Category Archives: income distribution-wealth-poverty

Some Sentences

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1. From Reihan Salam.

Right now, we’re stuck in a political debate in which a federal government that spends, say, 24 percent of GDP represents tyranny while a federal government that spends 19 percent of GDP represents a free society, irrespective of state and local expenditures, tax expenditures, off-balance-sheet activities, and the cost of regulatory initiatives. The end result is that we have endless debates over spending levels while ignoring, for example, the shadow nationalization of the mortgage market and the perverse buck-passing dynamic created by cooperative federalism programs that fuels the growth of state and local government.

2. From Philip Moeller.

“The best childhood personality predictor of longevity was conscientiousness—the qualities of a prudent, persistent, well-organized person,” according to the two professors (he at the University of California—Riverside, and she at La Sierra University). “Conscientiousness … also turned out to be the best personality predictor of long life when measured in adulthood.”

3. Carmen Reinhart.

it is certainly more difficult for a central banker to raise interest rates with a debt to gross domestic product ratio of over 100 percent than it is when this ratio stands at 39 percent. Therefore, I believe the shift towards less independence of monetary policy is not just a temporary change.

Personal Saving and Public Policy

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1. Ezra Klein writes,

This is the other, perhaps more pressing, Social Security crisis: It’s not generous enough to counteract the sorry state of retirement savings nationwide. In a report for the New American Foundation, Michael Lind, Steven Hill, Robert Hiltonsmith and Joshua Freedman survey this data and conclude that the ongoing debate over how to cut Social Security is all wrong: We need to make Social Security much more generous.

They would keep today’s income-based Social Security program, but add a “Part B,” which would be a flat payout to all retirees. When parts A and B are combined, all retirees would be guaranteed 60 percent of their average working wage in retirement, with low earners seeing closer to 100 percent replacement. Part B would be pricey, adding almost a trillion dollars to Social Security’s costs in 2037, and the authors don’t have a clear proposal, much less a politically realistic plan, for how to pay for it. But not paying for it doesn’t mean those costs disappear: It either means living standards for seniors will tumble, or families will strain as they try to support older relatives.

When I read this, it came across to me as a poor use of economic language. Instead, I would have pointed out that if Baby Boomers are not saving enough for retirement, and someone suggests using transfer payments to give them more resources, then in order to know whether or not this is a good idea one needs to know where the resources will come from. Take any year, say, 2018. If you increase Baby Boomers’ consumption in that year, then either you have to decrease the consumption of other people who are alive that year or you have to diminish the rate of capital accumulation. Those are the costs that do not disappear in using transfers to solve the problem of Baby Boomers’ consumption needs in retirement. Perhaps this sounds picky. But as an economist I think that, particularly when one is writing for a lay audience, it is appropriate to employ the principles of scarcity and trade-offs.

2. Richard H. Thaler writes,

Payroll savings plans are vital because they are essentially the only way that middle-class Americans reliably save for retirement. Your grandmother probably knew that the best way to save is to put money aside before you have a chance to spend it. That approach has always worked — and is a core idea embedded in these plans.

…The Obama administration has proposed a simple solution to this problem: the automatic I.R.A. This plan, originally proposed by scholars at the Brookings Institution, would require any employer that doesn’t offer its own plan to enroll workers automatically into individual retirement accounts, with the option to opt out. The burden on employers would be tiny, and the benefit to workers could be life-changing.

Pointer from Mark Thoma.

I liked Thaler’s piece better. He sees the problem as one of encouraging people to provide for their own future consumption by deferring current consumption. If his suggestions were adopted and they work as intended, then there will be more capital in 2018 than otherwise, which would result in more output. Therefore, Thaler’s solution is consistent with economic principles.

As an aside, Klein covers another topic in his column, which is the cost of health care. He writes,

A key fact — perhaps the key fact — about American health care is that the prices we pay for the health care we consume are far, far higher than in any other country.

He recommends putting people age 55-65 on Medicare and negotiating down the compensation of health care providers.

