Thursday, December 23, 2010

Second Response to HP on Inequality

HP, like you don't claim inequality is not increasing at least to some degree I don't disagree that by some measures life is getting better for all. Wages are down for people in the lower income brackets, but technological advancements make like better for poor people as well. Productivity gains are enjoyed to a very tiny degree by the poor relative to the amount enjoyed by the rich.

I just think that we should consider an alternative system. As I said, life may have gotten better in slave societies with time, but this doesn't mean there isn't a better alternative. But instead of moving in a direction that will make it such that the poor also enjoy the gains in productivity we have a President that has enacted a tax policy that only raises taxes on the poorest Americans. There are changes to the estate tax that exacerbate the inequality situation. And in addition to that we have a tax holiday on social security taxes, which jeopardizes a program that is relied on heavily by the poor and prevents total destitution amongst the poorest of Americans.

Take a look at who it is that is enjoying economic growth these days with a couple of charts.

Here's another illustrating the same point.



You say no big deal. Yeah, inequality is for real, but it's not that bad. It's not bad in the sense that everyone is doing a little better. The poor have gained $200 in their income in the last 25 years. That's better. But why have a system that funnels virtually all economic growth into the pockets of a tiny minority? We know we can do better. We've done better in the past.

With regards to immigration, yes it does appear that the article from Cafe Hayek was mistaken to characterize Bourjas in the way they did. But I think there's a need to quantify the effect on wages. Look to the charts above. The disparity is enormous. This goes back to my prior point about how it seems you believe you can dismiss the importance of inequality merely because single motherhood is increasing or immigration is increasing. It's as if under these conditions you would assume it's impossible to know if inequality is a problem. The top 10% have enjoyed 63% of the income gains while the bottom 20% enjoyed 0.4% of the income gains. We expect the rich to gain more under any system. If all income groups enjoy a 5% increase that means most of the money goes to those at the top. That's perfectly reasonable. But at 0.4% the bottom 20% are getting almost nothing. Immigration can explain a tiny amount, but not all.

Also note that while immigrants start with a low income their increase in income as the years go by outpaces increases amongst natives. See a study here. So these are counterbalancing forces. As I said the key is to quantify the total effect. It may be positive in terms of reducing inequality when that is considered.

Now, consider your claim that involves a study that says if you merely consider health care costs the inequality gap disappears. That's nonsense as you would have to admit because you believe inequality is increasing. This study is flawed. The other thing I would point to is that the study seems to be arguing, based on your description, that with the rise in health care costs in fact total compensation considerations eliminate the inequality gap. So for their calculations they presume that health care costs are rising. If the compensation is corrected for inflation though that should mean that compensation doesn't change with rising health care costs. The fact that they say that it does would suggest they are doing it wrong.

I don't agree that it is my burden to research every speculative claim you offer in your attempts to explain inequality. Imagine that I explain the motivations of suicide terrorists by pointing to foreign military occupation and you reply "Did you investigate the possibility that brain boring bacteria may be prevalent in Islamic states? Go do some research and figure that one out and until you do I'm entitled to dismiss your claim." Mine is the position of the majority of economists and is the prima facie conclusion based on an analysis of income data. That's not to say that other causes are not relevant in explaining the data, but I think the ball is in your court to prove any claims about Britney Spears wannabes or Sergey Brin wannabes.

Regarding the rates at which the people with a college degree marry people without, I asked about the causes and you say this is specifically explained in the article. You cite the article. In that citation I see no explanation other than the repeated assertion about a striking decline since the 70's. Do you consider this an explanation? An assertion that this has happened since the 70's is not an explanation of the causes, nor does it give us the information we would need to consider whether there was some sort of correlation.

You say this fits my pattern calling for drastic changes in the 70's and 80's. First, we can't see the rates in your article, so I don't know why you're drawing that conclusion. Second, you imply that the rate reduced in the 90's. But inequality is still increasing in the 90's and in the 21st century. So this pattern does not fit the inequality that we are seeing.

Should you dismiss EPI or Huffington Post as I dismiss AEI? If they provide no argument, like AEI, then yes. Everybody wants to be a pop star, and my evidence is zero. That's quite weak coming from a group that takes thousands in tobacco money in order to put out studies on the virtues and glories of tobacco which kills hundreds of thousands of people per year in the US alone.

