Category Archives: income distribution-wealth-poverty

Inter-generational mean reversion

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Tyler Cowen, among many others, is intrigued by a study by Raj Chetty and others showing downward mobility of black males.

My view, which I came to in the process of reading Gregory Clark’s study of long-term heritability of income, is that inter-generational income has a large heritable component and a large random component. Over several generations, the random component washes out. But for the difference across a single generation, the random component matters.

This model suggests that when someone’s income is far above (below) the heritable component, it will revert to the mean. Children will do worse than parents who have enjoyed a positive shock and they will do better than parents who have suffered a negative shock.

If the shocks to income were normally distributed, then mean reversion would not produce any systematic pattern of children falling below parents or rising above them. So you would not expect the Chetty result in that case.

But what if the random component is not normally distributed? Suppose that what you observe in one generation are a few really large shocks on the up side, with a lot of smaller negative shocks on the down side. The next generation will then have some apparent big losers and a lot of apparent small winners. Depending on how you sort the data (Chetty appears to be looking at measures of income based on rank rather than absolute level), Chetty’s result could be an artifact of the random component. It might be that if he were to measure incomes three or four generations apart, the apparent downward mobility would disappear.

Jonathan Tepper on slow wage growth

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He writes,

Americans have the illusion of choice, but in industry after industry, a few players dominate the entire market:

  • Two corporations control 90% of the beer Americans drink.
  • When it comes to high-speed internet access, almost all markets are local monopolies; over 75 percent of households have no choice with only one provider.
  • Four airlines completely dominate airline traffic, often enjoying local monopolies or duopolies in their regional hubs. Five banks control about half of the nation’s banking assets.
  • Many states have health insurance markets where the top two insurers have 80-90% market share. For example, in Alabama one company has 84% market share and in Hawaii one has 65% market share.
  • Four players control the entire US beef market.
  • After two mergers this year, three companies will control 70 percent of the world’s pesticide market and 80 percent of the US corn-seed market.

The list of industries with dominant players is endless.

Pointer from John Mauldin. Read the whole thing. Tepper also makes the case that many local labor markets are monopsonistic, meaning that only a few employers are available.

My thoughts on middle-class stagnation six years ago

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A reader reminded me of this post.

Let us consider some possibilities.

1. Maybe the middle class is not going to stagnate. Both Tyler Cowen and Eric Brynjolfsson have it wrong. We are all in a pessimistic mood now, but once the economy picks up, upward mobility will resume.

2. Many people are slipping downward relative to the top, but their attitude is “We’re all right, Jack.” People are able to satisfy their main consumer needs, and they don’t really want a Great Redistributor to come and steal from the rich people to give them a few more dollars.

3. Ultimately, the people will fall for a demagogue. We will have our own Hugo Chavez.

4. The center will recover. Government will become more competent, and this competence will improve the well-being of the middle class.

5. Democracy will fail gracefully. We will head toward a “thousands nations” world of competitive government. People will not worry about their status relative to the richest individuals in the West. They will just try to find the most congenial community in which to live.

I think that (3) and (4) are the least likely.

Of course, some people will tell you that we got (3), well, sort of. It seems like a safe bet that we are not going to get (4).

Russ Roberts on middle-class income stagnation

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Using an animated format, he starts to delve into the statistics. It is aimed at people without formal education in economics, but it struck me that some of the points that it makes might be best appreciated by a trained economist. Kind of like a children’s book with jokes mixed in that only adults can get. I imagine that if this had been available when I was teaching high school economics, then I would have used it.

Recall that Russ conceived and scripted the famous Keynes-Hayek rap videos.

Ray Dalio’s data points

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The essay is on inequality, but there are interesting statistics scattered throughout. For example,

While many of the major causes of death have been flat or falling over the last 15 years, deaths from drugs and alcohol more than offset it among the bottom 60%. And the rise in drug-related deaths is not happening across the world—the phenomenon is unique to the US.

Pointer from John Mauldin.

I could swear that when I first looked at Dalio’s piece, he had more tables with more statistics, including death rates that are preventable with health interventions (higher for the U.S.) Those tables, which are in the appendix, do not show up in the version of Chrome on my laptop. Ah, there they are. They show up fine on the Microsoft browser and on Chrome on my tablet. They appear to be graphics. If you don’t see a table called “Health Care Performance Measures Across Developed Nations,” try a different browser. Those tables are a big reason that I am sending you to his essay.

