Category Archives: income distribution-wealth-poverty

Apparently, Gregory Clark is Not Most Economists

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Gillian B. White writes,

According to the Fed study, about 60 percent of black children whose parents had income that fell into the top 50 percent of the distribution saw their own income fall into the bottom half during adulthood. This type of downward slide was common for only 36 percent of white children.

…Still, most economists lack a clear, definitive explanation for why, after reaching the middle class, many black American families quickly lose that status as their children fall behind.

Pointer from Mark Thoma.

Obviously, she did not read my review of Gregory Clark’s latest book.

Clark suggests that this may reflect that the underlying mean for these ethnic groups may differ, and the higher propensity of middle-income blacks and Hispanics to have their children’s income fall to the bottom third might be due to regression toward a lower mean.

Suppose that you have two populations of men with different height-producing genetic characteristics. The mean height in group A is 5 feet, 9 inches, and the mean height in group B is 5 feet, 7 inches. There is substantial variation within each group.

Now, out of the current generation of men, you select men from each group who happen to be 5 feet, 8 inches. Track the height of their sons. It seems reasonable to predict that, starting with men who are 5 feet 8 inches, the sons of men from group A are likely to be taller than the sons of men from group B. This does not result from social prejudice against men from group B. It is the result of laws of probability.

The FARMS Indicator

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Alex Tabarrok writes,

Eligibility for free and reduced-price lunches, however, depends on eligibility rules and not just income levels let alone poverty rates.

He is criticizing the sensationalist statistics that “half of public school children are in poverty,” when eligibility for free and reduced meals is not quite the same thing.

Still, I think that the percentage of FARMS students is a very useful indicator. For example, a couple of times I have downloaded data on standardized test scores for various Maryland school districts. The scores and the FARMS percentages line up very closely. In contrast, there is almost zero correlation between school spending and test scores. As far as spending goes, the null hypothesis holds.

The interesting question, then, is whether the FARMS proportion is rising because of changes in eligibility rules or because of changes in the demographics of the public school population. I suspect is is the latter, and I suspect that it is a leading indicator of worse outcomes, such as performance on stand in terms of standardized tests and high school graduation rates (provided that schools do not reduce the requirements for graduation).

The Distribution of Leisure

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John Cochrane writes,

a larger and larger fraction of the population, including many prime-age men, are not working and not actively looking for work. . .where does the money come from?

He refers to an article in the NYT showing that people who have abandoned the labor force spend a lot of time watching TV.

I have been predicting for quite a while that the distribution of leisure will be a major social issue going forward. The video of my most memorable portrayal, using a dance, seems to have been taken down by the Kauffman Foundation. Too bad you missed it. Anyway, the issue of the distribution of leisure is the flip side of the issue of the distribution of income.

Condivergence: A Theory of Changes in Income Distribution

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The WSJ blog writes,

Within the United States, income inequality is most pronounced in the Southern half of the country

This is consistent with a theory that I call Condivergence. It combines convergence with respect to geography and divergence with respect to innate ability.

For two people of equal innate ability, their place of birth matters less than it did fifty years ago. Within the U.S., this means that the South appears to have closed much of the income gap with the rest of the country that existed in the 1930s. Across countries, we have seen incomes rising more rapidly in China, India, and other low-income countries than in the U.S. That is what economists call convergence, or factor-price equalization.

At the same time, however, we have seen a widening of income disparities within regions. House prices in one suburban neighborhood in St. Louis are several times those in a neighborhood just a few miles away. Income inequality has soared within the South, and within the U.S. I see this as a reflecting larger reward differentials for a given differential in innate ability. That is known as divergence.

The two processes are linked. As the effect of geography on income edges down, the effect of innate ability goes up. The winners are people with high ability in erstwhile low-income locations. The losers are people with moderate to low ability in erstwhile middle-income locations.

The Paradox of Education

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Joel Kotkin writes,

Generally speaking, those areas that have the heaviest concentration of educated people generally do better than those who don’t.

He looks at statistics across different sections of California.

Sort of randomly, the other morning I went to Zillow and looked up house prices in three places. On Faris Avenue, which is a block over from my childhood residence in suburban St. Louis (my own street was all multifamily dwellings, but I wanted to price a single-family home), there is a 1440 square foot house for sale for $37,900.