I think that if people read your blog they'd see which of us has the worldview commitment to an economic position. Not that I think that's relevant. It presumes to know your motives. It presumes to say that you have a prior commitment to an economic argument independent of the evidence. Maybe you do and maybe you don't. Regardless I think that's for the reader to decide. My speculating about your motives just isn't value added in my opinion. People can read your arguments and draw their own conclusions about your motives. I think you'd be better served doing the same, but suit yourself. The substantive portions of your replies are definitely value added and welcome here. I don't agree with you but I am learning.

38 comments:

HispanicPundit said...

It's important to understand the causes of income inequality because it gives a drastically different view of the importance of it. So when I say that a good chunk of income inequality is due to the divorce rate, or single mothers, or immigration, or age of population, or healthcare costs, or marriage preferences, or technology, or division of labor, what I am really getting at is that income inequality is a natural part of the system. At most it is a symptom, not a cause, of social turmoil.

Let's take the widely held economic view of the causes of income inequality: hours worked (the higher the quintile, the more hours worked), education level, immigration and trade. All of these things, I would argue, are good things in themselves. They make the world better for all. The fact that they happen to increase income inequality is a side effect that should largely be ignored.

Trade, for example, exasperates income inequality by making the goods available to a wider audience. Charles Dickens is probably a far better author than J.K. Rowling's, but because J.K. Rowling's wrote her books (author of the Harry Potter series) in a time of the Internet and globalization, she was able make alot more money, thereby, reach the top 0.01% of income earners. Or take Alex Rodriguez, he is probably not as good of a baseball player as Babe Ruth was but because Alex Rodriguez plays during a time where baseball and American sports in general are viewed around the world, his premium is much much higher (in fact, many economists argue that the drastic rise in the wealth of superstars and sports stars explains a good chunk of income inequality, see here).

But how is this in any way harmful to the poor? Why should we work in reversing this very thing? The same can be said of the other causes of income inequality: hours worked (the higher the quintile, the more hours worked), education level and immigration. They are all, on net, gains for the poor.

HispanicPundit said...

Lastly, an assumption implicit in Jon's responses is the belief that the economy is zero sum: someone else's gain is my loss. This is a belief that no economist holds (as opposed to being positive sum) and if Jon really believes this I think he owes it to us to explicitly say so. Because then this discussion would need to concentrate far more on basic economics than income inequality. So Jon, please specifically answer the question: is the economy zero sum?

With that said, I will respond to Jon's response below.

HispanicPundit said...

Regarding immigration: there are two factors of immigration, both of them directly exasperating income inequality. The first is the drastic increase in low income immigrants, specifically from Mexico. This directly harms the native born and reduces their wages. It also reduces the median wage just by being included (see here for a great example). The second is the drastic increase in high income immigrants, specifically from India, China and Africa. These immigrants directly increase the wages of the upper class. Both, adding to income inequality. And if Jon thinks this is minor, again, look at the CBO chart I mentioned in my previous response. The additional immigrants added has been exponential from the 1970's and onward. This is no small matter.

Regarding healthcare costs, the study did not say that "the inequality gap disappears". I don't know where you got that from. It said, "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."It explains a substantial amount of income inequality...not all. What they are arguing is that much of the wage increase has gone to pay for rising healthcare costs. So the problem is rising healthcare costs, not inequality itself (again, inequality is a symptom...). The inflation argument was answered in my previous response, so I won't repeat it here.

HispanicPundit said...

Regarding the burden of proof, you write, " Mine is the position of the majority of economists and is the prima facie conclusion based on an analysis of income data." But it really isn't, is it? We both agree that income inequality is rising. So on that point it is. But do you really agree with the majority of economists in attributing the causes of income inequality? Specifically, do you agree that its because of hours worked (the higher the quintile, the more hours worked), education level, immigration and trade? If so, were done here. I agree as well. But if not, then it is you drifting from mainstream economics, not me.

