Category Archives: income distribution-wealth-poverty

Jason Furman’s Puzzle

Posted on by

He writes,

In the absence of economic rents, the return on corporate capital should generally follow the path of interest rates, which reflect the prevailing return to capital in the economy. But over the past three decades, the return to productive capital generally has risen, despite the large decline in yields on government bonds.

Pointer from Mark Thoma.

For a moment, think that there is just one interest rate. If “the” interest rate is low, then the rate of return on new capital ought to be low. Otherwise, firms would borrow at the low interest rate in order to purchase new capital.

One possibility is that the marginal return on new capital is low, but the returns on existing capital are high. That would be true in an economy where there are economic rents available, due to monopoly power and/or government favoritism. I gather that this is the story that Furman thinks is right.

I would note that there is more than one interest rate. It could be that there is a high interest rate charged to firms that are trying to invest in new capital at the margin. Microsoft can borrow at a low interest rate, but when it buys Linked-In that is not new capital investment.

Despite that possibility, my inclination is to believe that Furman is onto something. Read his whole essay.

Intergenerational Income Immobility

Posted on by

Guglielmo Barone and Sauro Mocetti write,

We focus on the Italian city of Florence, for which data on taxpayers in 1427 – including surnames, occupations, earnings, and wealth – have been digitalised and made available online. We matched these data with those taken from the tax records relating to the city of Florence in 2011. Family dynasties are identified by surnames. Table 1 offers a first flavour of our results. We report for the top five and bottom five earners among current taxpayers (at the surname level) the modal value of the occupation and the percentiles in the earnings and wealth distribution in the 15th century (the surnames are replaced by capital letters for confidentiality). The top earners among the current taxpayers were already at the top of the socioeconomic ladder six centuries ago – they were lawyers or members of the wool, silk, and shoemaker guilds; their earnings and wealth were always above the median. In contrast, the poorest surnames had less prestigious occupations, and their earnings and wealth were below the median in most cases.

Yes, this is reminiscent of and reinforces the findings of Gregory Clark in The Son Also Rises. Recall my review of Clark’s book.

Libertarians and the Welfare State

Posted on by

Bryan Caplan writes,

1. Universal social programs that “help everyone” are folly. Regardless of your political philosophy, taxing everyone to help everyone makes no sense.

2. In the U.S. (along with virtually every other country), most government social spending is devoted to these indefensible universal programs – Social Security, Medicare, and K-12 public education for starters.

3. Social programs – universal or means-tested – give people perverse incentives, discouraging work, planning, and self-insurance. The programs give recipients very bad incentives; the taxes required to fund the programs give everyone moderately bad incentives. The more “generous” the programs, the worse the collateral damage. As a result, even programs carefully targeted to help the truly poor often fail a cost-benefit test. And while libertarians need not favor every government act that passes the cost-benefit test, they should at least oppose every government act that fails it.

Read the whole thing. However, these first few paragraphs made me worry about a nirvana fallacy. Nirvana would be a program that gives money or services to poor people without creating incentives that tend to discourage work. I do not believe that nirvana exists, so that in the real world we have to compromise. You either let poor people suffer or you provide a program that dilutes their incentive to work. Some further remarks:

1. Programs to help the poor do not necessarily have to be provided by the national government. They could come from local governments, or from private charity. I personally would like to see a mix. I can make a case for a universal basic income provided by the national government, with a marginal tax rate of 25 percent or less. For example, with a 25 percent tax rate, if a household of 4 with zero income gets $12,000. then when its income reaches $20,000 it gets $7000 and when its income reaches $48,000 it gets zero. Beyond the basic income, local governments and private charities could provide supplemental income and services to households with special needs, such as a child with expensive medical problems. If we are worried that households will not budget to meet their basic needs, we can give them money not in dollars but instead in the form of a flexible benefit that can only be spent on food, housing, medical care, and education.

2. I also can make a case for having generous welfare states, but with no involvement at the national level. Denmark and Sweden have less than 10 million people each. Why do we need to spread a welfare state over 300 million people?

