Category Archives: income distribution-wealth-poverty

Three Axes Meets Average is Over

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William Galston sees things along the oppressor-oppressed axis.

There’s nothing we can do, says Mr. Cowen, to avert a future in which 10% to 15% of Americans enjoy fantastically wealthy and interesting lives while the rest slog along without hope of a better life, tranquilized by free Internet and canned beans…He seems not to have considered the possibility that his depiction of our future might fill [us] with justified revulsion.

Patrick J. Deneen chimes in along the civilization-barbarism axis.

Thus, a philosophy that places in the forefront a theory of human liberty arrives at the conclusion that certain historical, technological, and economic forces are inevitable, and it is futile to resist them. One might bother to ask the Amish if this is true, but they didn’t go to Harvard. Clearly, they don’t value human freedom, since they are not on the historical merry-go-round to inevitable human liberty—and degradation.

Pointer from Tyler Cowen.

Two Recommendations From Reihan Salam

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I. On higher education, he recommends a proposal for a $10,000 degree, written by Anya Kamenetz. She concludes,

Making college affordable—without loans—by stripping it of its perks, refocusing the mission on education, using new technology in a blended learning model, and cutting administrative costs could be one of the most important economic boons for the middle class and the poor. Graduating students with massive debt—and even worse, failing to graduate students who acquire massive debt—is the worst way to start young people toward meaningful and productive lives. Change is hard, but colleges need to do so to fulfill their mission of preparing subsequent generations to succeed.

If you’re so smart, why aren’t you an entrepreneur? That is, what is stopping someone from starting a college like this and making a killing? Some possibilities:

1. The credentials cartel is too strong. You cannot get accreditation unless you waste a lot of money on admin, old-fashioned teaching methods, and non-educational resources.

2. The consumers are too stupid. Students will not to go low-cost, efficient schools. They would rather run up big debts an high-cost, inefficient schools.

3. Entrepreneurs are stupid. Only policy wonks can come with ideas like this.

I have to say that I really get annoyed when policy wonks write as if the answer is (3). The whole Obamacare thingy fits in that category. If health insurance exchanges are the answer to affordable health insurance, what was stopping entrepreneurs from creating them? (And if your answer is “moral hazard,” your assignment is to read David Hogberg’s essay, which describes the logic of paying the fine until you get sick under Obamacare) What is it that is stopping insurance companies from compensating doctors on the basis of outcomes rather than procedures, if that is so great?

II. On poverty programs for an Average is Over world, he recommends an article by Oren Cass, who writes,

Rather than have numerous federal agencies each administer numerous programs, the federal government would ideally have a single agency apply a formula, establish the year’s lump-sum payment for each state, and transfer the funds. Call it the Flex Fund. States happy with the existing funding allocations and program structures could continue to apply the funding as they do today. But states with better ideas—even radically different ones—would be free to pursue them.

Also,

An adjustment in benefit types offers the best opportunity to incentivize work without slashing benefits or increasing spending. Two families—one whose head of household works, one whose head of household does not—may both need $3,000 worth of nutritional support. But if the non-working household receives the $3,000 in food stamps while the working household receives it as cash via a wage subsidy, the latter might feel substantially better off. While the Affordable Care Act draws an arbitrary line, providing Medicaid to those below 138 percent of the poverty line and a subsidy for private insurance to those above 138 percent of the poverty line, the benefit could instead be provided as Medicaid for those who do not work and, for those who do work, as additional cash provided via wage subsidy.

Changing some income-support programs to wage subsidies sounds like a good idea to me. The Flex Fund I’mm no so sure about. Many wonks have thought in terms of replacing food stamps, Medicaid, and the rest with a simple cash assistance program. Cass is suggesting replacing all the Federal programs with a state program. Will the states make fewer mistakes with the money than individual poor people? My guess is “no.” Also, if the money comes from the Federal government, how strong is the incentive for states to use it well? If a state puts together an inefficient transfer system, funded by the Feds, how much will voters care?

The Toady Class On Average is Over

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Random notes from a discussion of Tyler Cowen’s Average is Over:

Michael Mandel is optimistic. He thinks that the baby boomers are about to retire in droves (in part because of health reasons), helping to solve the unemployment problem of the young. Tyler, Robin Hanson, Megan McArdle, and I are unpersuaded.

Tyler pictures an economy evolving over the next twenty years to one with a slice of high earners (the 20 percent or so whose skills complement the ever-expanding power of computers) and then a large group that lives comfortably but without a financial cushion to protect against adverse shocks to health or other major risks.

Matt Yglesias wonders how, in a world that requires technical skill and social skills, those of us in the room have survived. It seems that most work for think tanks, newspapers, and other non-profits. Tyler replies that our presence in the room is indicative of marketing skills. Each of us has proven adept at marketing, with wealthy donors as our consumers in most cases. Steve Teles points out that as society’s rich accumulate wealth beyond what they can consume, their philanthropic ideas will, for better or worse, allocate society’s resources. Afterward, it occurs to me that this suggests that there will emerge a toady class, meaning people whose work in one way or another flatters the wealthy.