Also, income inequality is not really germane to my political philosophy. Based on my views - and I would argue the views of most Americans - it's a big dont care, but you claim that it is a cause of worry. In which case, its your burden to show that in fact it is. If its merely a statistical mirage, a fact of forgetting to include changing households, single mothers, immigrants, or healthcare costs, then its up to you to show otherwise. Otherwise, we all go back to the default position of ignoring it.

Regarding changing marriage preferences, the causes are simply that, preferences. We now have the ability, because of widespread economic growth, to choose partners for different reasons than economic gain (division of labor). So people do. Its really that simple. Reread the article, that is precisely what they argued. Here is another attempt at explaining it to your satisfaction.

Either way, the causes are not what is important here. It's the effect. If marriage has moved towards a consumption partnership, where the rich are largely marrying the rich, and the educated marrying the educated, this will directly increase income inequality. And more importantly, this is something that legislation cannot stop. It is a fact of changing preferences (also, I don't know where I implied that this slowed down in the 90's, on the contrary, like income inequality this trend seems to be increasing...).

HispanicPundit said...

Lastly, lets talk about sources. I want those reading this post to notice two vastly different methods of arguing here. Jon, primarily quotes EPI and leftwing sources. For those not familiar with the EPI, it is, "a progressive non-profit think tank that was created in 1986." (See here). It's board of directors consists primarily of union advocates. And unions have a clear interest in promulgating the idea of increasing income inequality. So this is really no different than having a debate on the economics of oil and Jon quoting economists from oil producing companies. How objective do you think their studies would be?

On the other hand, the studied I have quoted come from mainstream economists who have no political ax to grind. And from academic economists, who have no clear incentive to promote the idea of income inequality.

I could have easily taken the road Jon does. I could have quoted from right wing sources, for example, see here, here, here, here, here, and here. All of these links contain studies, graphs, and data. They could stand on their own. But why? I don't need to. The arguments I make here are strong enough to stand on their own.

Darf Ferrara said...

Jon still hasn't stated that there is any system by which the poor would do better either. He is too worried about the rich enjoying themselves to address that point.

Jon said...

HP, I don't think anybody would dispute that families with two income earners would generally earn more than families with a single income earner. There is income inequality for that reason. But that's not what we're talking about. We're talking about the radical change since 1980 in income inequality. As I said, 23% of all income goes to the top 1% today. It was 10% in 1980. Did the top 1% double their work hours in that time frame while the remainder scaled back? You need to offer an argument that explains the shift, not just point out obvious things that do cause some inequality. Nobody is arguing that there should be no inequality. I don't object to people who work more earning more. It's that believe the increase in inequality that we've witnessed over the last 30 years poses a problem. Obama is exacerbating the problem, not alleviating it.

You assert that I'm assuming the economy is zero sum. I've made no such assumption. You're just repeating right wing slogans with that comment. I don't assume that and don't believe it.

Regarding immigration, I think my point that these things must be quantified stands. There are counterbalancing forces, including the fact that poor immigrants experience income gains at a higher rate than the native population.

Jon said...

My quote regarding the "inequality gap disappears" statement was me quoting you, not me quoting from your link.

You say that the cause of income inequality is due to the number of hours worked and that this is the opinion of the majority of economists. But that's not what we're debating. We're debating whether or not we have a system that is designed in such a way that it has the effect of expanding the gap between rich and poor. That's not to deny that hours worked effects income inequality.

So take for example this statement taken from The State of Working American from 1999, which is statistics compiled by the EPI.

"Were it not for the extra hours of work provided by working wives, the average income of middle-income, married families would have fallen in the 1990s. Between 1989 and 1996, middle-class husbands and wives increased their annual hours of work outside the home from 3,550 to 3,685, or more than three weeks of extra work per year. And, because of falling wages, this 3.8% increase in hours translated into just 1.1% more family income over seven years. Most of the added hours came from wives, and, without their added work effort, these middle-class families would have lost 1.1% of their income. These middle-income families were not alone: the bottom 80% of families increased their annual hours of work but still managed only to stay even. . . ."

Jon said...

Income was up for the middle quintile, but not as much as the working hours were up. Unless you were in the top quintile. Those are conditions that I regard as problematic and institutional, like Citigroup recognizes.

You say who cares? The majority of social scientists believe it is a problem according to your Wikipedia link. Mine is the position of the experts.