Maybe I was in an uncharitable mood, but I was disturbed by the tone of the quoted sentence. In Crisis of Abundance, I spent a chapter talking about various narratives that have been used to explain health care spending in the United States. On page 25 I wrote,

The most awkward fact for the narrative that attributes high health care spending solely to prices is the finding by John Wennberg and his colleagues…by looking directly at utilization figures, it is clear that when it comes to explaining spending differences across regions it is not prices. Patients in high-spending regions see more physicians and undergo more procedures than patients in low-spending regions.

After surveying a lot of literature, I concluded that the most important narrative for explaining American health care spending is that we use a lot of what I dubbed “premium medicine.” I offered evidence that health care in the United States uses more physical and human capital, meaning medical equipment and specialists, than health care in other countries.

Klein is entitled to disagree with me, of course. But I cringed when he pronounced the over-pricing narrative as if it were a “fact.” In fact, there are many economists who doubt that we can have a free lunch by paying providers less for their services.

3. Turning back to Baby Boomers’ retirement, Reihan Salam writes,

In recent months, opponents of reducing the growth of Social Security benefits have been making the case that Social Security benefits should actually increase, to reflect the inadequacy of private retirement savings. A month, I wrote about Josh Barro’s call for an expanded Social Security program and how it might be reconciled with Andrew Biggs’ center-right vision for Social Security reform. Basically, Barro is open to expanding the public commitment to retirement security through a number of strategies, including mandatory savings accounts….

while policy intellectuals are thinking hard about Social Security’s future — another good example is the work of Charles Blahous and Jason Fichtner on how to make the Social Security payroll tax more work-friendly and fertility-neutral — there has has yet to emerge a consensus among Republican lawmakers on Social Security reform, hence the fact that the House Republican budget proposal didn’t tackle the issue head on. My sense is that there is a way to draw on the work of Biggs (the larger architecture), Barro (his idea of a new class of government securities linked to wage growth or GDP growth merits consideration), and Blahous and Fichtner (thinking through how we can connect their work on fertility-neutrality to the Stein tax reform agenda) to craft an attractive retirement security agenda that would actually prove more generous, when all elements including the mandatory savings element are taken together, than the current system while also proving more fiscally sustainable. Fundamentally, this would be a “conservative” reform, as it would improve work incentives and emphasize pre-funding.

Read the whole thing. Salam is my favorite policy wonk.

Tantalizing Findings

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David Autor and Melanie Wasserman summarize trends in education and labor market outcomes by gender. Timothy Taylor locates their explanation for the relative decline among males.

the earnings power of non-college males combined with gains in the economic self-sufficiency of women—rising educational attainment, a falling gender gap, and greater female control over fertility choices—have reduced the economic value of marriage for women. This has catalyzed a sharp decline in the marriage rates of non-college U.S. adults—both in absolute terms and relative to college-educated adults—a steep rise in the fraction of U.S. children born out of wedlock, and a commensurate growth in the fraction of children reared in households characterized by absent fathers.

The second part of the hypothesis posits that the increased prevalence of single-headed households and the diminished child-rearing role played by stable male parents may serve to reinforce the emerging gender gaps in education and labor force participation by negatively affecting male children in particular. Specifically, we review evidence that suggests that male children raised in single-parent households tend to fare particularly poorly, with effects apparent in almost all academic and economic outcomes. One reason why single-headedness may affect male children more and differently than female children is that the vast majority of single-headed households are female-headed households. Thus, boys raised in these households are less likely to have a positive or stable same-sex role model present.

As I interpret it, their story is one of mutually reinforcing economic and social trends. The economic trend is that the comparative advantage of non-college-educated males in the work force has declined, as innovation and globalization have increased productivity in manufacturing. This reinforces a social trend in which those males are not attractive marriage partners, so that women who formerly would have married them are instead having children out of wedlock. This social trend then reinforces the economic trend, because men born out of wedlock are disadvantage when it comes to being able to remain in school.