James Manzi points out that many people work in fields where output is hard to evaluate, such as education and health care, and I would add that entry to these fields is restricted by credentials. Tyler thinks that as we gather more data we will overcome our inability to evaluate performance sooner than people expect. If that is correct, then the credentials cartel would seem to be destined to fall. I believe that a lot of the thesis of his book stands or falls on whether such data-driven evaluation systems pan out. He would agree that we are far away right now, but he would argue that progress is fast.

What most concerns the discussants, including McArdle, William Galston, Jonathan Rauch, and Brink Lindsey, are the social implications of losing the middle class. (Hanson comments on this focus.) Tyler insists that societies will not fracture, nor will redistributionist demagogues take power. Factors favoring stability include aging, surveillance technology, the skill of the rich at controlling the political environment, nativism, NIMBYism, and the basic comfort achieved by the lower class. He points out that Britain and Germany are farther along than the U.S. in the growth of the new lower class, and their societies appear to be stable–Merkel just won re-election by a wide margin.

Tyler says that in the long run mood-altering drugs may be a solution. Teles suggests that Tyler’s next book will be The Great Medication.

The Labor Share of Income

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Has fallen and it can’t get up, according to Michael Elsby, Bart Hobijn, and Aysegul Sahin.

the decline of the labor share, which has been driven by a decline in the share of payroll compensation in national income over the last 25 years, is likely due to the offshoring of the labor-intensive component of the U.S. supply chain.

Pointer from Tyler Cowen. I have called this the Great Factor-price Equalization.

If your model of a recession is that it is caused by sticky wages, then as far as I can tell labor’s share of income should rise during a recession. Or, to put it another way, if labor’s share falls (as it has during this recession), then makes the sticky-wage story less attractive. Labor’s share of income can be written as WL/PY, where w is the wage, L is employment, P is the price level, and Y is real GDP. We can re-write this as (W/P)(L/Y), or the real wage times the average productivity of labor. I labor’s share falls, then either real wages have fallen or productivity has risen. If real wages have fallen, then this directly contradicts the sticky-wage story. If real wages have risen, then productivity has risen faster, and I still have doubts about the sticky-wage story.

Better Measures of Poverty

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Timothy Taylor writes,

Meyer and Sullivan used consumption data, and again they set up the calculation so that the poverty rate for consumption data is the same as the poverty rate for income data as of 1980…By this measure, the poverty rate almost reaches zero percent in 2007, before the Great Recession.

He is referring to a paper by Bruce D. Meyer and James X. Sullivan. Since it comes from a Brookings conference, you can read comments by others at the end of the paper. The commenters did not shoot it down.

The main reason for using a consumption-based measure is that poor people tend to under-report much of their income, such as the value of government-provided benefits. In other words, even if you think that income is the right variable to use for measuring poverty, consumption might be the best available proxy for income.

If the substance of the paper is correct, and poverty is at low levels in the United States, then there is a case for reducing benefits in order to reduce the high marginal tax rate that deters low-income people from working.

However, my own opinion, driven by anecdotal observation rather than data, is that poverty in the U.S. is nowhere near zero. Perhaps if people with low incomes made really good decisions about how to spend their money, then poverty would be near zero. However, over the course of their lifetimes, many people make many bad decisions, and as a result they will spend a lot of time dealing with financial adversity. The moral and practical implications of this view of poverty are not as clearcut as either a progressive or a conservative would like.

Median Household Income: Did You Two Visit the Same Country?

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Neil Irwin writes,

In 1989, the median American household made $51,681 in current dollars (the 2012 number, again, was $51,017). That means that 24 years ago, a middle class American family was making more than the a middle class family was making one year ago.

Pointer from Tyler Cowen.
James Pethokoukis writes,

real median household income indeed rose over the Long Boom of 1983 through 2007.

Welcome to the world of endpoint choice. Wapo’s wonkblog, the official regurgitator of White House talking points, wants you to start in 1989, end in 2012, and say it’s one long miserable period for the middle class. Ergo, not Obama’s fault.

Pethokoukis, who has a somewhat different narrative agenda, shall we say, suggests you start your 1980s comparison at a low point rather than a high point. More important, he says to end it in 2007. Using this new endpoint, it seems that the “30-year stagnation” in real median income is actually a 5-year decline, most of which took place on Obama’s watch.

I am inclined to fall somewhere in between. The peak for this statistic appears to be in 1999, at about $56,000. I would focus on the decline since that date, and I would not blame any President as much as I would blame structural change.

One thing I would like to see is a narrower statistic: the median household income for a household of a given size (say, 4) headed by someone of a given age range (say, 35 to 45). That would control for demographic changes. I am not saying it would tell a different story, but I would like to see things like changes in household size not mixed in with the numbers.