You just assert that changing marriage behavior is due to preferences. Where is your evidence? My point was that your article didn't provide the kind of details we would need to draw a conclusion. What if there are just fewer marriageable people that lack a degree? When 5% of the population goes to college we aren't surprised that college educated people marry those without a college degree. When 75% of the population goes to college we expect the college educated to marry the uneducated at a lower rate. There are simply fewer people that lack a college education, so it's impossible to sustain the rate.

You have failed to understand my point regarding the AEI. As I explained last time I have no problem with you using AEI as long as the link you provide has facts and sources. I quote the EPI because they provide the statistical data. It doesn't matter if that data comes from the EPI or the AEI.

Every source you initially offered regarding income inequality was from Cafe Hayek, a right wing source. I didn't dismiss it because the arguments dealt with data and arguments. So I addressed every link. What I object to is right wing sources that offer speculation without evidence and data. You're entitled to your own opinions, but not your own facts. Facts are facts. What I offer from the EPI is undisputed factual data. The interpretation of that data is a matter of debate, but the data themselves are not.

HispanicPundit said...

Responses below:

Good to hear that you don't believe in zero sum economics. But then, I have to ask, why the focus on income inequality at all?

Regarding immigration, you write, "There are counterbalancing forces, including the fact that poor immigrants experience income gains at a higher rate than the native population."

Right - but it comes at the expense of the poor native population, as I have shown above. I plead the reader to look at the title page of this CBO report on immigration and notice that it starts to rise drastically right around the time Jon is concerned about income inequality (1980's and forward). Add in the fact that our immigration policies drastically changed also around the same time (including Reagan's immigration act of the 1980's) and it fits perfectly into the income inequality time frame Jon is worried about.

Also, this is only half of the contribution from immigration. There is also the drastic increase of educated immigrants from India, China, South Korea and other recently industrialized countries that have made the rich richer, all around the 1970's, 1980's and forward. In other words, the recent impact on income inequality from immigration cannot be so easily dismissed as Jon tries to do above.

Jon said...

HP's second comment:

Regarding marriage preferences, Jon writes, "What if there are just fewer marriageable people that lack a degree?" Whatever the reasons, it doesn't really matter - the effects are the same, an increase in income inequality.

I found this article that explains the difference better:

http://pewsocialtrends.org/2010/01/19/women-men-and-the-new-economics-of-marriage/

Part of the reason for the superior gains of married adults is compositional in nature. Marriage rates have declined for all adults since 1970 and gone down most sharply for the least educated men and women. As a result, those with more education are far more likely than those with less education to be married, a gap that has widened since 1970. Because higher education tends to lead to higher earnings, these compositional changes have bolstered the economic gains from being married for both men and women.

There also is an important gender component of these trends. Forty years ago, the typical man did not gain another breadwinner in his household when he married. Today, he does — giving his household increased earning power that most unmarried men do not enjoy. The superior gains of married men have enabled them to overtake and surpass unmarried men in their median household income.

In other words, the poor are getting married less and the rich are getting married more, specifically since the 1970's and beyond (thereby directly increasing income inequality, in the period you are most concerned about).

And here is another important stark difference: "Among college-educated adults, married men are markedly more likely to have a wife who is college educated — only 37% did in 1970, compared with 71% in 2007."

In other words, much of the gain in income inequality since the 1970's is cultural changes, like deciding to marry and marriage preferences (ie marrying someone with a college degree vs no degree).

Regarding sources, Cafe Hayek is not rightwing. The authors are generally against wars, and were against the Iraq war. They are also strongly in favor of immigration, including open borders. And they even encouraged their readers to vote for Barack Obama against John McCain. So how does that make them right-wing? If anything, their independence on such issues shows they should be trusted more, not less.

Contrast that to the sources Jon uses. Can Jon show me one instance of EPI ever going against the liberal line? Of course not, they are just as much of a Democratic mouth piece as you can get. The difference couldn't be more staggering.

Furthermore, if Jon really wants to get into a political link dump, irrespective of the source, then I ask readers to look at the right wing sources I did provide towards the end of my previous post. I did not base my arguments on them, but I provide them for completion. They use data, graphs, and various sources just as strongly as Jon's leftwing sources do. But they come to diametrically different conclusions. Which is why I decided to use largely politically independent sources and ignored those sources in my replies.

