones are geographical aggregations of counties that are similar to metro areas but also cover rural areas. Children are assigned to a zone based on their location at age 16 (no matter where they live as adults), so that their location represents where they grew up. When analysing local area variation, we rank both children and parents based on their positions in the national income distribution. Hence, our statistics measure how well children do relative to those in the nation as a whole rather than those in their own particular community.
We find substantial variation in mobility across areas (Figure 1). To take one example, children from families at the 25th percentile in Seattle have outcomes comparable to children from families at the median in Atlanta. Some cities – such as Salt Lake City and San Jose – have rates of mobility comparable to countries with the highest rates of relative mobility, such as Denmark. Other cities – such as Atlanta and Milwaukee – have lower rates of mobility than any developed country for which data are currently available.

Figure 1. Intergenerational mobility in the US

Mobility

Notes: This map shows the average percentile rank of children who grow up in below-median income families across areas of the US (absolute upward mobility). Lighter colours represent areas where children from low-income families are more likely to move up in the income distribution. To look up statistics for your own city, use the interactive version of this map created by The New York Times.

What drives social mobility?
Next, we analyse what drives the variation in social mobility across areas. The spatial patterns of the gradients of college attendance and teenage birth rates with respect to parent income across zones are very similar to the pattern in intergenerational income mobility. The fact that much of the spatial variation in children's outcomes emerges before they enter the labour market suggests that the differences in mobility are driven by factors that affect children while they are growing up.
We explore such factors by correlating the spatial variation in mobility with observable characteristics. We begin by showing that upward income mobility is significantly lower in areas with larger African-American populations. However, white individuals in areas with large African-American populations also have lower rates of upward mobility, implying that racial shares matter at the community (rather than individual) level. One mechanism for such a community-level effect of race is segregation. Areas with larger black populations tend to be more segregated by income and race, which could affect both white and black low-income individuals adversely. Indeed, we find a strong negative correlation between standard measures of racial and income segregation and upward mobility. Moreover, we also find that upward mobility is higher in cities with less sprawl, as measured by commute times to work. These findings lead us to identify segregation as the first of five major factors that are strongly correlated with mobility.
The second factor we explore is inequality. Commuting zones with larger Gini coefficients have less upward mobility, consistent with the “Great Gatsby curve” documented across countries (Krueger 2012, Corak 2013). In contrast, top 1% income shares are not highly correlated with intergenerational mobility both across zones within the US and across countries. Although one cannot draw definitive conclusions from such correlations, they suggest that the factors that erode the middle class hamper intergenerational mobility more than the factors that lead to income growth in the upper tail.
Third, proxies for the quality of the K-12 school system are also correlated with mobility. Areas with higher test scores (controlling for income levels), lower dropout rates, and smaller class sizes have higher rates of upward mobility. In addition, areas with higher local tax rates, which are predominantly used to finance public schools, have higher rates of mobility.
Fourth, social capital indices (Putnam 1995) – which are proxies for the strength of social networks and community involvement in an area -- are very strongly correlated with mobility. For instance, high upward mobility areas tend to have higher fractions of religious individuals and greater participation in local civic organisations.
Finally, the strongest predictors of upward mobility are measures of family structure such as the fraction of single parents in the area. As with race, parents' marital status does not matter purely through its effects at the individual level. Children of married parents also have higher rates of upward mobility if they live in communities with fewer single parents.
We find modest correlations between upward mobility and local tax and government expenditure policies and no systematic correlation between mobility and local labour market conditions, rates of migration, or access to higher education.
Caveats
We caution that all of the findings in this study are correlational and cannot be interpreted as causal effects. For instance, areas with high rates of segregation may also have other characteristics that could be the root cause driving the differences in children’s outcomes.
What is clear from this research is that there is substantial variation in the US in the prospects for escaping poverty. Understanding the properties of the highest mobility areas – and how we can improve mobility in areas that currently have lower rates of mobility – is an important question for future research that we and other social scientists are exploring.
To facilitate this ongoing work, we have posted the mobility statistics by area and the other correlates used in the study on the project website.
References
Black, Sandra E. and Paul J. Devereux (2011), "Recent Developments in Intergenerational Mobility" in O Ashenfelter and D Card (eds.), Handbook of Labor Economics, Vol. 4, Elsevier, chapter 16, pp. 1487-1541.
Chetty, Raj, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez (2014), “Where is the Land of Opportunity? The Geography of Intergenerational Mobility in the US”, NBER Working Paper 19843
Corak, Miles (2013), Income Inequality, Equality of Opportunity, and Intergenerational Mobility." Journal of Economic Perspectives, 27 (3): 79-102.
Grawe, Nathan D and Casey B Mulligan (2002), Economic Interpretations of Intergenerational Correlations", Journal of Economic Perspectives, 16 (3): 45-58.
Krueger, Alan (2012), "The Rise and Consequences of Inequality in the US", Speech at the Center for American Progress, Washington D.C. on 12 January.
Solon, Gary (1999), "Intergenerational Mobility in the Labor Market" in O Ashenfelter and D Card, (eds.), Handbook of Labor Economics, Vol. 3, Elsevier, pp. 1761-1800.

