Category Archives: income distribution-wealth-poverty

Chris Dillow on a Basic Income

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He writes,

A lowish basic income satisfies the right’s desire that there be only limited redistribution. But it would compel people to find low-paid and unpleasant work.

Pointer from Mark Thoma.

Dillow believes that a basic income should be high enough so that a person could turn down low-paid and unpleasant work. I am confident that I could not persuade him otherwise, but all I can say is that I disagree. The summers I spent in an electronics factory were much better for my morale than the summers that I spent idle. And if my daughters faced the choice of a future cleaning hotel rooms or a future living on welfare checks, I honestly would think of them as better off cleaning hotel rooms.

In fact, one of the arguments against a negative income tax is that there is some evidence that labor supply is highly inelastic, so that even with high implicit marginal tax rates poor people choose to work. That evidence would suggest that many people share my preferences about the dignity of having a job and earning one’s living.

If the studies are correct, then lowering the implicit marginal tax rate will induce only a small increase in labor supply. I happen to think that in the long-run, perhaps meaning the multi-generational long run, the labor supply elasticity is higher than the studies show. However, even if I am wrong about that, I would still prefer lowering the marginal tax rate on ethical grounds. Let government policy reinforce the work ethic, rather than exploit it.

Surveying the War on Poverty

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Michael Tanner looks at a lot of literature. His conclusion:

Looked at objectively, continuing the War on Poverty is unlikely to further reduce poverty, increase self-sufficiency, or expand economic mobility. More anti-poverty programs and more welfare spending are not the answer to continued poverty. Fifty years of failure is enough.

Of the many papers he refers to, I looked at one by Bruce D. Meyer and James X. Sullivan.

We find that consumption poverty, after adjusting for biases in price indexes, declined by 26.4 percentage points between 1960 and 2010

What they argue is that consumer prices rose less rapidly over the past 50 years than the official figures show. That means that real incomes were lower 50 years ago than the data would indicate. That in turn raises their measure of poverty fifty years ago.

I am not sure whether or not I agree. I

In any case, the poverty rate is one of the most messed-up statistics out there. You would think that poverty would be defined in absolute terms, as the ability to afford X amount of food, Y amount of medical services, Z amount of housing, etc. Instead, it is defined in relative terms, so that if you were to double everyone’s income, poverty would remain the same.

Clarify the Connection

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1. Melinda Pitts, John Robertson, and Ellyn Terry have a chart that seems to me to show that much of the decline in labor force participation in recent years can be accounted for by population aging, disability, and young people attending school.

Pointer from Mark Thoma.

2. James Pethokoukis has a chart showing that the number of people on food stamps has remained really, really high.

I would interpret (1) as saying that we are in a “nothing to see here, move along” sort of labor market. Given that the unemployment rate is normal, if labor force participation is just following natural demographic trends, then the economy is pretty much ok.

I would interpret (2) as saying that there is something to see here. With unemployment down, we should be seeing people fall off the food stamp rolls.

Are senior citizens, people on disability, and young students going on food stamps in droves? Are people who are still in the labor force and working staying on food stamps in droves?

I am not trying to make a point. I genuinely do not know how to connect these dots in the data. For those of you who follow algebra, we have

FS = food stamp recipients
POP = total population
UNEMP = employedunemployed
LF = Labor force

Then FS/POP = (LF/POP)(UNEMP/LF)(FS/UNEMP). We know that FS/POP is unexpectedly high, but LF/POP is low, and UNEMP/LF has come down. So FS/UNEMP must be quite high, right?

My Take on the Piketty Poll

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1. The poll asked whether the post-1970s increase in inequality in the U.S. is due to r>g. No one* agreed with that statement. Piketty does not agree with that statement.

2. What this makes clear is that Piketty is making a claim about the future. That is, in the future, we will have rising inequality because r>g.

3. Supporters of Piketty can say that the poll asked the wrong question, and those of us who jumped on the poll should have known that.

4. Still, in my opinion, the poll serves to highlight that there is no necessary link between (i) rising inequality and (ii) r>g. You can have (i) without (ii), and you can have (ii) without (i). Yes, we already knew that. You can argue that it does not refute Piketty, because he would never come out and insist that (i) entails (ii) or that (ii) entails (i). However, his book is making a rhetorical attempt to link the two propositions (he would hardly have written it otherwise). I think that the poll illustrates that the rhetoric cannot overcome the economics.

*except for Hilary Hoynes

No Economic Experts Agree with Piketty

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The IGM forum asked its panel of leading economists to agree or disagree with

The most powerful force pushing towards greater wealth inequality in the US since the 1970s is the gap between the after-tax return on capital and the economic growth rate.

Actually, one economist agreed with the statement, newly-added panelist Hilary Hoynes. Let me know if you can find another panelist with a less impressive resume or a narrower body of work.

Six economists, including Raj Chetty, answered “uncertain.” Seven economists strongly disagree. The remaining twenty economists who gave an answer (including Emanuel Saez!) checked “disagree.”

UPDATE: Brad DeLong speculates that Piketty himself would have answered “disagree” to the poll. (Pointer from Mark Thoma). Brad thinks that the IGM forum should have asked a different question, but he does not say what that question should be. Let me suggest this, and I hope this would make Brad happy: Going forward, the most powerful force pushing towards greater wealth inequality in the U.S. will be the gap, etc.