Before we end on the sources differences, I'm curious: do you think it's disingenuous for EPI to calculate income inequality and completely leave out benefits like healthcare, retirement plans, and other non-wage benefits?

So in conclusion, I would argue that the rise in income inequality, specifically from the 1970's, 1980's and onward, is a direct result of a) rising healthcare costs, b) changes in the marriage rate and marriage preferences, c) immigration and d) trade.

This is precisely why concerns about income inequality is largely a past time of the elites. The general population just doesn't care all that much about income inequality. It shouldn't either, it largely doesn't affect em.

Jon said...

You know, I think it’s interesting to watch you “plead” with the reader to look at your evidence. You sound desperate to make sure that people see this your way. Almost like your worldview hinges on it.

I think we’re going around and around on a lot of this. Yeah, immigration went up in the 70’s. But illegal immigration is falling today as inequality continues to rise. You say that many immigrants are highly educated and this exacerbates the inequality problem because these are highly compensated people. Are you sure? A masters degree is high educated, but actually middle class life in most cases. Why isn’t immigration helping to retain a middle class? Instead the middle class is eroding.

You say it doesn’t matter the reasons for change in marriage actions. It certainly does. Consider a hypothetical. 30 years ago only 5% of the population had a college degree. Suppose today 100% do. So because of this the number of people with a college degree marrying those without has dropped. It’s now zero because nobody lacks a college degree. And yet we see vast extension between the rich and poor. Would you say that this is because everyone has a college education now? Your claim is basically that people are more snobbish. The rich marry the rich and the poor marry the poor and this wasn’t true before. But that’s not necessarily true. If everyone has a college degree than the fact that the rate of marriage between college educated and not college educated has nothing to do with rich people marrying rich people and poor people marrying poor people. The rate at which the rich marry the poor could be exactly the same even though the rate at which the college educated marry the non-college educated has dropped because of the reduction in raw #’s of those lacking a college education.

Next we’re back to the old discussion about how the wealthy are more likely to be married and marriage rates have declined more for the poor since the 70’s than the rich. But I thought we already covered this. Family working hours are up for all. Are they up only for the rich? No. This argument is that married people have two income earners/more working hours so they naturally make more. But everyone is working more, rich and poor.

As I showed last time the middle class saw an increase in working hours of 3.8% during a 7 year stretch in the 90’s and had 1.1% income improvement to show for it. What was it for the rich? There’s no need to look at marriage rates. Look at family working hours.

CafĂ© Hayek is right wing on economics. That’s what we’re talking about here, not war.

Jon said...

But you’re obviously not grasping my point here as you continue to argue against the validity of the EPI. I’m saying I have no problem with using AEI as a source provided they make arguments or are providing statistical data that is factual. I objected to one link from AEI because it was a right wing speculative explanation with no basis in data. The #’s from the EPI I’ve offered are correct and undisputed as far as I know. And as far as the EPI omitting 401k’s and health care, I think it makes sense since income is inflation adjusted, so leaving health care aside means it's treated in an inflation adjusted way. And 401k’s are worse than pensions, so adding those would work against your argument.

So in sum I’ll say that the vast majority of economists are right that inequality is increasing (and you agree). I agree with the vast majority of social scientists that this is a problem. And I agree with Citigroup’s analysis that conditions are such that this will continue due to favorable governments. I think they’ve proved themselves in that their investment strategy is based on this analysis and this strategy has been working over the last several years. I think what you offer can show that inequality is partly due to factors that are not systemic, but I think Citigroup is right in that it doesn’t explain the drastic expansion between rich and poor. It was 10% of all income to the top 1% in 1980 and today it's 23%? That's a huge change and Citigroup can see that it's systemic, not the result of the fact that fewer people marry today.