Missing from the St. Louis merger story: Clayton

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The WSJ reports,

A group of business leaders with bipartisan political backing see a common issue behind the problems—the region’s multitude of local governments.

They are pushing a plan to explore the reunification of the city and county to make the region of 1.3 million people more efficient and economically competitive.

My first thought was, “This is a hostile takeover of Clayton,” but the story takes a different focus. For example, it quotes the mayor of Olivette, which is where I lived until 6th grade, on the street with the white-trash folks that I have mentioned before. Of course, in other streets not far away, there were respectable professionals, and I became friends with their children when I started going to elementary school (while keeping the friends from my street).

Back to Clayton. That is where we moved when I started 7th grade. Super-affluent. I was just back there visiting last week, and it is sort of like Bethesda in Maryland or Brookline in Massachusetts or Menlo Park in northern California or Beverly Hills in southern California.

I am sure that all of the other municipalities, including the city of St. Louis, would love to get their hands on more of Clayton’s wealth. I am guessing that Clayton’s wealthy are not so keen on it. But a Ctrl-F for “Clayton” in the story comes up empty, so I do not know.

The Richard Reeves recommendations

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From a review of The Dream Hoarders:

Reeves is optimistic, however, that the correct policy agenda can reverse this trend. His policy background shines through in the clarity of his seven-point agenda. The first four focus on equalizing human capital development—reducing unintended pregnancies by expanding access to better contraception, narrowing the parenting skills gap by investing in home visits by nurses, paying the best teachers to work in poor schools, and making college funding more equal. The remaining three are aimed at reducing opportunity hoarding—curbing exclusionary housing zones, widening the doors into postsecondary education, and opening up internships through increasing regulatory oversight, expanding student aid to interns, and changing the norms of how internships are allocated.

The latest issue of Democracy is filled with articles about the pitfalls of progressive policies, which is refreshing. Of course, in many cases, but not all, they recommend alternatives that are further to the left.

Changes in the distribution of net worth

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From an article in Bloomberg:

In 2007, half of families had a net worth of $139,700 or more and half fell below this level. By 2016, the midpoint dropped to $97,300 — a decline of $42,600. Families ranked in the top tenth of net worth have enjoyed a sizable gain since 2007: a $132,100 rise in net worth to reach almost $1.2 million.

As is common with reporting on these sorts of numbers, the writer makes it sound as if the families in each percentile grouping remained constant. In fact, the data do not tell us that families ranked in the top tenth of net worth in 2007 gained $132,100 on average. What they tell us is that the threshold for a family to be ranked in the top tenth rose by that amount. At the 50th percentile, the data tell us that the threshold for a family to be at that percentile dropped by $42,600. We cannot use these figures to say what happened to families that were at the 50th percentile in 2007.

I am not contesting the inference that the distribution of wealth became more concentrated. I am just asking for the wording to describe the precise meaning of the data rather than imposing a misinterpretation.

For more on the wealth survey, see Timothy Taylor.

Big cities vs. the rest

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Philip Auerswald suggests that this is the key political and tribal divide.

the 21st century, certainly the 20th century going into the 21st, has been an era in which the largest cities have become even more dominant and have driven the advance of human society and human prosperity. . . .in a way, when we think about the origins of populist surges–and I really want to point out that this isn’t just the United States: that the point is this is a global phenomenon–that it is something that is really kind of the revenge of the country

This podcast with Russ Roberts covers many topics, all interesting.

Grumpy support for universal basic income

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In the WSJ, John Cochrane advocates getting rid of the personal income tax, the corporate income tax, and the estate tax. Instead, he favors a VAT. En passant, he advocates a universal basic income, without calling it that. On his blog, he explains

The oped explains briefly how to make a VAT progressive, if that’s what you want. The idea is explained more at length in an earlier post. Briefly, you get a rebate for VAT on your first $10,000 of expenditures, half on the next $10,000 and so on. The rebate can happen instantly, like a giant rewards program for debit cards.

Incidentally, when we canceled the WaPo and subscribed to the WSJ, it was a very big improvement. The weekend review section of the WSJ contains interesting pieces by interesting writers. Paul Theroux on road trips. Michael Shermer on human reason. The equivalent weekend review section in the WaPo had essays that were predictable at best and cringeworthy at worst, with a tendency toward an increase in the latter.