Tuesday, December 14, 2010

Economic Matters

The realities of our economic climate are quite harsh and getting harsher. That is, if you aren't among the top 10% of wage earners. So for instance though productivity is on the rise, median income is not. The total share of income of the top 1% is skyrocketing, from about 10% of the total in 1980 to a whopping 23% today.

Citigroup can see this quite plainly. They issued a couple of reports outlining an investment strategy based on the structure of our economies and these were leaked. Part 2 is not easy to find, but I was able to track down both Part 1 and Part 2. In fact Citigroup is trying to scub these studies out, so that link may not work forever. They read like left wing screeds, except rather than being depressed the authors sound jubilant. The worldwide economic order is organized such that the poor will have to get by with an ever decreasing share of the income and the rich will take more. So you should invest in companies that cater to the needs of the rich. Here are a couple of excerpts as culled by Bill Moyers in a speech that is available here.

"Asset booms, a rising profit share and favorable treatment by market-friendly governments have allowed the rich to prosper... [and] take an increasing share of income and wealth over the last 20 years."

"...the top 10%, particularly the top 1% of the United States - the plutonomists in our parlance - have benefited disproportionately from the recent productivity surged in the US... [and] from globalization and the productivity boom, at the relative expense of labor."

"... [and they] are likely to get even wealthier in the coming years. Because the dynamics of plutonomy are still intact."

So now we're getting a tax cut from Obama and the Republicans. Huge reductions in the estate tax. Making permanent the Bush era tax cuts, the consequence of which are outlined in Citigroup's reports. There's only one group that will see an increase in their overall tax burden. The poorest Americans. We should expect the share of the pie going to the rich to increase ever more aggressively.

I speak with right wingers and explain these matters and I get a variety of responses that I'd like to address here.

I'm told that the increase in inequality is due to the changing family structure. More single family homes. It's interesting that a lot of these responses I get come without evidence. It's just a claim that sounds plausible. But I think right wingers should allow real world data to inform their claims rather than just spinning them out of their head. When you do that you find that your theories, which sound plausible in your head, in fact don't correlate to the real world.

Though I'm not offered evidence in support of this claim I do go look for it on my own. You can go here to see divorce rates and the number of children affected by divorce through the years. You'll notice that divorce began increasing in the 60's, when inequality wasn't as much of a problem, and then leveled off just prior to the 80's, when inequality began to skyrocket. So these are not correlative.

I also found a report on working hours contrasted with income. Looking at that you can see that working hours for families are on the rise. From my link above we know this is happening while productivity was increasing. And yet the income gains are not there. The claim regarding family structure would presume that total family working hours are decreasing. Maybe a two parent family can work 50 or 60 hours a week, whereas a single parent family might not be able to work more than 40. The data show that this is not the case.

I'm told that it makes more sense to evaluate total compensation, rather than simply income. 401k's are on the rise, as are health care costs. Once again that sounds plausible, but is it true? This source says that yes, considering overall compensation does reduce the inequality gap, but does not eliminate it. And pensions have been eliminated as 401k's have come in and 401k's are not better than pension plans. Note that the total savings rate for Americans is down even accounting for 401k's.

Why not blame the immigrants? That's a frequent right wing ploy and it usually comes without evidence. Presumably legal immigration is not the problem. Those that come here legally are usually well off and well educated. It's the illegals. I haven't found data on illegal immigration going back to the 70's, but it looks like it has dipped since 2007 though inequality continues to set records. So the data that is available to me doesn't support this claim.

I'm sometimes told that the poor don't have it so bad if you consider the massive benefits paid to them via welfare. We should really be concerned about so called "welfare queens." Black women having as many babies as possible so as to the game the system. Truthfully this is what I'm told. It's worth noting though that welfare spending on the poor is not necessarily as much as you would think. But in fact it is not true that having more babies is helpful. It's also worth noting that welfare benefits don't continue indefinitely. Unlike our massive war spending.

It's not surprising to me that Americans vastly underestimate inequality and would prefer something much different than what we have. Americans are inundated with news and stories about how we should enact policies that are for the betterment of the super rich. "They drive the economy" we're told. If only we let them keep more of the money it will trickle down to the rest of us. Maybe if we stuff their pants fuller and fuller some money will fall out and the poor can enjoy it.

The argument is that the rich are the investors/job creators. But studies directly contradict these plausible sounding assertions. Not only that, but companies are flush with cash now, but simply won't spend it. Instead they hoard it.