In a later post, Tyler Cowen downplays demographics. However, he links to Kevin Erdmann, who puts demographics front and center–in particular, the decline in the number of earners per household. Erdmann shows that income per earner has gone up, but earners per household has gone down. Reasons he gives for the latter:

1. As the population has aged, the number of zero-earner households as risen sharply. Remember that the income data does not include Social Security or other government transfer payments. [correction, the SS payments would be income. see Erdmanns comment below]

2. The importance of non-wage benefits may be holding down the number of two-earner households. Once one person can provide job-related health insurance to the household, there is not so much point in sending another person into the labor market to obtain a job whose compensation consists largely of health insurance.

The Next Policy Frontier: Improving Parenting?

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Richard V. Reeves, Isabel Sawhill, & Kimberly Howard write,

interventions in parenting are politically unpalatable. Conservatives are comfortable with the notion that parents and families matter, but too often simply blame the parents for whatever goes wrong. They resist the notion that government has a role in promoting good parenting. Judging is fine. Acting is not. Liberals have exactly the opposite problem. They have no qualms about deploying expensive public policies, but are wary of any suggestion that parents—especially poor and/or black parents—are in some way responsible for the constrained life chances of their children.

Later, they write,

Forty-five percent of mothers with less than a high-school degree, and 44 percent of single mothers, are ranked as being among the “weakest” quarter of parents. At the other end of the scale, higher levels of income, education, and family stability all predict stronger parenting. There are also sizable racial gaps in parenting scores. Our analysis suggests that the biggest gaps are not between the helicopter parents at the top and ordinary families in the middle, but between the middle and the bottom. Forty-eight percent of parents in the bottom income quintile rank among the weakest, compared to 16 percent of those in the middle, and 5 percent of the most affluent.

Still later,

In our new paper, we estimate the effects of HIPPY on longer-term outcomes of participants. The goal of the program, offered when children are age three to five, is to effectively train parents to be their child’s first teacher. Families receive biweekly home visits from a paraprofessional for 30 weeks out of the year, along with biweekly group meetings. Parents are also given books and toys. A high-quality evaluation of the program found significant improvements in reading and school readiness in first grade. Using a microsimulation model—the Social Genome Model—we predict that HIPPY participants are 3 percent more likely to graduate high school, and 6 percent less likely to become teen parents. These are modest effects, but positive ones, given the importance of the outcomes.

Of course, if the improvements in readiness in first grade fade out, or prove impossible to replicate in subsequent studies….

Overall, this is an essay that is modest in its claims, and I give the authors kudos for that.

Pointer from Timothy Taylor.

Average is Over, Boys and Girls

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Christina Hoff Sommers writes,

Women still predominate—some­times overwhelmingly—in empathy-centered fields such as early-childhood education, social work, veterinary medicine, and psychology, while men prevail in the mechanical vocations such as car repair, oil drilling, and electrical engineering.

If she would read Tyler Cowen’s new book, she would understand that “empathy-centered fields” have been trending up in demand, because that is where humans have a comparative advantage in a world where computers and robots keep getting better. In addition, Cowen argues that complex businesses require teamwork, not the sort of oppositional, maverick attitude that comes more naturally to males. I read Average is Over as implying that we should not blame the deteriorating outcomes for average males on feminist prejudice in education.

Gotcha!

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Greg Mankiw (among others) points to new NBER working papers by Casey Mulligan that point out that marginal tax rates go up under Obamacare. I have not read the papers, but I assume that he counts as an increase in the marginal tax rate the fact that you lose out on subsidies as your incomes goes up. That is legitimate economic analysis, but try to do satisfy the following:

1. Use “means testing” in order to provide a significant benefit that is aimed at the poor.

2. Keep the marginal tax rate low.

3. Keep the budget cost low.

Those of us on the right tend to argue separately for all three. But collectively, they are not so easy to satisfy. (My undergraduate economics professor, Bernie Saffran, pointed this out, and I have not forgotten it.)

If you want to offer a means-tested benefit at low cost, then you have to scale-back the benefit rapidly as income rises, meaning a high marginal tax rate.

If you want to keep the marginal tax rate low and and the budget cost low, then you cannot offer a sizable benefit to the poor. So you can’t do much in terms of means-testing.

If you want to provide a significant benefit to the poor with a low marginal tax rate, then you have to phase the benefit out very slowly as incomes rise. So the budget cost is high.

If we want to, we can play “gotcha!” with any proposal that is aimed at helping people who are poor. It is bound to fail (1), (2), or (3). But how can we be constructive?

My solution was offered in the essay Bleeding-Heart Libertarianism. The idea was to offer a significant benefit with a low marginal tax rate. To hold down the budget cost, I shift away from in-kind benefits (such as food stamps or Medicaid) toward a cash benefit.

That essay is worth re-reading.

From Different Planets

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Daniel Little:

the idea that a properly functioning market economy will tend to reduce poverty and narrow the extremes of income inequality has been historically refuted — at least in the case of American capitalism.

Echoed by Mark Thoma.

On the other hand, Don Boudreaux.

Each and every thing that we consume today in market societies is something that requires the coordinated efforts of millions of people, yet each of us is able to command possession and use of these things in exchange for only a small fraction of our work time.