Two anecdotal things to offer. I watched the former Michigan Governor Jennifer Granholm last night in an interview. As an incentive to retain a production facility, which was on the verge of moving to Mexico, she first offered tax relief. They pay no taxes for years on end. When that didn’t get it done she offered to pay to construct their building. Ultimately that didn’t work. It was $1.54 an hour in Mexico. Too appealing. But think about what’s happening here. She’s ready to take money from the public treasury and offer it as a gift to a corporation by building their factory. That’s money directly from taxpayers into the pockets of the stock holders. It didn’t work this time, but it’s probably worked in the past. And when these companies don’t have to pay taxes you know what that means. Higher stock returns (stocks owned almost entirely by the super wealthy, your 401k is a pittance next to what is held by the top 1%) and less of the social programs needed to assist the poor. This is expanding the gap between rich and poor.

Second anecdote. I was just checking out the cost of tuition for my 2 kids. Supposing they did what I did (Community College for 2 years, U of M for 5 semesters) at today’s rates I’d need $50K for each of them. That’s just tuition. I did it for about $22K. It’s almost unobtainable for normal, working class people. How is a normal person supposed to achieve this? And if you lack the college degree these days you’re nothing. So you have to do it, you have to get the loans, you have to be a slave to them. I understand this is just an anecdote, but it seems to be something that will very much extend inequality. It’s a scary proposition. Much different and much worse than when I was young, though I had it worse than my parents.

HispanicPundit said...

How is income inequality in anyway central to my worldview? It really isn't. It's a nuisance at best, a dont care at worst. I "plead" with the readers to look at the graph precisely because of how big the immigration difference is since the 1970's and 80's. It's exponential and far greater than your hand waving gives it credit for.

You write, Yeah, immigration went up in the 70’s. But illegal immigration is falling today as inequality continues to rise. But it's still a net increase. Sure, it has slowed down a bit, but that still leaves an overall net exponential growth in immigrants.

Regarding highly educated immigrants, I was referring to immigrants like this:

According to the National Venture Capital Association, immigrants make up only 11.7% of the U.S. population, but have started one in four of all U.S. public companies that have been venture-backed over the past 15 years, including Intel, Google, Yahoo!, Sun and eBay.

A similar study from Duke University showed immigrants were responsible for starting 25.3% of all new, high-technology businesses in the U.S. during the past 10 years. The greatest percentage of these entrepreneurs hailed from India (26%), followed by immigrants from the U.K., China and Taiwan.

I doubt CEO's of Intel, Google, Yahoo, Sun, eBay, Alcoa, Pepsi, Coke, and AIG count as middle class, or do they Jon? :-)

HispanicPundit said...

Regarding marriage, college attainment has only increased 20% from the 1970's (from ~10% to ~30%, see here).That could not possibly cancel out the vast marriage differences seen from the 1970's onward. Such as, “Among college-educated adults, married men are markedly more likely to have a wife who is college educated — only 37% did in 1970, compared with 71% in 2007.”

Then there is the other issue regarding marriage, namely: Marriage rates have declined for all adults since 1970 and gone down most sharply for the least educated men and women. As a result, those with more education are far more likely than those with less education to be married, a gap that has widened since 1970. Because higher education tends to lead to higher earnings, these compositional changes have bolstered the economic gains from being married for both men and women.

You try to answer this with, "Family working hours are up for all. Are they up only for the rich? No. This argument is that married people have two income earners/more working hours so they naturally make more. But everyone is working more, rich and poor."

But for this to matter, the poor would have had to roughly double their working hours (to account for a "household pair" vs a "household single") relatively to the rich over the period in question, which is certainly not the case. In fact, after googling this more, I found this chart which confirmed my suspicions that working hours have not really changed all that much (and, in fact, that the richer you are, the more hours you work!). In fact, if you look at the graph, the disparity between working hours of the rich vs the poor has gotten greater, not less, since the 1970's onward.

HispanicPundit said...

Regarding Cafe Hayek, but that's the point. They are "right-wing" on economics. "left-wing" on foreign policy. "humanitarian" on immigration, and sometimes Democrat in politics. That makes them, IMHO, independent thinkers. Wouldn't you say that gives them more credibility, not less? Especially considering that the sources you supply are left-wing in everything - economics, politics, and presidency. They clearly have a political agenda to put forward.

Regarding healthcare and inequality, you write, "I think it makes sense since income is inflation adjusted, so leaving health care aside means it's treated in an inflation adjusted way." This is simply not true. Healthcare costs can also be "inflation adjusted" (there called real vs nominal healthcare costs), so again I ask, why exclude it from the analysis?

