Category Archives: income distribution-wealth-poverty

The poverty trap

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“>Ariel J. Binder and John Bound write,

The existing literature, in our view, has not satisfactorily explained the decline in less-educated male labor-force participation. This leads us to develop a new explanation. As others have documented, family structure in the United States has changed dramatically since the 1960s, featuring a tremendous decline in the share of less-educated men forming and maintaining stable marriages. We additionally show an increase in the share of less-educated men living with their parents or other relatives. Providing for a new family plausibly incentivizes a man to engage in labor market activity: a reduction in the prospects of forming and maintaining a stable family, then, removes an important labor supply incentive. At the same time, the possibility of drawing income support from existing relatives creates a feasible labor-force exit. We suspect that changing family structure not only shifts male labor supply incentives independently of labor market conditions, but also moderates the effect of a male labor demand shock on labor-force participation. Since male earning potential is an important determinant of new marriage formation, a persistent labor demand shock which reduces male earning potential exerts an impact on male labor-force participation which operates through the marriage market.

Thanks to a reader for forwarding the paper.

Let me add to their story. Once upon a time, a woman with a child needed a husband for support. But in recent decades, government benefits have provided support. Moreover, these benefits go away as a household earns income. At the margin, a man who earns a modest wage has his income implicitly taxed at a high rate should he marry the mother of his child. The woman has little or no economic incentive to marry him, because together they cannot keep much of the income that he earns. And so he drops out of the labor force, because he no longer is motivated to work in order to get married.

Most studies fail to show an effect on labor supply of policies that change the way that benefits are provided and taxed. But these studies are limited to short time periods. In my view, our benefits policies have over a long period of time created a poverty trap by changing cultural habits. If we were to change those policies, and in particular replace existing means-tested programs with a universal basic income, it would take a long time for cultural habits to re-adjust. But my hope is that if government stopped holding people in the poverty trap, cultural habits eventually would improve.

Am I a welfare state advocate?

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Samuel Hammond writes,

social insurance can enhance market dynamism and economic freedom in four key ways: By enabling entrepreneurial risk-taking; by easing the adjustment and search costs associated with creative destruction; by detaching social benefits from market structure; and by making the economy more robust to immigration. Together, these point to a set of design principles for reforming existing U.S. social insurance programs in a pro-market way.21

Now, check out the footnote:

Discerning readers may recognize an Austrian School influence in the first of these three defenses of social insurance. Austrian School economics places an emphasis on (1) entrepreneurial discovery in the face of fundamental uncertainty; (2) equilibrium as a dynamic, evolutionary process; and (3) the decomposability of capital, implying particular market structures will often need to liquidate given shifting patterns of specialization and trade. While the Austrian School has become mood-affiliated with small government libertarianism, its basic analytical toolkit turns out to be highly congenial to the “free-market welfare state” perspective. For an introduction to these themes see: Kling, Arnold. 2016. Specialization and Trade: A Re-Introduction to Economics.

One of Hammond’s suggestions is that government-provided benefits are better than employer-provided benefits. One reason for this is that with employer-provided benefits, politicians have a stake in keeping the corporation alive. He uses the example of General Motors getting bailed out in 2008.

In a response to Hammond, Kai Weiss writes,

Instead, advocates of the free market should look to a strengthening of civil society, combined with a job-rich economy, to help those left behind. In the end, responding to skepticism about the role of free markets by arguing for more statism might be an oxymoron after all.

If the Scandinavian countries are such great examples of welfare states, then this shows that a risk pool of 5 or 10 million is sufficient. You do not need 300 million. To me, that suggests that at most we need the Federal government to provide a small universal basic income. Otherwise, smaller units, such as cities, counties, states, private insurance companies, or large voluntary associations could deal with health coverage, retirement savings, unemployment insurance, and aid for households dealing with mental and physical disabilities.

Wages and productivity

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Scott Alexander writes,

Median wages tracked productivity until 1973, then stopped. Productivity kept growing, but wages remained stagnant.

This is called “wage decoupling”. Sometimes people talk about wages decoupling from GDP, or from GDP per capita, but it all works out pretty much the same way. Increasing growth no longer produces increasing wages for ordinary workers.

Is this true? If so, why?

He makes a valiant effort to summarize and assess the economic literature. But this is where orthodox economics is hopeless.

Productivity by definition is output divided by the amount of labor input. Let me make three points:

1. You can’t measure the numerator very well.

2. You can’t measure the denominator very well.

3. The U.S. is not just one big GDP factory. Both the numerator and the denominator are affected by shifts in the composition of the economy, even if actual productivity and wages were not changing at all.

The numerator is output. How many people work in businesses with measurable output? Scott Alexander doesn’t. I never have. Most of my readers never have. There are entire industries, like health care, education, and finance, where we do not have any idea how to measure output. And even within an industry that has quantifiable output, we still have the issue that, as Garett Jones pointed out many years ago, most workers are not engaged in actual production; they are building organizational capabilities. Even if the factory managers can count widget production, they cannot measure the productivity of the tax accountants or of the team developing a new marketing initiative.

