Category Archives: income distribution-wealth-poverty

Labor’s “share” in a Garett Jones World

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Timothy Taylor looks at an article on the secular decline in labor’s share of income, and he concludes

These explanations all have some plausibility, but it isn’t clear to me that, taken together, they adequately explain the fall of more than four percentage points in labor share in the decade or so from the early 2000s (roughly 61%) to the years right after the Great Recession (just above 56%). The labor share does show some sign of rebounding in the last couple of year, and it will be interesting to see whether that turns out to be true bounce-back or a damp squib.

“Labor’s share” is one of those macro-Marxist concepts that I distrust. It ignores the heterogeneity of labor. Some workers have few skills. Others have highly marketable skills. It ignores heterogeneity of capital. But perhaps even more important, it ignores the fact that most of us are Garett Jones workers, who do not produce output but instead produce organizational capital.

As an example of a firm with a high labor “share,” consider a 1990s dotcom, which has lots of dreams but little revenue. For many of the dotcom darlings, labor’s share was way over 100 percent, and hence they went bust. Those that survived are now living off the organizational capital that they developed back in the day, which could make for a low labor share today.

In some (many?) firms, the labor share is arbitrary. For example, my guess is that as of now the “labor share” at Google is low, because the organizational capital that it built up during its first decade of existence is very valuable relative to the necessary labor input to keep it running. But Google has a lot of leeway. The more it invests today in organizational capital (research into driverless cars and such), the higher will be its (current) labor’s share. The more it just sticks to its existing business and trims workers in the research areas, the lower will be its labor’s share.

The Felons Among Us

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Nicholas Eberstadt writes,

Maybe 90 percent of all sentenced felons today are out of confinement and living more or less among us.

…rough arithmetic suggests that about 17 million men in our general population have a felony conviction somewhere in their CV. That works out to one of every eight adult males in America today.

Read the entire essay, which paints a very dark picture of conditions in this country. It strikes me as the most important magazine piece that I have seen so far this year.

Means Testing and Behavior Testing

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When it comes to giving taxpayer aid to poor households, I think that people favor a combination of means testing and behavior testing. [UPDATE: between the time I wrote this and the time I posted it, Bryan Caplan expressed similar ideas.]

Means testing follows the principle that the more you can earn on your own, the less aid you get. Contrary to appearances, a basic income grant works that way, assuming that there is an income tax operating in parallel. See my explanation of the equivalence of a basic income grant with a negative income tax.

Behavior testing follows the principle that the more that your poverty is your fault, the less aid you get. Somebody who is mentally and/or physically handicapped deserves more aid than someone who is able-bodied and able-minded.

My view is that the Federal government has a comparative advantage at handing out means-tested aid, while local governments and charities have a comparative advantage at handing out behavior-tested aid. So I would like to see the Federal government provide a small basic income grant and have local governments and charities supply behavior-tested aid.

Ron Haskins on Work and Welfare

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He writes,

Significant advances against poverty in the coming years seem likely to depend on significant increases in paid work among the poor — and the reasons are not purely economic. Work means increased earnings, to be sure, which in turn would increase self-sufficiency, increase economic mobility, increase income in retirement, and reduce public expenditures on welfare and related programs. But work is more than just a means of income generation. Work also provides adults and their families with a time structure, a source of status and identity, a means of participating in a collective purpose, and opportunity for social engagement outside family life. A host of studies have connected joblessness to increased risk of family destabilization, suicide, alcohol abuse, and disease incidence, as well as reduced lifespan. Several large reviews of research conclude that unemployment not only reduces physical but also psychological well-being.

Read the whole essay. He argues that cutting off welfare benefits for people who choose to not work was a good idea, and we should do the same with food stamps and housing subsidies.

While he does not discuss a Basic Opportunity Grant directly, I think that his analysis clearly lines up against the idea.

Mike Munger and Russ Roberts on the Basic Income Grant

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I found listening to this podcast very frustrating. I just have a very different conception of how a basic income grant works.

You have two parameters to play with. One is the size of the grant, and the other is the income tax rate (let’s go with a flat tax to keep the arithmetic simple). Together, they determine the breakeven income, that is the amount of income someone earns where the tax and the grant cancel out.

For example, suppose that the grant is $20,000 and the tax rate is 20 percent. In that case, if I earn $100,000 then I pay $20,000 in taxes and that just offsets my $20,000 grant. If the BIG is administered by the IRS, at $100,000 a year the IRS and I don’t exchange any money. If I earn $80,000 then the IRS pays me $4000 (20K in BIG minus 16K in taxes), and if I earn $120,000 then I pay the IRS $4000.

Note that this works out exactly the same as a negative income tax with rate of -20% for people earning less than $100,000 a year.* So when Russ says that a negative income tax is better than a BIG, he loses me.

Now, I think that a $100,000 breakeven point is not a good choice. But if you want to get to a lower breakeven point, you need a lower BIG, a higher tax rate, or some combination of the two.

I prefer a lower BIG, say, $10,000 per person, perhaps even less. People who need more and cannot earn it can get help from charity or local governments, which are closer to the family in need and can be more in touch with individual circumstances.