3. I think that the case for abolishing or phasing out existing social welfare programs is very strong.

4. Those who favor a role for the national government in providing a welfare state should worry about a political nirvana fallacy. Take your ideal welfare state. Maybe it looks like (1) above). Maybe it looks like some idealized version of Scandinavia. In practice, how do you get from here to there?

Overall, I think that there is a powerful pragmatic utilitarian case for reducing the role of the national government in the U.S. in providing support for education, health care, housing, and income security. Not because we do not wish to be generous in helping people with those benefits. But because the set of national programs is so wasteful and inefficient.

For a more philosophical counter to Bryan, see Matt Zwolinksi. I do not like to discuss these issues solely at an abstract philosophical level. I am more focused on taking reality as it is and posing the question of what is the direction for improvement.

Thoughts on Social Class

Posted on by

Scptt Alexander writes,

All those studies that analyze whether some variable or other affects income? They’d all be much more interesting if they analyzed the effect on class instead. For example, there’s a surprisingly low correlation between your parents’ income and your own income, which sounds like it means there’s high social mobility. But I grew up in a Gentry class family; I became a doctor, my brother became a musician, and my cousin got a law degree but eventually decided to work very irregularly and mostly stay home raising her children. I make more money than my brother, and we both make more money than my cousin, but this is not a victory for social mobility and family non-determinism; it’s no coincidence none of us ended up as farmers or factory workers. We all ended up Gentry class, but I chose something closer to the maximize-income part of the Gentry class tradeoff space, my brother chose something closer to the maximize-creativity part, and my cousin chose to raise the next generation. Any studies that interpret our income difference as an outcome difference and tries to analyze what factors gave me a leg up over my relatives (better schools? more breastfeeding as a child?) are stupid and will come up with random noise. We all got approximately the same level of success/opportunity, and those things just happen to be very poorly measured by money. If we could somehow collapse the entirety of tradeoffspace into a single variable, I bet it would have a far greater parent-child correlation than income does. This is part of why I don’t follow the people who take the modest effect of IQ on income as a sign that IQ doesn’t change your opportunities much; maybe everyone in my family has similar IQs but wildly different income levels, and there’s your merely modest IQ/income relationship right there. I think some studies (especially in Britain) have tried analyzing class and gotten some gains over analyzing income, but I don’t know much about this.

My thoughts:

1. I agree that income is a noisy measure of something that is more fundamental and more highly heritable. I take Gregory Clark’s The Son Also Rises as strong evidence for that. Re-read my review.

Clark and his researchers looked at multi-generational outcomes on a variety of measures in several countries. They concluded that under many different institutional arrangements and across many time periods, the true correlation across generations in social status is somewhere between .7 and.8, which is much higher than most conventional estimates. In short, persistence of social class is much higher than most researchers believe it to be, based on single-generation correlations that are biased downward by measurement error.

2. Alexander describes a number of impressionistic descriptions of social class. I prefer the data-based approach used by sociologists and market researchers. See, for example, The Clustering of America, which uses cluster analysis.

3. People are much more tightly grouped around social class than around income or political beliefs. That is why so many of us feel totally isolated from the Trump phenomenon. Remember Charles Murray’s bubble test?

4. Speaking of Trump, Alexander writes,

Donald Trump appeals to a lot of people because despite his immense wealth he practically glows with signs of being Labor class. This isn’t surprising; his grandfather was a barber and his father clawed his way up to the top by getting his hands dirty. He himself went to a medium-tier college and is probably closer in spirit to the small-business owners of the upper Labor class than to the Stanford MBA-holding executives of the Elite. Trump loves and participates in professional wrestling and reality television; those definitely aren’t Gentry or Elites pastimes! When liberals shake their heads wondering why Joe Sixpack feels like Trump is a kindred soul even though Trump’s been a billionaire his whole life, they’re falling into the liberal habit of sorting people by wealth instead of by class. To Joe Sixpack, Trump is “local boy made good”.

I find that insightful.

Socialism and Income Distribution

Posted on by

John Hinderaker writes,

Only under socialism could Fidel Castro become the richest warlord, relative to his subjects’ wealth, in recorded history. (And that was the least of his sins.) Only under socialism could Maria Gabriela Chavez, daughter of socialist tribune of the people Hugo Chavez, beloved by the American left, waltz off with a $4 billion fortune. But then, she was a piker: Chavez’s Minister of the Treasury stashed $11 billion in Swiss bank accounts.