The denominator is labor input. But most of labor input consists of human capital. To measure labor input, you need to be able to measure quality, not just quantity. What is the incremental value of X years of schooling and Y years of experience? We do not have a reliable way to do that. One approach uses wage rates as an indicator of quality, but that amounts to assuming that productivity and wage rates are tightly coupled, but that amounts to assuming away the question that Alexander is raising.

We are not in a GDP factory. As the share of GDP devoted to health care and education goes up and the share devoted to manufacturing goes down, we are giving more weight to a sector where real output and the quality of labor input are extremely difficult to measure.

I think that for economists to say anything useful about productivity and wages, they should try to study individual units of individual firms. My guess is if you were to undertake such a study, you would be overwhelmed by doubts about the precision of your measurements and the difficulty of obtaining a decent signal-to-noise ratio. It’s perverse that you would instead look at the aggregate statistics cranked out by the Commerce Department and the Labor Department and pretend that it’s 100 percent signal.

Speaking as an economist. . .

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Suresh Haidu, Dani Rodrik, and Gabriel Zucman write,

Neoliberalism — or market fundamentalism, market fetishism, etc. — is a perversion of mainstream economics, rather than an application thereof. And contemporary economics research is rife with new ideas for creating a more inclusive society. But it is up to us economists to convince their audience about the merits of these claims.

Pointer from Tyler Cowen. The authors are launching a project called “Econoimsts for Inclusive Prosperity.”

1. The use of neoliberalism as a boo-word puts me off right away. I see it as a sign that this will be an exercise in government fundamentalism,, government fetishism, etc. When they are uncharitable to those of us who say “Markets fail. Use markets,” it becomes really hard for me to be charitable to them.

2. Anat Admati has an essay in which she advocates higher capital requirements for banks and opposes tax policy that encourages debt finance rather than equity finance. It is a reasonable case. But I recommend my essay on the book that she co-authored, in which I suggest that the households who ultimately supply the funds for banks might prefer less equity and more deposit-like liabilities than what the book proposes. That essay is a Kling Klassic on capital structure.

3. Atif Mian has an essay that suggests that the extravagant wealth of some people leads to an excess supply in the capital market. Less-wealthy people are lured by low interest rates and weak credit screening into borrowing too much, making the financial system unstable. His solution is to have government confiscate more from the wealthy and redistribute it to the less-wealthy. I think that there is only a low probability that he has correctly diagnosed a problem. Even if he has, I imagine that one can come up with much better solutions.

4. Those are the two essays about which I can be the most charitable.

5. My main point is that I am becoming quite allergic to phrases like “economists say” or “economics says.” I know that I used to employ such phrases, but I have done so only sparingly, and from now on I plan to avoid them completely. Don’t argue from authority. Just state your proposition and defend it. Along these lines, I have had a strict personal policy for many years of not signing petitions of the form “economists who favor X” or “economists opposed to Y.” I dislike the implied tone of “I have credentials, you must listen to me.” I would sign a petition in favor of refraining from ever using the phrase “Speaking as an economist. . .”

Economics over sociology?

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Consider Marriage Markets, by June Carbone and Naomi Cahn. They write,

At the top, there are more successful men seeking to pair with a smaller pool of similarly successful women. In the middle and the bottom, there are are more competent and stable women seeing to pair with a shrinking pool of reliable men.

. . .the conclusion is short and simple: it’s the economy, stupid. And any analysis or proposed solution that does not take growing inequality into account is based on a lie.

Thanks to a commenter for mentioning the book.

I will read it with some skepticism. I certainly see a strong arrow going in the other direction, from assortative mating to inequality. If there is a reverse causal arrow, then that implies a sort of positive feedback loop.

I am not sure what they mean by the first sentence quoted above. If you define success as “college-educated,” then it is the sucessful women who have to compete for a relatively small pool of men.

Consider the following alternate universes:

1. Boys grow up in households with their fathers in households with decent finances.

2. Boys grow up in households with their fathers in households with fragile finances.

3. Boys grow up in households without their fathers in households with decent finances.

Pretty much everyone assumes that in alternate universe (1) we would have fewer problems than we have today. If the authors really believe that “it’s the economy, stupid,” then it seems to me that they either believe that (3) would work about as well as (1) or that income redistribution would be sufficient to create (1).

I read conservatives as saying that scenario (2) leads to boys who can function well as adults, and that scenario (3) does not. And conservatives see income redistribution as leading to (3) rather than (1).

New research on the minimum wage

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Doruk Cengiz, Arindrajit Dube, Attila Lindner, and Ben Zipperer write,

Our method infers the disemployment effect of the minimum wage by tracking the changes in the number of jobs throughout the wage distribution following a minimum wage increase. The changes at the bottom of the wage distribution—in particular the missing jobs below the minimum, and the excess jobs at or just above the minimum—reflect the effect of the minimum wage on low-wage workers.