But I also think that a tax rate of 25 percent would not be too high. So with a $10,000 BIG and a 25 percent tax rate, the breakeven point would be $40,000 in income for a single individual.

Incidentally, I also disagree with Russ that our current programs are not problematic in terms of high implicit marginal tax rates. Even if every single program has only a gradual fall-off in eligibility, the combination of programs has fall-offs that for some people make the marginal tax rate on additional income 100 percent or higher.

One issue with a BIG, and with assistance programs of all kinds, is the treatment of households vs. individuals, or adults vs. children. Suppose that the BIG is $10,000 per single adult. Does a household with two adults and two children get $40,000? Or some other number?

Finally, if you only want people to spend assistance on “merit goods,” you can provide the BIG in special savings accounts that can only be used for housing, education, food, and health care. See my early posts in the category of Setting Economic Priorities.

*Mathematically, draw a line with the equation Y = $20,000 – 0.2X [corrected–I had written $40,000], where Y is what the individual nets from the IRS and X is the person’s income. If you think of the line as starting from the coordinate (0; $20,000) and going to the right, then you have a BIG. If you think of the line as starting from the coordinate (100,000; 0) going to the left, you have a negative income tax. But it’s the same line!

Economic Indicators to Follow in the Trump Era?

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Tyler Cowen gives three.

if the worst predictions about Trump turn out to be true, the negative consequences ought to show up in some of the world’s most fragile spots.

He suggests following an index of Baltic stocks, an index of Taiwan stocks, and the exchange value of the dollar. On the later, he writes,

Many emerging-economy companies are running up alarmingly high dollar-denominated debts, and a strong dollar increases that debt burden in real terms. More generally, the dollar remains the primary source of liquidity in the global economy, especially if the eurozone sees continuing troubles. A more expensive dollar implies a greater scarcity of liquidity, and there is increasing evidence this may herald or cause global financial and economic volatility.

What about domestic policy? I would suggest looking at an indicator of where the highest-income counties are located. For now, Terrence P. Jeffrey writes,

The four richest counties in the United States, when measured by median household income, are all suburbs of Washington, D.C., according to newly released data from the Census Bureau.

It would be nice to have incomes go up more in the rest of the country than in the DC area.

Other Calls to Disperse the Federal Government

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David French writes,

the basic idea — relocating agencies to struggling heartland cities — is sound. Memphis, for example, could use 20,000 new white-collar jobs. And civil servants would benefit from the lower cost of living and — more importantly — the experience of life outside the DC bubble.

…Perhaps it’s time for a broader discussion.

I also think that the Federal government could promote dispersal of private sector jobs through a program of subsidizing companies that build multi-worker facilities in depressed areas.

Did SarbOx concentrate wealth?

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Marc Andreessen points out,

Microsoft went public in 1986, valued at $300m. It went to $300bn. Public shareholders got a thousand-time rise. When Google went public in 2004, it had about a $30bn valuation and went to about $300bn. Investors got about a 10-time rise. Facebook went public at about $100bn. It’s now $200bn, so public investors have had a two-time rise.

Pointer from Tyler Cowen.

Why is more value being captured in the pre-public phase than in the post-public phase? My guess is that Sarbanes-Oxley and the hostile environment to public corporations in general probably accounts for some of it. The consequence is that ordinary Americans capture a smaller share of wealth creation from growing companies than they used to.

How Would I Fix the Rust Belt?

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A commenter asks,

As libertarian economist, what do you recommend for WWC [white working class] in the Rust Belt. Paul Krugman is right the jobs in these areas aren’t coming back no matter what happens to China. And it is really hard to solidify a culture without private investment. (And no David Brooks Sullivan Travels nonsense is not the answer.) Do we teach these kids to work hard to basically get the hell out like the urban inner cities of the 1980s?

1. I could dodge the question, and say that as a libertarian I leave it up to the WWC in the rust belt to figure it out.

2. How are all those programs to alleviate African-American urban poverty workin’ out for ya?

3. I think that what the Federal government does poorly is administer programs at a national level–see (2). What it does well is hand out money. So here is what I would recommend:

First, come up with some criteria for determining a low-income geographic region. Something like the bottom 20 percent of counties in terms of median income. (County is not the right geographic unit, but you get what I mean.) Hand over some Federal tax money to the governmental units in those regions. In addition, give a very large subsidy to any organization that builds a new facility that employs at least 1000 people in one of those regions or which relocates a facility from a high-income region to one of those regions. Even if the facility does not hire from the local community itself, the multiplier effects should be favorable.

Peter Turchin on Surplus Elites

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Bloomberg view decided that this was a good time to recycle this column, first published in 2013.

Past waves of political instability, such as the civil wars of the late Roman Republic, the French Wars of Religion and the American Civil War, had many interlinking causes and circumstances unique to their age. But a common thread in the eras we studied was elite overproduction. The other two important elements were stagnating and declining living standards of the general population and increasing indebtedness of the state.

He argues that the surplus of law school graduates indicates elite overproduction. The other elements seem to be here as well. On the stagnation issue, Tyler Cowen cites research into cohorts that sounds more convincing than the usual analysis of means and medians.

Recall that I wrote about Turchin a couple of months ago.