Category Archives: income distribution-wealth-poverty

Trends in poverty in the U.S.

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Timothy Taylor writes,

while it might seem that evidence suggesting that that US poverty level is actually far below the official rate is good news (to the extent that it is true), nothing is simple in a politically polarized world. Conservatives would have to accept that a number of government programs have had a dramatic effect in successfully reducing poverty rates. Liberals would have to accept that poverty is now a much smaller problem than several decades ago.

I recommend the whole post for its analysis of data and concepts.

My opinions:

1. The rising tide of economic growth has tended to lift all boats, and that accounts for some reduction in poverty, as properly measured.

2. Government transfer programs, such as food stamps, have also contributed to poverty reduction. Certainly this is true numerically.

3. But government transfer programs have, in my opinion, undermined social norms regarding work and marriage. The high implicit marginal tax rates that arise as people lose eligibility for benefits when they earn income have made it uneconomical for women to marry low-wage men. So low-wage men work less and marry less than they would otherwise.

Friends who might lose benefits

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From the WSJ,

More couples are deciding to live together instead of marrying, and strained finances are a top reason many cite. A survey last year by the nonpartisan Pew Research Center found that among those who live with a partner and wish to get married, more than half said they or their partner weren’t financially ready.

About half of middle earners were married in 2018, a drop of 16 percentage points since 1980. Among the highest U.S. earners, 60% were married in 2018, a decline of 4 percentage points over the same period. That marks a reversal. In 1980, a higher proportion of middle-class Americans than top earners were married.

1. You have to decide whether or not to have children.

2. You have to decide whether to live independently or together.

3. If you live together, you have to decide whether or not to get married.

It seems to me that the decision that ought to most be affected by economic circumstances is (1). Raising children is expensive. And that decision in turn would affect (2) and (3).

Whatever you decide about (1), I can also see (2) having an effect, since it is cheaper to live together. And that in turn would affect (3).

But mostly the article is written as if financial status directly affects (3). Both the headline and one of the academics quoted in the story refer to marriage as having become a “luxury good.”

I don’t see (3) as the likely margin along which financial status affects decisions. Something is wrong with this picture.

If the chain of thinking were “We’ve decided that we can’t afford children, and if we can’t afford children then there is no point in getting married,” would make sense. It also would be very sad.

But the article says:

More couples are forming families without matrimony. One in four parents living with a child is unmarried, according to Pew. More than one-third of them are living with a partner, up from one in five in 1997, the Pew study of 2017 data found.

Seriously? People are thinking We wanted children, but getting married seems like too much of a commitment. We can’t afford to make that kind of commitment yet. ?????

I still think that replacing means-tested entitlements with a UBI would make low-wage men more attractive as marriage partners. Indeed, the article profiles a couple with children who fit with my model of non-marriage.

They said they want to get married but are holding off because Ms. Dlouhy is enrolled in a publicly funded program that pays for her to earn a nursing license. Combining their income could jeopardize that assistance, she said, as well as her state health-insurance subsidies.

Russ Roberts on middle-class progress

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He says,

In the 1980s, the two best basketball players were Larry Bird and Magic Johnson. They made a lot of money and a lot more money than the people in the stands watching them. Now let’s come to the present, when LeBron James and Kevin Durant make a lot more money than the people in the stands. The gap between the best basketball players’ salaries and the average fan salary is bigger than it used to be, because basketball is more popular today than it was 30–40 years ago. But note that Larry Bird and Magic Johnson didn’t get those gains. Basketball players have gotten richer over time relative to their fans, but also relative to past basketball players. The bottom half is not static over time, and the 1 percent is not static over time. So when we use the snapshot model and say, “The top 1 percent has gotten all the gains”—they’re not the same people!

There is much more in the interview.

The plight of American low-skilled workers

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Nicholas Eberstadt writes,

America’s overall unemployment rate today is lower than at any time since the 1960s, and the official unemployment rate for prime-age men is just 3%. Yet for every prime-age man who is out of work and looking for a job, there are four more who are neither working nor looking. This is not a problem that can be solved by more Keynesian stimulus, a new industrial policy, or other so-called “demand-side tools.”

. . .Barely half of native-born, prime-age American men with no high school degree are in the job market at all. By contrast, labor force participation rates for their foreign-born dropout counterparts are as robust as for native-born college graduates.

Turning to supply-side factors, he writes,

the vast and yet somehow invisible army of former convicts; the new normal of unfathomably slow advances in educational attainment—these are just some of the major problems hiding in plain sight.

Let me add these possibilities to the list:

1. The cumulative effect on the worth ethic of people experiencing significant assistance for not working and high marginal tax rates on those benefits when they do work.