And it's not that these companies are evil. They simply aren't designed to be concerned that people are suffering and unemployed. What they do is what I'd expect them to do based on the incentive structure that exists. Why not simply do stock buy back plans which inflates the price of stock for the betterment of stock holders (the majority of whom of course are already rich). I'd likewise expect that Citigroup is right. Our economic order will be revised to cater to the rich, not the poor, since the rich will have everything and the poor will have nothing. We will become more and more like third world countries. This is not because people are evil. This is the product of the system we have. Under Obama it continues.

13 comments:

Darf Ferrara said...

There's too much economic ignorance for me to address here, but ask yourself, would you rather have the median income today, or the median income 30 years ago? Would you rather have the medicine of yesteryear, where AIDS was a fatal disease, or of today, where AIDS is a chronic disease? Would you rather have a computer from 30 years ago, made by corporate elites like IBM and costing several thousand dollars, or a computer made today that you can get for $200 and has plentiful useful software written by good socialists like Richard Stallman, a computer that has more computing power and memory than all the computers that existed forty or so years ago. Would you rather have a giant 1980's television set, where you got to watch 6 channels on a grainy screen, or a 50 inch plasma for less than a grand? I haven't even mentioned the internet, which puts the knowledge of all mankind from the last several thousand years at the disposal of the meanest laborer.

In spite of the government being used to benefit the connected, life has continued to improve for the vast majority of Americans. To believe otherwise is loony.

HispanicPundit said...

Finally, a response. You have been harping the income inequality argument for some time now, and simply ignoring the responses that have come (see here and here, for recent examples). Lets discuss.

First, family size. You write, I'm told that the increase in inequality is due to the changing family structure. More single family homes. It's interesting that a lot of these responses I get come without evidence. It's just a claim that sounds plausible.

This is the wrong way to look at it Jon. Remember, it's not the right that is making the income inequality argument, it's the left. The reason you don't find a lot of responses controlling for family size is because frankly, there are few, if any solid ones. But that speaks ill of the left, not the right: after all, income inequality is their argument - their primary argument, in many ways - and the fact that they haven't taken the time to control for such basic differences speaks badly of their academic objectivity, wouldn't you say?

With that said, all you had to do was ask. Here is one, two, three, four, five, six, seven, eight and nine. It's not just divorce rates and working hours that matter, it's also immigration and more importantly, the rise in single mothers and the age of the population.

HispanicPundit said...

Second, total compensation. Were not just talking about 401k's here, were primarily talking about healthcare costs. And when you factor those in, almost all of the income inequality disappears. Cornell University professors Richard Burkhauser and Kosali Simon write in a NBER paper:

In this paper we take estimates of the value of different types of health insurance received by households and add them to usual pre tax post transfer measures of income from the Current Population Survey's March Annual Demographic Supplement for income years 1995-2008 to investigate their impact on levels and trends in measured inequality. We show that ignoring the value of health insurance coverage will substantially understate the level of economic well being of Americans and its upward trend and overstate the level of inequality and its upward trend. (emphasis mine)

But again, doesn't the dearth of studies that take into account health care costs and 401k's say something about the academic integrity of those that constantly put forth the income inequality argument (the economists, that is)? It's like they are cherry picking the data that most fits what they want to believe and specifically avoiding that which contradicts their cherished views.

HispanicPundit said...

Third, consumption inequality. Then there are mitigating factors to income inequality. Income inequality just looks at the inputs to income but what about the outputs? In other words, instead of looking at wages, lets look at purchasing power. And when you do that, you see that the trend is the opposite:

Looking at trade data between 1994 and 2005, Broda and Romalis construct inflation rates for different income groups and find that rates for the richest outpaced rates for the poorest by about 4 percent over the period. Since income inequality between the top and bottom 10 percent of earners grew by about 6 percent, the different inflation rates among income groups wipes out about two-thirds of the rise in inequality.

This study is by two University of Chicago economists. This is how University of Chicago economist Steve Levitt (and author of Freakonomics) puts it:

Their argument could hardly be simpler. How rich you are depends on two things: how much money you have, and how much the stuff you want to buy costs. If your income doubles, but the prices of the things you consume also double, then you are no better off.

When people talk about inequality, they tend to focus exclusively on the income part of the equation. According to all our measures, the gap in income between the rich and the poor has been growing. What Broda and Romalis quite convincingly demonstrate, however, is that the prices of goods that poor people tend to consume have fallen sharply relative to the prices of goods that rich people consume. Consequently, when you measure the true buying power of the rich and the poor, inequality grew only one-third as fast as economists previously thought it did — or maybe didn’t grow at all.