And your next statement regarding 401k's confuses me, you write, And 401k’s are worse than pensions, so adding those would work against your argument. I'm curious Jon, how could any 401k plan or pension plan "work against" my argument? Even if the plans are performing badly (arguendo), that still means added income to the worker. In other words, as long the plans are > $0, they will reduce income inequality. No matter how bad 401k's or pensions are, I know of none that performs so bad that the worker ends up owing money to the plan. So no matter how little they have, they still add to the wages earned by workers.

So again I ask, do you think it's disingenuous of EPI to exclude healthcare costs from their income inequality calculations? What about excluding 401k's and pensions from their income inequality calculations?

HispanicPundit said...

One more thing, since Jon concedes that the economy is not zero-sum, and is in fact positive sum, then pray tell: why the focus on income inequality?

In other words, I want Jon to answer why income inequality is an important indicator that we should worry about? Atleast here in the United States.

Jon said...

I think listing a sequence of foreign born CEO's and acting like this is somehow demonstrative of something is simply fundamentally irrational. We're not talking about what has happened with certain individuals. I could list a series of native born white people struggling to make ends meet that were formerly in the middle class. I think the immigration effects need to be shown, not just asserted. So immigrants make a disproportionately high number of venture capital start up companies. I just don't see how any conclusions can be drawn from that. How have they done? Listing 6 individuals that would be in the top 1% wouldn't tell us much.

Let's look at your marriage claims. 10% of the population had the degree in 1970 vs 30% today. Suppose people married randomly and weren't interested in marrying based on education in 1970. That would mean a person with a degree would have a 10% chance of marrying someone that also had a degree. However today with 30% of the population having a degree assuming people married randomly a person would of course have a 30% chance of marrying someone with a degree. With no change in preferences and no change in the rich marrying the poor the rate should have increased from 10% to 30%. It should have tripled. What actually happened is it went from 37% to 71%. It didn't quite double. What that means is of course in 1970 the college educated did prefer to marry the college educated and today they do as well, but it's not clear to me that that preference rate has changed. Obviously I don't expect it to triple. In other words I don't expect it to go from 37% to 111% because that's impossible. It's a non linear function. But what this means is that the statement regarding the increase from 37 to 71% doesn't tell us that preferences have changed. It may mean nothing more than that the college graduation rate is up and we naturally expect the rate of the college educated marrying the college educated to also go up. I'm not exactly sure how much though. Darf could probably tell us.

Working hours aren't up much you say and you provide a chart. According to your charts for the middle quintiles it was about 500 hours per year. 500 freaking hours per year from 1980 to 2000. 12.5 flipping working weeks per year. That's not much? And their wages are barely increasing as compared to the rich. That's pretty darn shocking, wouldn't you say? And their wages are not increasing as much as the top quintile which according to your chart saw the rich working another 200 hours per year. Less of a rise in working hours, but more of an increase in wages. That seems pretty devastating to your claims about marriage which simply presumes that the rich achieve a larger increase in working hours.

Jon said...

This is really illustrative of the problem. The bottom quintile hasn't had a change in working hours. Could be because they can't find work, but I'm not sure. Their pay isn't increasing. Does that make sense? In a world where productivity is going up for all with massive technological advancement they don't get a corresponding increase in income.

It says to me that on our system productivity gains are skewed to go to the rich. So in answer to your question about zero sum, why would I want a system that skews all the benefits to the rich and leaves the rest unchanged? Why not rather have a system where everybody enjoys the gains? That's why I care about it even though it is not zero sum.

I've already made the point repeatedly regarding AEI and you are not addressing it so I won't repeat it.

Another point on health care. The cost burden is shifting to where it used to be limited co-pays, etc. For instance my Dad with a fairly menial job at Ford was able to get my and my brother in braces no problem. Today it's a huge cost. Same with cavities. Had my daughter been born a month later (she was born Dec 7) it would have cost me $2K. Instead I paid $150. The fact is health care is an additional drain on income probably not factored in to the EPI estimates, once again exacerbating the inequality problem.