2. Assortative mating, with the lower portion of the male skill distribution made much less attractive as husbands because of (1).

3. A mismatch between demand and supply. Perhaps the demand is for working with people (elder care, child care) and those out of the labor force, particularly men, prefer working with things.

Status-seeking services

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Kevin Erdmann writes,

I suspect there is a combination of mismeasured well-being and variance in well-being that is largely played out in status seeking services. Thus, measured inequality seems high even though most households can purchase basic goods at real costs that are far below what they were in 1970.

If you earn $100,000 and spend $60,000 on status-producing services (rent in an expensive city and/or tuition for your child at a brand-name college) and I earn $50,000 and spend nothing on those services, then the raw income data say that you are twice as well off as I am. But are you that much better off, or are you even better off at all?

Daniel Markovitz interview, annotated

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Markovitz is the author of The Meritocracy Trap. The interviewer is from Spectator Books. I listened on The Podcast Browser. This is the sort of essay I used to post to Medium, but I am now putting on the blog.

min 1 We now have an aristocracy based on schooling.
min 3-5 The economy creates unhappy winners and losers. Losers don’t get enough parental investment in their education, so they suffer from bad job prospects. Winners suffer because they have to work very hard for their wealth. It used to be if you inherited land or a factory, you didn’t have to work hard. Now, wealth consists of human capital, and you have to use it to profit from it.
min 6 a lot of income that looks like capital income is labor income; e.g. hedge fund carried interest. A reasonable guess is that the top 1 percent get 75% of income from labor. Rent-seeking is limited. Managers are not taking advantaged of dispersed shareholders because when shareholders become concentrated by private equity firms taking over, executive compensation does not fall.
min 10 in old days, top manager was lazy, middle managers ran firm; you can think of the management function in those days as dispersed among middle managers and workers.
min 11 management function is now concentrated in elite of executives, and consequently so is wealth.

min 11-12 The economy has been remade the economy around highly educated people. They have tasks involving a lot of abstraction.
Other workers are left with tasks that are more concrete–they might be done by robots.

min 14 This is not inevitable. The technology we invent is socially determined. We are inventing technology that empowers the highly-educated elite because that is the technology that the elite wants.

min 15 first generation of meritocrats got rid of old elite. Then it started to draw technology in its direction, in finance for example. Then they developed an insatiable taste for educating and training their children.

min 16 how much training can one person absorb? how much inequality can a society absorb?

min 17 why don’t the children of elites get off the treadmill? In part, the economy has not created any choices for them that fall somewhere in between investment banker and barista.

min 18 in part, younger meritocrats are conditioned to stay on the treadmill. Older meritocrats have hobbies, but younger ones are such workaholics that they don’t

21 Marx was in one way better than today’s left, because he doesn’t go around looking for villains. But what Marx gets wrong about today’s economy is that we have human capitalism–capital embodied in humans.

23 The liberal response to inequality is to double-down on equality of opportunity. But this is at best a fantasy, and we need to focus on equality of outcomes.

27 Markowitz makes the claim that academicians and journalists could have made it finance, but they chose a higher calling [me:
gag]

30 There is unsustainable growth in university endowments–they are on a path to end up with all wealth

My comments:

Markovitz is offering a theory of economic structure in which schooling determines earning ability. People who obtain a lot of schooling want to:

(a) tighten the connection between schooling and earnings by creating and deploying technology that is complementary with schooling;
(b) make sure that their own children get the best schooling, so that they inherit high social positions.

The result is a distribution of occupations that has high-end jobs that require lots of skill and effort and low-end jobs that offer little reward. He would prefer a distribution of occupations that includes more middle-level jobs that require less intensive training and effort but more reward than low-end jobs.

For (a), Markovitz assumes that schooling works through human capital. You might be able to tell a similar story with schooling working through signaling, but it probably would be harder to tell.

For (b), Markovitz assumes that the Null Hypothesis is false. That is, when parents put a lot of money into getting their children in to exclusive schools, this makes a big difference.

I am more inclined to see the distribution of outcomes as determined by the distribution of personality characteristics, including IQ. Unlike Markovitz, I think that a lot of highly-educated people would fail in the world of business and finance, because of personality shortcomings.

I think that the biggest shortcoming that keeps highly-educated people in narrow occupations is an inability to interact with a broad spectrum of people. I mean by that something more than just introversion. I would describe the problem I see in many academics is that they have a very limited comfort zone in terms of the people they can befriend or have as colleagues.

I am an introvert, but compared to most academics I know, I have a much wider comfort zone in terms of people. In my entrepreneurial days, my main business partner did not even graduate high school, and I don’t think there are many people with my education credentials that could have handled that.