What caused this dramatic drop in the prices of goods purchased primarily by the poor vs those by the rich? Levitt explains that as well:

Why did the prices of the things poor people buy fall relative to the stuff rich people buy? Lefties aren’t going to like the answers one bit: globalization and Wal-Mart!

China is able to produce clothes, electronics, and trinkets incredibly cheaply. Poor people spend more of their income on these sorts of things and less on fancy cars, expensive wine, etc. According to Broda and Romalis, China alone accounts for about half of their result....

MIT economist Jerry Hausman (who taught me econometrics in my first year of graduate school) and co-author Ephraim Leibtag have analyzed the impact of the entrance of a Wal-Mart superstore on local food prices.

Not only are Wal-Mart’s prices lower, but its entry also induces competitors to lower prices. The impact is much larger on the poor than the rich, both because the poor are more likely to shop at Wal-Mart and because they spend more of their income on food.

In other words, the two greatest forces in mitigating the impact of income inequality are precisely the other two things the left dislikes most: globalization via China and Walmart.

HispanicPundit said...

What caused this dramatic drop in the prices of goods purchased primarily by the poor vs those by the rich? Levitt explains that as well:

Why did the prices of the things poor people buy fall relative to the stuff rich people buy? Lefties aren’t going to like the answers one bit: globalization and Wal-Mart!

China is able to produce clothes, electronics, and trinkets incredibly cheaply. Poor people spend more of their income on these sorts of things and less on fancy cars, expensive wine, etc. According to Broda and Romalis, China alone accounts for about half of their result....

MIT economist Jerry Hausman (who taught me econometrics in my first year of graduate school) and co-author Ephraim Leibtag have analyzed the impact of the entrance of a Wal-Mart superstore on local food prices.

Not only are Wal-Mart’s prices lower, but its entry also induces competitors to lower prices. The impact is much larger on the poor than the rich, both because the poor are more likely to shop at Wal-Mart and because they spend more of their income on food.

In other words, the two greatest forces in mitigating the impact of income inequality are precisely the other two things the left dislikes most: globalization via China and Walmart.

HispanicPundit said...

With that said, I don't want to leave the impression that I think there has been no increase in income inequality. I do believe that there has been in fact real inequality and it has been growing (and for precisely the same reasons economists generally believe: technology, greater division of labor etc). I just disagree with the magnitude and more so, the importance of it.

HispanicPundit said...

Fourth, culture. Much of the increase in income inequality is a result of cultural changes, specifically in marriage mating. Arnold Kling writes:

There is also another factor at work. A trend is underway in America for marriage to be increasingly “assortative.” That means children of well-educated parents tend to marry one another and the children of less educated parents tend to marry one another. This was less the case a few generations ago. For example, sociologists Christine Schwartz of the University of Wisconsin and Robert Mare of UCLA found that beginning in the early 1970s there was a striking “decline in the odds that those with very low levels of education marry up.” And they found that between 1940 and the late 1970s the likelihood that someone with only a high-school diploma would marry someone with a college degree dropped by over 40 percent.

Indeed, economists Betsey Stevenson and Justin Wolfers at the Wharton School at the University of Pennsylvania believe that a revolution in modern marriage has taken place. According to their view, two generations ago, a husband and wife married in order to share production, with the man working in the market and the woman working at home. Today, the husband and wife are both likely to work in the market, and they choose one another because they have similar tastes in consumption....

Stevenson and Wolfers point out that it may well have been the case a few generations ago that “opposites attract” and the production-based marriage benefited from differences in backgrounds and skills. Today, the consumption-based marriage benefits from the couple’s similarities. Thus, marriage becomes less a driver of mobility across income segments and more a driver of income inequality.

The full article, which I highly recommend, can be found here.

HispanicPundit said...

Fifth, the benefits of income inequality. Let's remember from our basic economics course that some income inequality is good. It serves as a signal mechanism to encourage more productive behavior, such as, getting an education. This is the basic argument that Gary Becker and Kevin Murphy of the University of Chicago make here.

HispanicPundit said...

Sixth, the irrelevance of income inequality.There are powerful arguments on why income inequality should be ignored. For example, here and here. But my favorite of em all, is the growing irrelevance of income inequality. Don Boudreaux explains:

But I here suggest that economic growth, even as it might generate ever-larger income inequality, increasingly renders these same differences in money income or wealth less and less relevant as a measure of differences in quality of life. Some examples:

- Inexpensive consumer electronics enable almost all Americans, even the poorest, to listen at their leisure to the world’s finest orchestras perform great music; contrast now with, say, 1880, when only the relatively rich could afford to hear great music – and only the superrich (by hiring their own chamber orchestras) could enjoy listening to such music whenever they wished.