Sunday, February 02, 2014

Why Inequality Matters

Chris Dillow:

Why inequality matters: ...we lefties care about inequality not because we have some idea of what the Gini coefficient or share of the top 1% should be, but because we fear that three things that would make inequalities tolerable are - to some extent - missing.
Firstly, inequalities don't all arise from fair processes. One condition here - set out in Rawls' difference principle - is that inequality should be associated with "fair equality of opportunity". But this condition is obviously lacking...
Also, many inequalities arise not from free market processes but from what Acemoglu and Robinson call extractive institutions - the ability of the rich to use political power to extract wealth for themselves...
Secondly, we fear that inequality has adverse effects. I'm not thinking so much here of its impacts on economic growth, social cohesion (pdf) and other aspects of well-being... Instead, the danger is that inequality is, as Sean McElwee says, an "affront to democracy." ...
Thirdly, we've no great beef with inequality if it is combined with some form of risk-pooling. Even if our first two conditions were met, we'd favour some redistribution to mitigate the effects of bad luck - be it the bad luck of a bad draw in the genetic lottery or of being hurt by a recession. Of course, lefties define luck more widely that righties, but most of the latter should support some redistribution; Hayek, for example, favoured a basic income. ...

Friday, January 31, 2014

Democracy vs. Inequality

This was in today's links:

Democracy vs. Inequality, by Daron Acemoglu and James Robinson: ... That ... widening gaps between rich and poor should be taking place in established democracies is puzzling. The workhorse models of democracy are based on the idea that the median voter will use his democratic power to redistribute resources away from the rich towards himself. When the gap between the rich (or mean income in society) and the median voter (who is typically close to the median of the income distribution) is greater, this redistributive tendency should be greater. ...
These strong predictions notwithstanding, the evidence on this topic is decidedly mixed. Our recent paper, joint with Suresh Naidu and Pascual Restrepo, “Democracy, Redistribution and Inequality” revisits these questions. ...
First, democracy may be “captured” or “constrained”. ... Elites who see their de jure power eroded by democratization may sufficiently increase their investments in de facto power ... to continue their control of the political process. ...
Finally, consistent with Stigler’s “Director’s Law”, democracy may transfer political power to the middle class—-rather than the poor. If so, redistribution may increase and inequality may be curtailed only if the middle class is in favor of such redistribution. ...
What about the facts? This is where the previous literature has been pretty contentious. ... Overall, our results suggest that democracy does represent a real shift in political power away from elites and has first-order consequences for redistribution and government policy. But the impact of democracy on inequality may be more limited than one might have expected. ...
The ... Director’s s Law is unlikely to explain the inability of the US political system to confront inequality, since the middle classes have largely been losers in the widening inequality trends.
Could it be that US democracy is captured? This seems unlikely when looked at from the viewpoint of our typical models of captured democracies. But perhaps there are other ways of thinking about this problem that might relate the increasingly paralyzing gridlock in US politics to capture-related ideas. 

[There's quite a bit more in the original post.]

Thursday, January 30, 2014

Mobility and Inequality

Dean Baker:

Mobility and Inequality: More on Non-New Findings: Robert Samuelson is happy to tell us that contrary to what he hoped some of us believed, there was not much change in mobility for children entering the labor force between the first President Bush and second President Bush's administrations. Samuelson misrepresents the study to imply that it finds that there has been no change in mobility over the post-war period. ...
Samuelson ... notes the study's finding that there has been little change in mobility for workers entering the labor market in 2007 compared to 1990. The study then refers to earlier work finding no change in mobility prior to 1990. This study did not itself examine the period prior to 1990.
This is important since that is the period in which we might have expected growing inequality to have a notable impact on mobility. There was some divergence between quintiles of income distribution in the 1980s. In the years since 1980, there has not been much divergence between the bottom half of the top quintile and the rest of the income distribution. Most of the inequality was associated with the pulling away of the one percent from everyone else. This study made no effort to examine mobility into the one percent.
As far as mobility in the years prior to the 1990, contrary to the claim of this study, the research is far from conclusive. For example, an assessment published by the Cleveland Fed concluded:
"After staying relatively stable for several decades, intergenerational mobility appears to have declined sharply at some point between 1980 and 1990, a period in which both income inequality and the economic returns to education rose sharply. This finding is also consistent with theoretical models of intergenerational mobility that emphasize the role of human capital formation. There is fairly consistent evidence that intergenerational mobility has stayed roughly constant since 1990 but remains below the rates of mobility experienced from 1950 to 1980."
While it would be wrong to take this statement as conclusive, it is also wrong to take the assessment of the study cited by Samuelson as conclusive and it is a gross misrepresentation to imply that this study examined patterns in mobility over the whole post-war period. It did not even try to examine changes in mobility over the 1980s, the period when patterns in inequality would have most likely led to a decline in mobility. 