One way to acquire enormous wealth is to be perceived as an egalitarian.

Inequality and Team Performance

Posted on by

An alert commenter points to a more recent study of baseball team performance.

Having a larger Gini coefficient (as you’d see in a stars-and-scrubs roster) is ever so slightly associated with better outcomes over the rest of the season. However, the effect wasn’t large enough to be statistically significant, so this analysis says a team should probably just be indifferent about which approach it uses to build a roster.

I believe that the study that Turchin cited looked at inequality in terms of salary, whereas this study appears to look at inequality in terms of players’ contributions to wins. In any case, this study finds the opposite result, although it is not statistically significant.

Even the original study cited by Turchin does not quite say what he claims it says. The abstract reads,

in the latter part of the 1990s and continuing into the 21st century, the greater the team payroll and the more equally this payroll is distributed among team members, the better the on-field performance of the team.

I interpret this as saying that teams with higher total salaries for players were winning more. Given an aggregate salary level, it was better to have it more evenly distributed among team members. But that might indicate that, other things equal, it was better to have a balanced roster than a stars-and-scrubs roster.

Turchin uses this one study, which he interprets as showing that unequal salaries per se cause poor performance, to argue that inequality will lead to social collapse. Seems like quite a stretch.

Dean Baker on the One Percent

Posted on by

He writes,

This paper argues that the bulk of this upward redistribution comes from the growth of rents in the
economy in four major areas: patent and copyright protection, the financial sector, the pay of CEOs and other top executives, and protectionist measures that have boosted the pay of doctors and other highly educated professionals.

Pointer from Mark Thoma. Baker backs up this opinion with evidence. he then concludes

The implication of this argument is that progressives need not think of themselves as using government against the market. Rather they should seek to find ways to use market mechanisms to bring down the incomes of the wealthy in the same way that wealthy have sought to structure markets to lower the income of everyone else.

If progressives want to look at ways that financial policy, patent policy, and occupational licensing create artificial rents rather than create “public goods,” that works for me.

Significance Comparisons and Measurement Error

Posted on by

Leilan Shu and Sara Dada report,

We first use a simple linear regression model of average test score and average household income to first establish a positively correlated relationship. This relationship is further analyzed by differentiating for other community-based factors (race, household type, and educational attainment level) in three multiple variable regression models. For comparison and to evaluate any consistencies these variables may have, the regressions were run on data from both 2007 and 2014. In both cases, the final multiple regressions found that average household income was not statistically significant in impacting the average test scores of the counties studied, while household type and educational attainment level were statistically significant.

Pointer from Tyler Cowen. If this were credible, it would seem to suggest that “schooling inequality” is really ability inequality.

BUT…Whenever somebody says that “X1 does better than X2 at predicting Y,” watch out for the impact of measurement error. A variable that is measured with less error will drive out a variable that is measured with more error.

In this case, suppose that the variable that matters is “parents’ resources.” Income could measure that variable. Educational attainment could predict that variable. Income has many sources of measurement error–if nothing else, one year’s income could be high or low due to volatility. Educational attainment has fewer sources of measurement error. So even if parents’ resources is the true cause of children’s test scores, you could wind up with a zero coefficient on income, particularly if you include another regressor with lower measurement error.

And this is one of many reasons to prefer experimental data to regressions.

Women’s Education and Childbearing

Posted on by

Moshe Hazan and Hosny Zoabi write,

while highly educated women had fewer kids than women with lesser education in the US until the 1990s, it is no longer true today. During the 2000s, highly educated women had higher fertility rates than women with intermediate levels of education.

Their explanation:

childcare has become relatively more expensive for women with less than a college degree but relatively cheaper for women with a college or an advanced degree. Note that the changes are quantitatively large. Over the past three decades, the relative childcare cost has increased by 33%, 16% and 5% for women with no high-school diploma, a high-school degree and some college education, respectively. In contrast, this relative cost decreased by 9% for women with a college degree and by nearly 16% for women with an advanced degree.

Read the whole article. Pointer from Mark Thoma.