I know someone who lives in a more affluent suburb in St. Louis. A 2428 square foot house on their street, Eversdale Court, sold almost two years ago for $417,000. Thus, it is less than twice the size of the house on Faris avenue, but it is worth more than 10 times as much.

In Bethesda, a 45-minute bike ride from where I live now, there is a new condominium building called The Darcy with prices that range from the mid $600 K to $3 million. The smallest floor plan has 835 square feet.

Just to put this in perspective, for the price of an 835 square foot condo in Bethesda, you could buy close to 4000 square feet of home on Eversdale Court and about 20,000 square feet of homes on Faris Avenue (which would just about get you the whole street). I think this tells you everything you need to know about economic disparities. And if you use house prices as your indicator of disparities, my guess is that you will find plenty of correlation with educational attainment rates.

But the paradox is that if you think of education as fairy dust, and you try to sprinkle it on to the residents of Faris avenue, you could sprinkle like crazy without moving their economic status very much. The Null Hypothesis, which says that educational interventions have almost no discernible long-term effects in a replicable controlled-experiment setting, is a pretty safe bet.

As you probably know, Bryan Caplan’s explanation for the paradox is that education is all signaling. My hypothesis, which is not too much different, is that formal education is a cultural norm for the affluent.

In Bryan’s story, the educational credentials play a causal role, because if you don’t get the credentials, you send an adverse signal. In my story, educational credentials are not a cause. They are a symptom of your future affluence, which is caused by the personality traits you inherited from your affluent parents. So when we observe clusters of well-educated young people in particular geographic areas, what we are observing are clusters of children of affluent adults.

Will the Swiss Support a BIG Welfare State?

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From Newsweek,

Despite tentative bipartisan support for basic income in the U.S, the concept has gained greatest traction outside America. Switzerland has become the first country to hold a referendum on basic income at a national level; in 2015, the Swiss Parliament will vote on whether to extend a basic income of 2,500 Swiss francs (about $2,600) per month to every Swiss resident.

The article discusses radical versions of the Basic Income Grant for the U.S., in which $15,000 per household would be provided instead of Social Security as well as means-tested programs such as food stamps. It was hard for me to tell whether Medicaid would have to go, too. One commenter even thinks that Medicare would be axed to help pay for the income grant.

Anyway, although political judgment is not my specialty, it seems to me that tying a basic income grant to getting rid of Social Security would make it much harder to pass.

Meanwhile, if Switzerland pulls it off, it will be another victory for small states having better government/

What Do We Really Know About the Cost of Living?

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In an article on consumers’ expectations for home prices, Robert Shiller writes,

with the median home price under $200,000, according to RealtyTrac…

Pointer from Mark Thoma.

My question is: Where are these homes that are priced at less than $200,000? My niece in LA, my daughter in DC, another daughter in NY, and my third daughter in Boston would sure like to know.

This gets back to the issue of widening differences in income and housing costs within and across metro areas. I mentioned that issue last month, when I cited Joel Kotkin’s finding that much of the population growth in recent years has been in the far suburbs.

Suppose that housing cost is 25 percent of income, and suppose that close to the center of a city housing cost is 5 times what it is in the outer suburbs. That means that the cost of living is 1.25 times as high close in as it is far out. Yes, you should adjust for commuting time and cost, the value of different amenities, and so on. But that is a huge difference.

Consider that, at a national level, economic experts soberly analyze changes in trend productivity growth of 0.5 percent per year. To measure productivity changes, you need to have accurate measures of real GDP. To measure real GDP, you need to have accurate measures of “the” rate of inflation.

But what if inflation is 5 percent higher in downtown LA than it is 30 miles away? Which is the accurate measure of inflation? Even a slight mistake in aggregating across different areas could completely change the picture for national productivity growth.

I find myself thinking that the multiplicity of economies within the U.S. really matters. For example, I could imagine that the minimum wage would have a much bigger effect on employment in the locations with those sub-$200,000 houses than in higher-cost areas, where employers probably have to pay above the minimum, anyway. I can imagine that downward stickiness of wages matters a lot if you have inflation differentials across areas of 5 percent or so.