Wednesday, January 29, 2014

Let's Make a Deal

Brad DeLong:

... Suppose, back before you were born, the Archangel Michael and offered you a deal: “There’s a 1% chance you will be in the top 1%, with about $1.5 million a year. There’s an 80% chance you will be in the bottom 80%, with less than $50,000 a year. How about we reduce your income if you happen to be in the top 1% by $75 thousand, and raise it if you happen to be in the bottom 80% by $900?”
The only argument against taking that deal is: “But I already chose the right parents! And I’m very likely to be in the top 1%!”
And I do not think that is a particularly good argument…

Tuesday, January 28, 2014

'Money and Class'

Paul Krugman:

Money and Class: My post on Americans starting to recognize class realities has brought some predictable reactions, which I’d place under two headings: (1) “But they have cell phones!” and (2) it’s about how you behave, not how much money you have.

My answer to both of these would be to say that when we talk about being middle class, I’d argue that we have two crucial attributes of that status in mind: security and opportunity.

By security, I mean that you have enough resources and backup that the ordinary emergencies of life won’t plunge you into the abyss. This means having decent health insurance, reasonably stable employment, and enough financial assets that having to replace your car or your boiler isn’t a crisis.

By opportunity I mainly mean being able to get your children a good education and access to job prospects, not feeling that doors are shut because you just can’t afford to do the right thing.

If you don’t have these things, I would say that you don’t lead a middle-class life, even if you have a car and a few electronic gadgets that weren’t around during the era when most Americans really were middle class, and no matter how clean, sober, and prudent your behavior may be. ...

A lot of Americans — quite arguably a majority — just don’t have the prerequisites for middle-class life as we’ve always understood it. ...

The sad thing is that our fetishization of the middle class, our pretense that we’re almost all members of that class, is a major reason so many of us actually aren’t. That’s why the growing appreciation of class realities on the part of the public is a good thing; it raises the chances that we’ll actually start creating the kind of society we only pretend to have.

I've written about this in the past, e.g. in 2010:

...people who, because of their incomes, cannot participate fully in society are poor. A child getting enough to eat, and with clothes to wear, who cannot afford the toys needed to be part of the group of kids in the neighborhood is socially isolated and socially disadvantaged (we don't want to play at your house because you don't have a TV, you can't come with us because you don't have a bike, you didn't get my text message about baseball practice being moved?, etc., etc., etc.). Giving people, children in particular, what they need to participate in the society around them is an important element of how successful they will be in the future. It helps to determine their ability to give back to society as fully participating adults. ...

Or, from 2008:

To me, being poor isn't just about stuff, it's about being able to participate fully in society. The things on the list that almost all households now have, refrigerators, stoves, TVs, and telephones, are things you have to have to function in this society... How do you make a doctor's appointment without a phone? Drop by in you spare time? A refrigerator and a stove are items a household has to have given how we bring food to the table in this society. I just don't see these things as doing anything more than providing the minimum necessary to function. Even something like a TV is necessary if you want to, say, keep up with the political debates (there's a presumption in our political discourse that you can watch campaigns on television and they are largely devoted to delivery over that medium - without a TV you cannot participate fully) or even talk to people around the water-cooler at work about the latest popular TV show. Yes, the poor might have been well-off in, say, 1821 given the societal standards of the time, or some other historical period one might choose to compare, but this isn't 1821 - things have changed and so have the minimum standards necessary to be part of the society. I'm sorry if there are people who don't want to share... Giving people the things they need to be a full part of the society they live in is the decent and right thing to do. As our society elevates itself and the requirements for full participation increase, when things like computers are as necessary as a stove, our standards of decency - what we are willing to accept as a minimum standard of living - must also rise. Just meeting physical needs - food and clothing - is not enough to be a full part of the society we live in today. We can and should do better than that.

Sharing the Gains from Economic Growth

I have a new column on inequality:

Sharing the Gains from Economic Growth, by Mark Thoma: President Obama will make reducing inequality a major part of his State of the Union Address according to several reports. But to avoid being accused of waging class warfare, he will talk about creating “ladders of opportunity” instead of focusing directly on the inequality problem.
This shift in emphasis is a mistake because it misses a key part of the inequality problem. ...