So I do not fully agree with Markovitz. But I give him credit for shifting the focus away from the neoclassical thinking about income distribution between labor and capital. In that regard, his view of the world is much less distorted than neo-Marxists of the Piketty persuasion.

Bryan Caplan’s sociology

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Bryan Caplan writes,

1. All humans are somewhat impulsive, but the degree of impulsiveness varies.

2. On average, impulsiveness causes poverty. The greater the impulsiveness, the greater the poverty. So the very poor tend to be highly impulsive.

3. In traditional societies, however, social pressure and stigma against impulsive behavior sharply reduce their incidence. Teens like unprotected sex, but fear social suicide.

4. In the 1960s, social pressure and stigma against single motherhood started to deteriorate for largely cultural – not economic – reasons. (While the expansion of the welfare state was one notable economic factor, it wasn’t decisive).

This is similar to Charles Murray’s sociology. Both Caplan and Murray see the cultural changes of the last several decades as removing some of the social guardrails. People with strong character traits kept driving down the middle of the road, but people with weaker character traits crashed into telephone poles by having children out of wedlock.

One element that appears to be central to Caplan’s sociology is the trait of conscientiousness. He sees this trait as predicting success. He sees college completion as a signal of conscientiousness, which explains how college graduates can earn a salary premium without necessarily acquiring any skills in college. He sees poverty as caused by impulsiveness, which is the opposite of conscientiousness.

Others, notably Eldar Shafir and Sendhil Mullainathan, claim that causality runs from poverty to low conscientiousness. Poverty is a stressor that makes it more difficult for people to make good decisions.

Is low conscientiousness an innate trait or a trait caused by stressful circumstances? I am skeptical of the latter view. Probably the most stressed people would be new immigrants. Yet immigrants are often highly conscientious. Perhaps this is a selection phenomenon (it takes a lot of conscientiousness to get to another country). But even if it is a selection phenomenon, that shows that innate qualities can dominate external circumstances.

The decline of labor’s share

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Germán Gutiérrez and Sophie Pitony write,

non-housing labor shares have remained broadly stable since 1970 for all advanced economies but the US. This is our main result. . . housing explains all of the decline in European total economy labor shares. The US NFC labor share is largely unaffected by housing or self-employment, so it still exhibits a sharp decline particularly after 2000

Owen Zidar and others write,

Private business profit falls by three-quarters after owner retirement or premature death. Classifying three-quarters of private business profit as human capital income, we find that most top earners are working rich: they derive most of their income from human capital, not physical or financial capital. The human capital income of private business owners exceeds top wage income and top public equity income. Growth in private business profit is explained by both rising productivity and a rising share of value added accruing to owners.

Pointers from Tyler Cowen and David Henderson, respectively.

The attempt to divide all income between labor and capital is a fool’s errand. As I put it,

economists still inhabit the world of the 19th century, in which hordes of interchangeable workers in stark factories toil in the service of the owners of capital

Intangible factors matter more and more in today’s economy. You can choose to label the income that is derived from intangible factors “capital income,” in which case the “labor share” of income is declining. Or you can try to “correct” this by justifying labeling some of the intangible income as “labor” income. But what you really should be doing is abandoning the project of trying to view a modern economy through the lens of an aggregate production function f(K,L). It’s a really popular pastime, but it’s a crock.

Russ Roberts on non-stagnation

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He has a 7-minute video lesson and a companion essay.

What the snapshots show is that the rich today are richer than the rich of yesterday. If the rich people are the same people as yesterday, than one’s class determines one’s fate. But if they are not the same people, the snapshots tell you that the dispersion of income has increased. That may or may not bother you, but it doesn’t necessarily mean that there is a distinct group called “the rich” who are capturing all the gains while the rest of us tread water.

The mis-reading of snapshots is one of my pet peeves. A snapshot means looking at, say the average income of someone in the 90th percentile in 1980 and comparing it with someone in the 90th percentile in 2010. The mis-reading of snapshots is to treat the two as if they were the same person.

If you follow actual people from 1980 to 2010, the average increase in income for people in the bottom 20 percent in 1980 is actually quite high. The thing is, many of those people no longer show up in the bottom 20 percent! Instead, the bottom 20 percent in 2010 is occupied by a new set of people, including young families, retired people no longer earning incomes, new immigrants, and people who have recently lost jobs. The snapshots can show stagnation at the bottom 20 percent, even though real people in the bottom 20 percent in 1980 did not stagnate.

I would like to see a high-profile debate on what the data show about trends in income distribution. Otherwise, I fear that those of us with a powerful case against the conventional wisdom will be ignored.