I would say that the trends are real, but the narrative is controversial. I think this is a situation where you pick your narrative to fit your policy recommendation. Are you Bryan Caplan, and do you recommend promoting marriage? Then your narrative has to be that marriage plays a causal role in improving men’s earnings. Are you Barack Obama, and do you recommend expanding pre-school and access to college? Then your narrative is that the the main causal factor is education. Are you Charles Murray and do you recommend promoting Victorian virtues? Then your narrative is that this is a civilization-barbarism problem, and we have to reverse the slide into barbarism.

My preferred narrative is that Neal Stephenson predicted this in The Diamond Age. The Vickies and the Thetes have divergent lifestyles, and I suspect that the attempt by the Vickies to impose their lifestyle on the Thetes is doomed to fail.

On the topic of marriage trends, Reihan Salam writes,

instead of serving as a foundation of a successful adult life (a “cornerstone”), it is seen as a culmination of a successful young adulthood (a “capstone”), according to the authors of the Knot Yet report on delayed marriage.

Pointing out the likely correlation between a decline in marriage and an increase in government dependency, Salam writes,

My suspicion is that it will be very difficult to construct such a post-marital libertarian agenda, but that’s not to suggest it’s a futile effort.

He then writes,

What I find interesting is the emerging tension between two tendencies on the center-left: (1) the civil libertarian desire to protect the autonomy of families, particularly families rooted in minority cultural traditions, as a post-marital culture yields ever more children raised in the context highly fragile, unstable family relationships; and (2) the egalitarian imperative to do more to build the human capital of children raised in the poorest households, an effort that may well require increasingly intrusive, heavy-handed, paternalistic interventions.

At the risk of being uncharitable, I do not think that (1) is a factor. Using the three-axes model, the single mom is in the oppressed class and her disadvantaged offspring are in the oppressed class, end of story.

In the talk that I gave in Phoenix, I compared universal pre-school to eugenics. Both appeal to the same desire to improve the human race based on “scientific evidence” of the unfitness of some parents.

Consumption contagion

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A paper by Marianne Bertrand and Adair Morse. (An earlier draft)

Have rising income and consumption at the top of income distribution since the early 1980s induced households in the lower tiers of the distribution to consume a larger share of their income? Using state-year variation in income level and consumption in the top first quintile or decile of the income distribution, we find evidence for such “trickle-down consumption.” The magnitude of effect suggests that middle income households would have saved between 2.6 and 3.2 percent more by the mid-2000s had incomes at the top grown at the same rate as median income.

I cannot wait to see the policy recommendation to tax high incomes. That is, take income away from people with a high marginal propensity to save and give it to government, which has a negative marginal propensity to save.

ERP

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Sudeep Reddy does a very nice job of extracting substance from the latest Economic Report of the President. For example,

“The ‘labor share’ is the fraction of income that is paid to workers in wages, bonuses, and other compensation. … The labor share in the United States was remarkably stable in the post-war period until the early 2000s. Since then, it has dropped 5 percentage points. Because capital income is distributed more unequally than labor income, the decline in the labor share accounts for some, but not all, of the rise in inequality…”

The accompanying chart shows that this has been a worldwide phenomenon.

Overall, this year’s ERP continues to represent a step down from the quality of reports prior to the Obama Administration. It used to be that after patting the President on the back in the first chapter, the ERP would settle down to serious, careful analysis suitable for recommending to upper-level undergraduate economics majors. The decline of the ERP and the emergence of the blogosphere have combined to reduce the significance of the ERP, particularly for economic education.

Wealth, Saving, and Inequality

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Noah Smith writes,

If you do the math, you discover that in the long run, income levels and initial wealth (factors 1 and 2 from above) are not the main determinants of wealth. They are dwarfed by factors 3 and 4 — savings rates and rates of return. The most potent way to get more wealth to the poor and middle-class is to get these people to save more of their income, and to invest in assets with higher average rates of return.