The mechanism that distributes goods and services is broken.

Monday, January 27, 2014

Dreaming of a Better Gini

At MoneyWatch:

How do we know if income inequality is getting worse? - Mark Thoma

I guess the editors didn't like my Dream of Gini title.

Sunday, January 26, 2014

'Obama and the One Percent'

Paul Krugman:

Obama and the One Percent: Another week, another outburst by a one-percenter comparing progressive taxation to Nazi atrocities. I particularly liked the end:

Kristallnacht was unthinkable in 1930; is its descendent “progressive” radicalism unthinkable now?

Because it’s just obvious that San Francisco progressives are the political heirs of fascism, right?

You do wonder why the WSJ published this screed. ...

Anyway, thinking about this sort of thing makes me realize that there’s a danger, especially for progressives, of confusing the proposition that Obama’s billionaire haters are stark raving mad — which is true — with the proposition that Obama has done nothing that hurts the plutocrats’ interests, which is false. Actually, Obama has been tougher on the one percent than most progressives give him credit for.

Start with taxes..., taxes on wealthy Americans have basically been rolled back to pre-Reagan levels ...

Meanwhile, financial reform looks as if it will have significantly more teeth than expected.

So the one percent does have reason to be upset. No, Obama isn’t Hitler; but he is turning out to be a little bit of FDR, after all.

Saturday, January 25, 2014

'We Can’t Afford to Leave Inequality to the Economists'

Justin Fox on inequality:

We Can’t Afford to Leave Inequality to the Economists, by Justin Fox: ... Something really dramatic is going on up there in the top 5%, the top 1%, the top 0.01%. But while economists know some things about the impact of increasing overall income inequality, they still don’t know all that much about what this 1% stuff means....

It is one of the most dramatic economic developments of the past quarter century. And it seems like it might be bad thing. But conclusive economic evidence for its badness is hard to find.

Yes, there are theories: All that wealth sloshing around in the top 1% leads to more bubbles and crashes. Extreme wealth corrupts the political process. Income inequality may be slowing overall economic growth. And, as my colleague Walter Frick put it in an email when I brought this up, “given the diminishing marginal utility of income, it’s hugely wasteful for the super rich to have so much income.”

I happen to believe there’s some truth to all four of those. But there are also lots of counterarguments and some counterevidence, and big economic studies like the new one by Chetty & Co. don’t seem to be doing much to resolve the debate.

Which leads me to another theory: I think we’re eventually going to have to figure out what if anything to do about exploding high-end incomes without clear guidance from the economists. This is a discussion where political and moral considerations may end up predominating. And as Harvard’s Greg Mankiw made clear in his maddeningly inconclusive Journal of Economic Perspectives essay on inequality last summer, these are areas in which economists possess no comparative advantage.

Friday, January 24, 2014

Paul Krugman: The Populist Imperative

Jobs and inequality are "closely linked":

The Populist Imperative, by Paul Krugman, Commentary, NY Times: “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”
John Maynard Keynes wrote that in 1936, but it applies to our own time, too. And, in a better world, our leaders would be doing all they could to address both faults.
Unfortunately,... we should count ourselves lucky when leaders confront even one of our two great economic failures. If ... President Obama devotes much of his State of the Union address to inequality, everyone should be cheering him on.
They won’t, of course. Instead, he will face two kinds of sniping. The usual suspects on the right will, as always when questions of income distribution comes up, shriek “Class warfare!” But there will also be seemingly more sober voices arguing that he has picked the wrong target, that jobs, not inequality, should be at the top of his agenda.
Here’s why they’re wrong.
First of all, jobs and inequality are closely linked if not identical issues. ...
Moreover, there’s an even stronger case to be made that high unemployment — by destroying workers’ bargaining power — has become a major source of rising inequality and stagnating incomes even for those lucky enough to have jobs.
Beyond that, as a political matter, inequality and macroeconomic policy are already inseparably linked. ... For example, two-thirds of the spending cuts proposed last year by Representative Paul Ryan, the chairman of the House Budget Committee, would have come at the expense of lower-income families.
The flip side of this attempt to use fiscal scare tactics to worsen inequality is that highlighting concerns about inequality can translate into pushback against job-destroying austerity, too.
But the most important reason for Mr. Obama to focus on inequality is political realism. Like it or not, the simple fact is that Americans “get” inequality; macroeconomics, not so much. ...
The point is that of the two great problems facing the U.S. economy, inequality is the one on which Mr. Obama is most likely to connect with voters. And he should seek that connection with a clear conscience: There’s no shame is acknowledging political reality, as long as you’re trying to do the right thing.
So I hope we’ll hear something about jobs Tuesday night, and some pushback against deficit hysteria. But if we mainly hear about inequality and social justice, that’s O.K.