The Wedge Between Compensation and Wages

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Mark Warshawsky and Andrew Biggs write,

Most employers pay workers a combination of wages and benefits, the most important of which is health coverage. Economic theory says that when employers’ costs for benefits like health coverage rise, they will hold back on salary increases to keep total compensation costs in check. That’s exactly what seems to have happened: Bureau of Labor Statistics data show that from June 2004 to June 2014 compensation increased by 28% while employer health-insurance costs rose by 51%. Consequently, average wages grew by just 24%.

The kicker:

Health costs are a bigger share of total compensation for lower-wage workers, and so rising health costs hit their salaries the most. The result is higher income inequality.

I don’t think you can blame company-provided health insurance as a first-order cause. Suppose that there were no company-provided health insurance, and everyone instead bought health insurance on their own. In that case, more of the compensation of employees would have been in the form of wages and salaries. If health insurance in the individual market had gone up as rapidly as it has in the company-provided market, then this would have a stronger effect on the cost of living for low-income workers. So even if you did not have company-provided health insurance, you would still have the “wedge” between compensation and disposable income after health insurance.

As a second-order effect, you can argue that company-provided health insurance, and its tax exemption, push in the direction of raising health care costs. But that is not such a compelling argument.

I do think that it is increasingly misleading to speak of a single “cost of living,” when so much of the market basket consists of medical procedures and college expenses that not everyone undertakes. That is, I still believe that Calculating trends in the real wage is much harder than we realize, because every household has different tastes.

Related, from Timothy Taylor:

it’s also intriguing to note that since 1984, the share of income spent on luxuries is rising for each income group, and the share of income spent on necessities is falling for each income group.

He refers to a study by LaVaughn M. Henry.

Isabel Sawhill’s New Book

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Generation Unbound. I am reading it–may have finished by the time this is posted. In short, her thesis is that many twenty-somethings are having unplanned children out of wedlock, with detrimental consequences, particularly for the children.

Possibly related: This chart from Frances Woolley, showing Canadians’ intentions to have children, sorted by gender and age. What stands out is that among 15-24 year-olds, females are much keener on children than males.

Certainly related: Ben Casselman on a recent Pew survey of marriage patterns. Pointer from Jason Collins.

Creative Class or Creative License?

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I started with Peter Lawler’s post.

Are we dividing, maybe more than ever, into a “creative class” and a “service class?”

I followed the link to Emily Badger’s piece.

Their analysis separates workers into three classes, derived from Florida’s research: the “creative class” of knowledge workers who make up about a third of the U.S. workforce (people in advertising, business, education, the arts, etc.); the “service class,” which makes up the largest and fastest growing sector of the economy (people in retail, food service, clerical jobs); and the “working class,” where blue-collar jobs in industries like manufacturing have been disappearing (this also includes construction and transportation).

I am inclined to accuse Florida and his colleagues of using creative license in defining the occupations that constitute the “creative class.” As I stated this summer, I view the process of urban gentrification as being driven by hospitals and universities. They have the money, they are expanding in cities (during my road trip this summer, I saw this in Pittsburgh, Cincinnati, and St. Louis), and they hire people with lots of education credentials, who then move into the city.

But these credentialed workers are not necessarily creative. They are not opening new vistas or making new discoveries or overthrowing social conventions. Many of them are administrators who, if anything, get in the way of the creative individuals in their institutions.

Look, I think that Florida and his colleagues are spot-on in their observation of the changing geography of social class. But the term “creative class” grates on me, because I think it is misleading.

John Cochrane on Inequality

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He writes,

They believe that raising tax rates and a large increase in state direction of economic activity will reduce rent-seeking and cronyism. I assert the opposite, which is the rather traditional conclusion of the vast literature on public choice as well as obvious experience. If I were trying to be polite, I might say it’s an interesting new theory to be debated and investigated. But I’m not, and it isn’t. It is the cream on the cake of amateur ad-hoc assertions of cause-and-effect relationships in human affairs, changing the sign of everything we know.

There are some good thoughts in the piece, but there is too much ranting and too much asymmetric insight (believing that you know why your opponents hold their views better than they do themselves). When you engage in asymmetric insight, you are encroaching on Krugman’s turf. Best to stay out of there.

I think that the phenomenon of inequality is a poster child for what Jim Manzi calls “causal density.” Picture a causal relationship diagram with inequality in a circle in the center and arrows leading in and out from other circles.

There would be many arrows pointing to the inequality circle, representing possible causes. Some of them are bad things, like effective rent-seeking by wealthy people. Some of them are good things, like globalization, which reduces global inequality even as it increases inequality within counties.

There would be many arrows pointing out of the circle, representing possible effects. Some of them are bad things, like greater concentration of political power. Some of them are good things, like more saving. Note that I talk of these as possible effects, not necessarily actual effects.

Going directly at inequality by confiscatory taxation means you give up on trying to differentiate good from bad and just hope that you do more good than harm. In the context of causal density, this strikes me as a case of blind hope. For purposes of public policy, I think it is more likely better to focus on promoting the good things and thwarting the bad things. And if you say that you are not sure how to promote the good things and thwart the bad things, then I fail to see how you can be confident that confiscatory taxation will be beneficial.

Cochrane’s blog post is adapted from remarks he gave at a conference in honor of Gary Becker. John Taylor summarizes the conference.

Megan McArdle on New York Living Costs

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She writes,

Ultimately, something under 45 percent of New York’s rental stock is trading in a free market; the rest is going at below-market rates to people who cling to those apartment like ancient barnacles. If you are lucky enough to have a good deal, you can live in the city for well below the average rent — though you should not assume that all the tenants of rent-controlled or rent-stabilized apartments are low-income.

Read her whole post.