In trying to view the U.S. economy, I am tempted to drop the macroeconomic lens and replace it with the international trade lens.

A Conflict of Rhetoric

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Lawrence Mitchell writes,

A very significant component of success – one that may even be more determinative than hard work – is luck. This is true, even if the advantaged have worked hard to maximize the benefits of that luck. By luck, I mostly mean circumstances of birth and natural talents and abilities (which might well include the propensity to work hard).

Why do the disadvantaged tolerate this situation? The American myth of self-reliance. No matter the vagaries of fortune, we consistently find that Americans at all levels believe in some variant of the Horatio Alger myth – the classic American rags to riches success story – despite strong empirical evidence that belies it.

Pointer from Mark Thoma.

On the other hand, James Otteson writes,

Human beings are capable of being worthy to be free. Human beings become noble, and, I would even suggest, beautiful, by the vigorous use of their faculties and they become dignified when their lives are their own…

This conception of moral agency allows one to be one’s own person, and to stand, or fall, on one’s own individual initiative, without having to beg for personal favors, without having to grovel at the knees of a king or flatter a lord or satisfy the pleasure of the Regulatory Czar. It grants people the freedom to go where their own abilities and initiative–not someone else’s mercy or condescension–can take them. Yet with that freedom comes responsibility for one’s actions. If you succeed, then you reap the benefits–and no one begrudges you your success because it means you have done well both for yourself and for others. If you fail, however, then you may pay the cost and (one hopes) learn from the experience.

…Contrary to widespread opinion, failure is not something that public policy should attempt to eliminate…failure, and experiencing the consequences attendant on having made decisions that led to failure, is an indispensible [sic] part of moral agency.

Those quotes are from Otteson’s recent book, The End of Socialism.

My sense is that these two authors talk past one another. Otteson’s rhetoric emphasizes personal decisions as the determinant of individual success. For Mitchell, it is the opposite–even a “propensity to work hard” is a matter of luck.

I find myself unwilling to accept either extreme. I am inclined to think that Otteson makes the scope of individual moral agency seem too large, and Mitchell makes that scope seem too small. However, I have yet to finish Otteson’s book or to start Mitchell’s.

Coincidentally, Charles Murray writes,

deeper personal qualities account for what we call political polarization, but that one specific dimension—our respective attitudes toward personal responsibility—accounts for a huge proportion of the polarization all by itself.

Read the whole piece.

Family Structure and Income Inequality

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Aparna Mathur writes,

Recently, some papers have suggested that assortative mating has a role to play in household income inequality. Empirically, it has been found that the proportion of couples who share the same level of schooling has been growing over the past few decades. This has been accompanied by a rise in household income inequality. A paper by economists at the Federal Reserve Bank found that changing family structure accounted for 52 percent of the increase in the 50-10 ratio (50th percentile to 10th percentile) and 49 percent of the increase in the 95-5 ratio. Research by Harvard economists, Chetty et al. concludes that the single strongest correlate of upward economic mobility across geographic regions of America is the fraction of children living in single-parent families.

Technical and Communications Skills

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Catherine Weinberger writes,

while math scores, sports, leadership roles, and college education are all associated with higher earnings over the entire 1979-1999 period, the time trend in the earnings premium was strongest among those individuals who participated in sports or leadership activities during high school and had higher levels of cognitive skills. Supporting evidence based on Census and CPS data matched with the Autor, Levy and Murnane (2003) job-task measures provides an independent observation also suggesting that the labor market increasingly favors workers with strong endowments of both cognitive and social skills. These findings, coupled with evidence of growing employment, suggest increasing complementarity between cognitive and social skills among young workers.

Pointer from Tyler Cowen, who sees the findings in an average-is-over context. Indeed, if cognitive skills and social skills are both somewhat scarce and imperfectly correlated, increasing complementarity would lead to greater inequality.

I would always tell my AP Statistics students that they were learning technical communications skills. I would say that communicators without technical skills end up as baristas. Those with technical skills but poor communication skills will end up as Dilbert, working for a boss who appears to be an idiot.