Thursday, January 23, 2014

'A Response to Scott Winship’s Analysis of The Great Gatsby Curve'

Sticking with today's apparent theme of inequality and mobility, here's a rebuttal from Carter Price at the Washington Center for Equitable Growth to a recent claim that there is no relationship between inequality and mobility (also, on the "single motherhood" issue, see here):

A Mathematical Response to Scott Winship’s Analysis of The Great Gatsby Curve, by Carter Price, Washington Center for Equitable Growth: While we know today’s big inequality and mobility news is Raj Chetty, Emmanuel Saez, and others’ new paper on variance in mobility over time — which we’ll be discussing shortly — we wanted to take a moment to look at the math behind some analysis derived from some of the previous data they have collected from their Equality of Opportunity Project on variance in mobility over geography.
The “Great Gatsby Curve,” a term coined by Princeton economist Alan Krueger based on the work of Ottawa economist Miles Corak, shows that across developed countries, higher economic inequality is associated with lower mobility. This curve has sparked a great deal of debate particularly because the United States stands apart among the developed nations for its high inequality and low mobility.
In a recent foray into this debate, Manhattan Institute sociologist Scott Winship and Heritage Foundation research assistant Donald Schneider use data from the Equality of Opportunity Project to look at the relationship between inequality and mobility across U.S. “commuting zones,” which are groups of counties that form a common labor market. (The Equality of Opportunity Project assessed economic mobility by looking at the 2011-12 incomes of people born in 1980-82 and their parents’ incomes from 1996-2000.) Winship and Schneider conclude that this new data indicate that mobility is actually largely unrelated to economic inequality and that the core reason for low economic mobility is single motherhood.
I’ve reproduced their findings, but I don’t come to the same conclusions. Winship and Schneider don’t weight the data properly and ignore too much of the data. Thus, I do not conclude that they provide compelling arguments to ignore economic inequality when discussing economic mobility....

While analysis of multiple measures of inequality and multiple measures of mobility suggest that economic inequality is negatively associated with economic mobility, much more analysis needs to be done to fully understand these complex relationships. In particular, the mechanisms that drive these relationships should be understood. I hope that this dispels some of the faulty analysis and encourages more rigorous analysis of these data.

[See the article for regressions, graphs, and analysis supporting the conclusions.]

Don't Blame the Robots for our Wage or Job Problems

I'm a bit more sympathetic to the skill based technical change causing wage inequality arguments than Larry Mishel, technological change is at least part of the story in my view (but, importantly, not the whole story, unionization and relative bargaining power between workers and firms, political forces, etc. are also at work), but his arguments are certainly worth noting (and this extract may not fully reflect his views):

The Robots Are Here and More Are Coming: Do Not Blame Them for our Wage or Job Problems, , by Lawrence Mishel: The “robots are coming” narrative dominating discussions of the economy  was popularized by Erik Brynjolfsson and Andrew McAfee in their 2011 book, Race Against the Machine. They have built on that theme in the richer, deeper The Second Machine Age (W.W. Norton, 2014). The first half of the book provides a valuable window, at least for a non-technologist like me, into past developments and the future trajectory of digitization. Their claim is that digitization will do for mental power what the steam engine did for muscle power—that is, quite a bit, transforming our lives at work and play.
The remainder of the book dwells on the role of digitization in generating both bounty (more consumer choice and greater output, wealth, and income) and spread (greater inequalities of wages, income, and wealth). In treating these topics, they heavily rely on the work of others. As in their last book, they do not provide much direct evidence of the connection between technological change and wage inequality. I study these issues and believe they are wrong to tightly link digitization and robots to wage inequality and the slow job growth of the 2000s. Although the authors claim “technology is certainly not the only force causing this rise in spreads, but it is one of the main ones” my fear is that this book, like their last one, will fuel the mistaken narrative that technology is responsible for our job and wage problems and that we are powerless to obtain more equitable growth. ...
On wage inequality, the authors offer “skill-biased technical change” or SBTC as the explanation. In fact, they offer two distinct SBTC narratives, both of which cannot be simultaneously true and neither of which aptly explains wage trends.
In general, SBTC narratives are weak because they cannot explain one of the key inequality trends, the remarkable wage and income growth of the top 1.0 and 0.1 percent. ...
Specifically, the authors’ first SBTC narrative, the “race between technology and skills,” falls short because it doesn’t square with recent trends. Under this narrative, technological change makes employers value education more, and the more education or skills one has, the better one fares. Despite the absence of prima facie evidence for this popular narrative for two decades, it barrels along anyway. For instance, the wage gap between middle and low-wage workers has been stable or falling since 1987 or so, meaning that those with the least skills have done at least as well or better than those in the middle. ...
The second narrative is that technology is eroding jobs and wages in middle-wage occupations but expanding opportunities and wages among low- and high-wage occupations. This “job polarization” narrative, which emerged around 2006, was designed to overcome the flaw in the education narrative’s explanation of wage trends in the 1990s, when low-wage workers fared as well or better than middle-wage workers. The accumulating evidence now shows that job polarization has not occurred in the entire 2000s...
So, again, these two SBTC narratives can’t both be true—either middle-wage workers are doing better than low-wage workers or they’re not. And neither one can explain the trends of the 2000s, the period where one would expect digitization’s impact to be most evident. The robots are here and more will be coming but they are not responsible for our employment or our wage problems. Read the first half of the book to learn about technology but take the second half with a grain of salt. For understanding wage inequality you should look elsewhere.