The idea is that if the minimum wage increase has a big effect, then you should see a noticeable drop in the rate of growth of jobs that are just below the minimum wage. They do not find such a drop. They conclude that an increase in the minimum wage has minimal adverse employment effects.

Question on marriage trends, continued

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Yue Qian says,

For analytical purpose, I classified each individual’s income by the decile he or she occupied in the income distribution of the 1980 and 2008–2012 analytic samples, respectively. My study showed that for a majority of couples, husbands were in a higher income decile than their wives regardless of the time period and the educational pairing of spouses.

Using sophisticated statistical models (log-linear models) to control for gender differences and shifts in marginal distributions of education and income, I found that the tendency for women to marry up in income was greater when they married down in education: Women were 93 percent more likely to marry men in higher income deciles than themselves among couples in which the wife had more education than the husband than among couples in which the wife had less education than the husband.

Pointer from David French. The paper itself appears to be gated. It seems pertinent to a post from a couple of weeks ago.

Economics or sociology?

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Abby M. McCloskey writes,

Our social fabric is fraying, and people are losing a sense of purpose, dignity, and connection to one another. This too has implications for economic health. It is the strength of families and communities, not the broader economy, that is at the root of economic opportunity.

This goes along with the theme that I see emerging, which is that sociology is becoming more important than economics. To me, the widening of cultural gaps is very important. Those of us who live in affluent areas are really out of touch with much of the country in a way that was not as true fifty years ago. As I have said, back in 1965 at a Cardinals game, one would find people of all social classes sitting in the same section of the ballpark. That is not true any more.

McCloskey’s suggestions include

a voluntary national-service program. The activities would not be limited to military service but would include service in every venue, from childcare to eldercare to addiction recovery to environmental cleanup. While voluntary service is traditionally thought of as something for 18- or 19-year-olds, it could presumably be offered as a one-year program that anyone could participate in once in their lifetime for a set stipend of $30,000 or $15 an hour. The federal government would pay the stipend, or perhaps provide some other type of benefit, such as a credit for college costs, at that level. Instead of creating a large new federal agency to provide these service opportunities, citizens could partner with existing nonprofits or city-based projects. Indeed, such a program need not be a national one, but one that cities and communities could spearhead themselves.

She suggests starting with a trial pilot, rather than a full national program.

Even though service would be voluntary rather than obligatory, I am not on board with this suggestion. I don’t like to define “service” as working for a non-profit. Instead, if the goal is to help people feel useful and connected, I would look for ways to increase employment in general, including in the for-profit sector. Instead of a full stipend, the Federal government could offer a subsidy–perhaps a one-year exemption from the payroll tax.

Also, as one puts together a package of policies, it is important to keep in mind some fundamental trade-offs. For example, deep means-testing imposes high marginal tax rates, which impede upward mobility. See my essay on the UBI.

But in any case, this involves throwing economic solutions at sociological problems. My guess is that even if the economic ideas are well considered, the problems will confound economic policy. Of course, policies that are based on normative sociology (the study of what the causes of problems ought to be) will do even worse.

Normative sociology of homelessness

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Christopher F. Ruto writes,

the Seattle metro area spends more than $1 billion fighting homelessness every year. That’s nearly $100,000 for every homeless man, woman and child in King County, yet the crisis seems only to have deepened

The article goes on to list various approaches to homelessness, all of which assume a politically correct cause for the problem. For example, one woman on the city council is reported to claim that

the city’s homelessness crisis is the inevitable result of the Amazon boom, greedy landlords and rapidly increasing rents.

Pointer from John Cochrane, who concludes

really dysfunctional policies persist through the repetition of these fairy-tale narratives.

Normative sociology, which looks at what some people want to be the causes of social problems, is quite harmful.

Does W = MP?

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Scott Sumner writes,

merely by changing the laws on intellectual property rights you will impact the distribution of wage income. But the appropriate IP laws are a complex issue, about which even free market economists do not agree. There is no obvious straightforward way to think about the marginal product of labor; it depends on many institutional factors.

This is somewhat beside his main point, but it pertains to the central point that I will make in an essay that I am working on. My point is going to be that the whole neoclassical apparatus of marginal product is not valid in the real world. We have no precise idea what the marginal value of a worker is to an enterprise. Can you calculate the bushels-of-wheat equivalent of what you accomplish with an hour of your labor? I bet not. We are mostly Garett Jones workers, meaning that we are overhead labor. And firms’ cost is mostly overhead (recall the discussion on this blog of hospital costs). And if the people inside the market cannot measure accurately the quantities that economists think matter, what does this mean when economists try to use market measures as a basis for intervention?

What I see as Sumner’s main point is probably this, concerning the perception of fairness among non-economists vs. economists:

people probably visualize something like the following thought experiment. In 1820, a hardy pioneer and his family move out to a remote valley in Montana, where they build a cabin, plant crops and hunt for animals. There are no other families nearby. Doesn’t that family earn their marginal product? Yes, but that’s not why our intuition tells us that their compensation seems fair. Rather the perceived fairness comes from the fact that they also earn their total product.