- Today’s inexpensive Chevrolets and Kias are more reliable and better equipped than were top of the line Cadillacs of 40 years ago.

- Fifty years ago European vacations were a luxury enjoyed mostly by the rich and upper middle classes; today – chiefly because of inexpensive air travel – such vacations are within the means of a much greater proportion of the population.

- The clothing worn by wealthy Americans is virtually indistinguishable from the clothing of ordinary Americans; Bill Gates, Tom Hanks, and Laura Bush are not distinguished from the vast majority of Americans by their clothing. In both quality and quantity, clothing is nearly super-abundant in modern western society.

The further back you go in history, the greater were the material differences that separated rich from poor. Many of these distinctions were evident to the untrained eye (for example, the rich rode in carriages; the poor walked). Fewer of the distinctions today between rich Americans and middle-class Americans – even poor Americans – are as palpable, as salient, as stark, as were the distinctions of generations past.

Bill Gates has many more zeroes in the accounts of his finances than I have in the accounts of my finances. But I don’t see these. What is seen, what is experienced, what is palpable, as differences between Gates’s financial status and that of ordinary Americans is increasingly disappearing.

In other words, whats important here is economic growth, if you have that, income inequality matters less and less.

HispanicPundit said...

- Inexpensive consumer electronics enable almost all Americans, even the poorest, to listen at their leisure to the world’s finest orchestras perform great music; contrast now with, say, 1880, when only the relatively rich could afford to hear great music – and only the superrich (by hiring their own chamber orchestras) could enjoy listening to such music whenever they wished.

- Today’s inexpensive Chevrolets and Kias are more reliable and better equipped than were top of the line Cadillacs of 40 years ago.

- Fifty years ago European vacations were a luxury enjoyed mostly by the rich and upper middle classes; today – chiefly because of inexpensive air travel – such vacations are within the means of a much greater proportion of the population.

- The clothing worn by wealthy Americans is virtually indistinguishable from the clothing of ordinary Americans; Bill Gates, Tom Hanks, and Laura Bush are not distinguished from the vast majority of Americans by their clothing. In both quality and quantity, clothing is nearly super-abundant in modern western society.

The further back you go in history, the greater were the material differences that separated rich from poor. Many of these distinctions were evident to the untrained eye (for example, the rich rode in carriages; the poor walked). Fewer of the distinctions today between rich Americans and middle-class Americans – even poor Americans – are as palpable, as salient, as stark, as were the distinctions of generations past.

Bill Gates has many more zeroes in the accounts of his finances than I have in the accounts of my finances. But I don’t see these. What is seen, what is experienced, what is palpable, as differences between Gates’s financial status and that of ordinary Americans is increasingly disappearing.

In other words, whats important here is economic growth, if you have that, income inequality matters less and less.

Jon said...

Life got a lot better for slaves between 1750 and 1850. Is that an argument for slavery? A peasant would have rather lived in a latter century. Is this an argument for feudalism?

Or take Stalinism. In fact the great fear expressed in internal and now declassified memos is that the Soviet Union is presenting itself as a model for industrialization in a single generation. Life got WAY better for people in Russia between 1910 and 1989. Is this an argument for Stalinism?

And this is putting aside the fact that much of the economic improvement listed by both of you has come via violation of free market principles. Computers, the internet, shipping containers needed for Wal-Mart to function, NIH funding of health research, etc. European vacations are not just for the super wealthy, thanks to commercial aviation (developed at public expense). Microelectronics. Isn't the free market grand?

HispanicPundit said...

Hey Jon,

Your spam filter must have removed the first few posts of mine. Can you find them and approve them?

Darf Ferrara said...

Jon, I disagree with your assessment of why life has improved so greatly for virtually everyone, but I want to stay on topic, so I will try to avoid being baited into that discussion here. You make the claim that "The realities of our economic climate are quite harsh and getting harsher". Would you like to amend that to "The realities of our economic climate are incredibly mild by historical norms, and getting milder for everyone, but possibly at slightly different rates for different people"? If you agree that things have gotten so much better than they have been, then your statement that "we will become more like third world countries" sounds even more loony.

I know that you have a lot to get through with HP destroying your argument, but I would like to know what your argument boils down to. Is your argument that corporations cause suffering by not flushing their cash? Is your argument that income inequality causes pain?