Income Mobility

The topic of the day seems to be the new study on income mobility:

My take is similar to Kevin Drum's, who manages to separate the level of mobility (very low) to the rate of change (one study, the latest, says mobility is unchanged):

This response emphasizes the geographic variation -- where you are born appears to matter quite a bit:

Wednesday, January 22, 2014

'The Political Economy of Populism'

Paul Krugman:

A Note on the Political Economy of Populism: All indications are that President Obama will make inequality the central theme of his State of the Union address. Assuming he does, he will face two different kinds of sniping. One will come from the usual suspects on the right, shrieking “class warfare”. The other will come from a variety of people, some of them well-intentioned, arguing that while sure, inequality is an issue, the crucial thing now is to get the economy growing and create more jobs; these people will argue that populism is a diversion from the main issue.
Here’s why they’re wrong.
First of all, even on the straight economics inequality and job creation aren’t completely separable issues. ...
Beyond that, there’s the political economy.
It has been painfully obvious, to anyone willing to see (a group that unfortunately doesn’t include a large part of the press corps) that deficit obsession hasn’t really been about deficits — it has been about using deficits as a club with which to smash to welfare state, and hence increase inequality. ...
Conversely, talking about the need to help struggling families is ... a way to shift the focus away from deficit obsession, and pave the way at least for a relaxation of austerity, if not actual stimulus.
And I think we also have to face up to an awkward political reality: moderate populism has a broad popular constituency, Keynesian macroeconomics doesn’t..., the public doesn’t “get” macroeconomics; lines like “American families are having to tighten their belts, so the government should too” still resonate. You could blame Obama for not using the bully pulpit to teach the nation why this is wrong, and I wish he had made more of a stand. Still, the fact is that this is just a hard story to get across...
So if I were Obama, I’d do what he’s apparently doing: focus on inequality, which is a valid and popular issue, and use it indirectly to move macro policy in the right direction too.

To follow up on the previous post, capitalism is the best economic system yet discovered for producing economic growth, but it also concentrates risk and causes people to face hardship through no fault of their own (e.g. a recession that puts someone out of work, someone who shows up for work everyday and does their job well). The solution to this is for either the private sector or the government to provide insurance against these risks -- and market failures mean it is generally the government that must step in. Yes, that means transfers from the winners to the less fortunate, much as those with fire insurance who have good outcomes -- no fire -- find their insurance premiums transferred to those who do have the bad luck to experience a fire. But the risks inherent in the system that makes those at the top so wealthy, and those at the bottom so miserable must be attenuated through government provided insurance. Unemployment insurance is a good example of this, but more social insurance is needed to protect the vulnerable from risks they had no hand in creating (e.g. the financial crisis caused great pain for workers who had nothing at all to do with creating the problems that caused the Great Recession, while those who benefitted from the lead up to the crisis and had a hand in causing it, those who are doing very well now, whine incessantly if they are asked to help to reduce the hardship of the innocent).