Is this true? If so, it strikes me as a very conservative proposition. It suggests that the civilization-barbarism axis is what drives inequality of wealth, because deferred gratification is one of the civilized values in the conservative pantheon. In effect, Smith is saying that wealth comes from civilized behavior and lack of wealth comes from barbaric behavior.

Utterly oblivious to irony, Smith proceeds to recommend that government teach people to save.

Pointer from Mark Thoma.

Quintile Mobility: Built-in Properties

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Timothy Taylor writes,

For example, for all those born into the bottom quintile, 44% are still in that quintile as adults. About half as many, 22%, rise to the second quintile by adulthood. The percentages go down from there. … Similarly, those born into the top income quintile are relatively likely to remain in the top. Among children born into the top quintile, 47% are still there as adults. Only 7% fall to the bottom quintile. The experiences of those born into the middle three quintiles are quite different. The distribution among income quintiles as adults is much more even for those born in these three middle groups, suggesting significant mobility for these individuals. … This pattern has led researchers to conclude that the U.S. income distribution has a fairly mobile middle, but considerable “stickiness at the ends” …”

This result is nearly an arithmetical certainty. Suppose that everyone faces three equally-probable outcomes:

–their income as adults puts them in the same quintile as their parents
–their income as adults rises enough to move up a quintile
–their income as adults falls enough (in relative terms) to move down a quintile

If this were the case, then people in the top would have a 2/3 chance of remaining at the top, because those who get lucky have nowhere to go but up within the top quintile. Similarly, people would have a 2/3 chance of remaining at the bottom, because those who get unlucky have nowhere to go but down within the same quintile. People in the middle quintiles would have only a 1/3 chance of remaining in their original quintile, because they can move in either direction. This pattern would lead researchers to conclude that the U.S. income distribution has a fairly mobile middle but considerable stickiness at the ends, even though by construction everyone in all quintiles has the same probability of moving up or down the income scale.

David Brooks on Inequality

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He writes,

Decade after decade, smart and educated people flock away from Merced, Calif., Yuma, Ariz., Flint, Mich., and Vineland, N.J. In those places, less than 15 percent of the residents have college degrees. They flock to Washington, Boston, San Jose, Raleigh-Durham and San Francisco. In those places, nearly 50 percent of the residents have college degrees.

He cites the under-appreciated Enrico Moretti. Read the entire column. I agree with it, particularly his conclusion. However, does the relative strength of Texas in recent years undermine the model in which highly-educated elites flock to Blue locations?

The Capital of the Empire

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From Deborah Nelson and Himanshu Ojha

The top 5 percent of households in Washington, D.C., made more than $500,000 on average last year, while the bottom 20 percent earned less than $9,500 – a ratio of 54 to 1.

…Two decades of record federal spending and expanding regulation have fostered a growing upper class of federal contractors, lobbyists and lawyers in the District of Columbia area. The federal government funneled $83.5 billion their way in defense and other work in 2010 – an increase of more than 300 percent since 1989, even after adjusting for inflation. Private industry poured more than $3 billion into lobbying to influence the government, nearly double what it spent a decade ago.

…The ranks of Washington-area workers with incomes above $100,000 rose to 22 percent of the workforce, up from 14 percent in 1990, adjusted for inflation, a Reuters analysis of Census data found.

…Today there are 320,000 federal jobs in the Washington area. Within the District of Columbia, 55 percent pay $100,000 or more.

Nearly 13,000 lobbyists registered with the government last year and reported $3.3 billion in fees, or about $260,000 per lobbyist. That’s 22 percent more lobbyists and 37 percent more inflation-adjusted revenue per lobbyist than in 1998, according to a Reuters analysis of data from the nonpartisan Center for Responsive Politics.

Read the entire article, which is well researched and provides food for thought.

On a loosely related note, Richard Green writes

we should pay to society our fair share of what we get from society. But the implication of this is not necessarily that everyone should sacrifice in order to put us all on a sustainable fiscal path.

The Reuters piece may tell us something about who it is that “gets from society” and hence deserves to give something back.