'Inequality in Adam Smith’s World'

I like this as far as it goes, but why not make the point that there is a role for government in solving the market failures that lead to the lack of job insurance for vulnerable workers (and *perhaps* for solving the inequality problem as well if it progresses beyond some threshold)?:

Inequality in Adam Smith’s World, by Chris House: Inequality is a fact of economic life and it is becoming more and more pronounced over time. ...
There are many forces in our economy that create income inequality. The most basic of these forces however, is tied to the nature of trade itself and can be traced all the way back to Adam Smith and the division of labor. If you read the Wealth of Nations (something I told you not to do a few blog posts back …) you will find that Smith begins by marveling at the incredible increases in productivity that can be obtained by exploiting the division of labor, that is, by specializing. ... A jack-of-all-trades is simply not valued in a market system. ...
The way you get the division of labor to work is by combining it with trade. ... A physician cannot consume only her own medical advice – she must draw on the productivity of the many other specialists in society. If you are willing to do trade, you can, by specializing, reach incredible levels of productivity. As populations grow, and as the ability to trade grows, you should see more and more specialization and higher and higher productivity. (Obviously the division of labor is not the only source of increases in productivity.)
However, there is a downside... Adam Smith’s plan exposes people to incredible variations in income and thus a market system possesses and important force which causes inequality. Specialization ties your entire wellbeing to a single industry. If you decide that you are going to become a web designer, your fate is very closely tied to the market for web designers. As a result, while Smith’s plan dramatically increases overall productivity, it also exposes us to incredible risk.
Of course, markets do have responses to risk. The typical response is for the market to provide insurance contracts to reduce risk. In this case however, the type of insurance needed is actually income or job insurance. These types of insurance contracts are not typically available. ...
I don’t mean to imply that all or even most of the alarming increase in inequality is due to the division of labor and trade. I would guess that modern technology (which allows people to leverage luck to extreme degrees by cheaply reproducing and transmitting ideas and information) and inheritance, both play a significant role in creating inequality. However, living with income inequality is an implicit part of the deal we made with Adam Smith and it will be with us in some form for a long time.

'Brookings EITC Proposal Mostly Moves in the Wrong Direction'

As a follow-up to my recent article arguing that a combination of the minimum wage and EITC is the best approach to helping low income households:

Brookings EITC Proposal Mostly Moves in the Wrong Direction, by Shawn Fremstad, CEPR: [Shared via Creative Commons]: Isabel Sawhill and Quentin Karpilow of the Center on Children and Families at the Brookings Institution recently proposed what they call a “no-cost” way to reduce poverty and inequality. The proposal combines an increase in the minimum wage with some fairly radical and mostly unwise changes to the Earned Income Tax Credit.

It certainly makes sense to increase the minimum wage substantially. As economist Arindrajit Dube estimates in a new and very thorough working paper, such an increase would “reduce the number of non-elderly living in poverty by around 4.6 million, or by 6.8 million when longer term effects are accounted for.” It also makes sense to combine a minimum wage with increased social insurance. As Dube notes: “in the presence of [negative] incidence effects [of the EITC on wages] due to increased labor supply, the optimal policy calls for combining tax and transfers like the EITC with a minimum wage.”

At first glance, it may seem like the Brookings proposal follows Dube’s prescription, combining a minimum wage increase with expanded EITC benefits for certain workers, particularly:

  1. young adults (ages 21 to 39) who do not have dependent children and are working at least 1,500 hours a year (around 29 hours a week if working all 52 weeks),
  2. married couples that include two workers as long as the lower-earning spouse works at least 1000 hours a year (just under 20 hours a week if working all 52 weeks), and
  3. certain families with very young children.

At the same time, however, the proposal would cut EITC benefits for many workers in certain groups, including:

  1. those with more than one child,
  2. those with older children, and
  3. childless workers who are over age 39 or work less than 1,500 hours a year.

Although Sawhill and Karpilow aren’t as explicit as they should be about the extent of EITC cuts in their plan, they do acknowledge that it: “prioritizes full-time work over part-time employment, young children over big families, and young single adults over older ones.” It would be helpful for them to be even more transparent and explicitly quantify the distributional effects of their redesign. How many workers would see their EITC benefits cut and by how much, and how many would see increases?

The Sawhill/Karpilow proposal has a number of moving parts, but in the remainder of this post I’m just going to focus on the changes they propose to the childless worker credit. It would be a very good idea to increase the childless worker EITC (in conjunction with increasing the minimum wage and tying it to inflation or some other index). ...

But it would be a very bad idea to make the childless worker EITC, as well as the separate spousal credit Sawhill and Karpilow propose, contingent on working nearly 30 hours a week year-round (or nearly 20 hours a week for spouses). Given how far we are from full employment (current U-6 unemployment is 13.1 percent) and the extent of the decline in labor force participation over the last five years, it makes little sense to redesign the EITC in a way that (theoretically) increases incentives for workers to go from part-time to near-full-time employment, but reduces incentives for going from no employment to at least some employment.

Moreover, it makes little sense to penalize the many part-time workers who are working part-time for reasons that are quite sound and have positive externalities (caring for a family member with a disability or a child, going to school part-time, etc.) or for reasons beyond their control, such as a disability, illness, lack of available full-time work, etc. ...

Sawhill/Karpilow would also change age eligibility for the childless worker EITC (currently ages 25-64) by extending eligibility to workers age 21-24, but eliminating it for those age 40-64. They don’t provide any rationale for this cut, despite the extraordinary inequities it would create. A personal example: when my mother became a "childless worker" in her late 40s after the last of her children left the nest, she completed an A.A. degree with straight A’s, and then went on to work in a series of poorly compensated, dead-end jobs at K-Mart and in home health care, until serious health issues made even half-time work impossible. If the Sawhill/Karpilow proposal had been in place when she was still alive and working in her late 40s and early 50s, she would have lost eligibility for the modest EITC she received, while a 20-something worker doing the same work as her would have a received credit of around $1,600. 

Finally, while “target efficiency” isn't a particularly big concern of mine ... it should be noted that the ... target efficiency of the Sawhill/Karpilow EITC proposal is unclear. They say that the combination of raising the minimum wage and their EITC proposal would lift 3.4 million people out of poverty, but they don’t explain how much of this is due to the EITC proposal by itself. The Dube estimate I noted about suggests that the vast majority of the anti-poverty effect could be due to increasing the minimum wage. And various elements of the Sawhill/Kapilow proposal would cut EITC benefits for workers with below-poverty income..., while increasing them for other workers. 

We should increase the EITC, especially for workers without dependent children, and the minimum wage as a way to reduce poverty and inequality. But the Brookings plan is not the way to do it.

Monday, January 20, 2014

What's the Best Way to Help the Poor?

At MoneyWatch:

What's the best way to help the poor?, by Mark Thoma

Minimum wage, the EITC, or some combination of the two?

Paul Krugman: The Undeserving Rich

The rise in inequality is being met with "a determined campaign of statistical obfuscation":

The Undeserving Rich, by Paul Krugman, Commentary, NY Times: The reality of rising American inequality is stark. ... While we can and should have a serious debate about what to do about this situation, the simple fact — American capitalism as currently constituted is undermining the foundations of middle-class society — shouldn’t be up for argument.
But it is, of course..., class warfare is already underway, with the plutocrats on offense. The result has been a determined campaign of statistical obfuscation. ... The story goes like this: America’s affluent are affluent because they made the right lifestyle choices. They got themselves good educations, they got and stayed married, and so on. Basically, affluence is a reward for adhering to the Victorian virtues.
What’s wrong with this story? Even on its own terms, it postulates opportunities that don’t exist. For example, how are children of the poor, or even the working class, supposed to get a good education in an era of declining support for and sharply rising tuition at public universities? Even social indicators like family stability are, to an important extent, economic phenomena: nothing takes a toll on family values like lack of employment opportunities.
But the main thing about this myth is that it misidentifies the winners from growing inequality. White-collar professionals, even if married to each other, are only doing O.K. The big winners are a much smaller group. ...
And who are these lucky few? Mainly they’re executives of some kind, especially, although not only, in finance. You can argue about whether these people deserve to be paid so well, but one thing is clear: They didn’t get where they are simply by being prudent, clean and sober.
So how can the myth of the deserving rich be sustained? Mainly through a strategy of distortion by dilution. You almost never see apologists for inequality willing to talk about the 1 percent, let alone the really big winners. Instead, they talk about the top 20 percent, or at best the top 5 percent. These may sound like innocent choices, but they’re not, because they involve lumping in married lawyers with the wolves of Wall Street. ...
Again, I know that these realities make some people, not all of them hired guns for the plutocracy, uncomfortable, and they’d prefer to paint a different picture. But even if the facts have a well-known populist bias, they’re still the facts — and they must be faced.

Friday, January 17, 2014

'People Upset with David Brooks'

Travel day -- will post as I can, which may not be much. For now, quickly between flights, people upset with David Brooks include:

Monday, January 13, 2014

5 Reasons Why Your Pay Isn't Rising as Fast as it Should

At MoneyWatch:

... In theory, wages should grow at the rate of inflation plus the rate of growth of productivity. But in the last several years wage growth has been below this benchmark. Why? Here are five factors that are conspiring to restrain wage growth. ...

Sunday, January 12, 2014

'The Vicious Circle of Income Inequality'

Robert Frank says we should pay more attention to growing inequality and "public policies that might contain it":

The Vicious Circle of Income Inequality, by Robert Frank, Commentary, NY Times: ...Given the grave threats to the social order that extreme inequality has posed in other countries, it’s easy to see why the growing income gap is poised to become the signature political issue of 2014. Low- and middle-income Americans don’t appear to be on the threshold of revolt. But the middle-class squeeze continues to tighten, and it would be imprudent to consider ourselves immune. So if growing inequality has become a self-reinforcing process, we’ll want to think more creatively about public policies that might contain it. ...