You ask how an additional 401k benefit can be in any way a problem. The problem is that in imposing 401k's corporations have at the same time eliminated pensions. They've given with one hand and taken away with the other. Neither pensions nor 401k's are factored in to the income analysis, but what we know is that in the past with pensions it was better than it is now with 401k's.

It's just striking to me that while people are working harder and longer and at the same time they are even more productive by a wide margin their income gains are anemic. There's something there. It's not zero sum. But it's not what it was in the past nor is it what I think it should be now, except for that one small segment. The wealthy.

Darf Ferrara said...

Why do you continue to mention that pensions outperform 401k's, but from the paper that you site the differences are negligible, IRA's (a far larger retirement percentage) aren't included, fewer people participate in pensions than do in 401k's and many of the pensions are worth far less than they were presumed to (I'm thinking of the UAW pensions sans gov't bailouts, and public employee unions).

Either way, it seems that there is mostly an impasse. You've taken the position that there is massive income inequality (as a proxy for wealth inequality we presume), that it is bad per se, and that it has increased massively since 1980, presumably due to some identifiable event. I think that HP and I would say that it may be possible that income inequality may have increased, although it is extremely difficult (probably impossible) to know, income inequality is not a bad thing in and of itself in any case, and trying to claim any single cause is also probably impossible.

I personally believe that the income inequality caused by bailing out bankers is bad, but the income inequality that happens due to some workers having skills that have a much higher demand than it used to can be a good thing. I would much rather hear argument that can be made that doesn't depend on the fact that social "scientists" says that income inequality matters, and then to discuss specific problems, and to think about how any proposed solution might work.

HispanicPundit said...

This is the important part of my immigration claim:

According to the National Venture Capital Association, immigrants make up only 11.7% of the U.S. population, but have started one in four of all U.S. public companies that have been venture-backed over the past 15 years, including Intel, Google, Yahoo!, Sun and eBay.

A similar study from Duke University showed immigrants were responsible for starting 25.3% of all new, high-technology businesses in the U.S. during the past 10 years. The greatest percentage of these entrepreneurs hailed from India (26%), followed by immigrants from the U.K., China and Taiwan.

The link is here. And it's really a lot stronger than this, as the immigration percentage given (11.7% of the U.S. population) includes all immigrants, the educated from India, the U.K., China, and Taiwan and the uneducated from Mexico and general Latin America region. Now given that immigration from Mexico is probably the larger percentage, it's safe to assume that the educated immigrants from India and others are an even greater source of entrepreneurship per capita.

Factor in that the upper quintile is something like only 0.1% of the population, and you can see that you don't need too many "Intel, Google, Yahoo!, Sun and eBay's" CEO's to make an impact.

So to reiterate, poor immigrants harm those at the bottom and help those at the top. Educated immigrants contribute to the wealth at the top. In the end, immigration is an overall net income inequality riser. And when you factor in the dramatic rise in immigration from the 1970's onward, you can easily see that it's a substantial contributor (just as, btw, the majority of economists already believe, see here).

HispanicPundit said...

Regarding marriage, you write, "what this means is that the statement regarding the increase from 37 to 71% doesn't tell us that preferences have changed. It may mean nothing more than that the college graduation rate is up and we naturally expect the rate of the college educated marrying the college educated to also go up."

It's not just the marriage preferences change at the top that's important, remember, the marriage rate at the bottom has been decreasing. This makes the situation even worse. Income inequality goes up.

Regarding working hours, you write, "500 freaking hours per year from 1980 to 2000. 12.5 flipping working weeks per year. That's not much? And their wages are barely increasing as compared to the rich. That's pretty darn shocking, wouldn't you say?"

But this misses the point Jon, it's not the absolute amount of working hours that is important - it's the relative amount. So to make your point, you have to show working hours of the poor and middle class relative to working hours of the rich.

Second, it's not true that one hour worked by the rich should be equal to one hour worked by the middle class. The rich make more, so to leave income inequality the same, the middle class would have to increase their working hours by more than the rich. Lastly, the rich are already working exorbitant amount of hours, more so than those who make less than them. So one additional hour is going to be a lot harder than say one additional hour to the very poor, or middle class (as someone who has on occasion worked 16 hour days, I can attest that it's the last few hours that are always the hardest). So based on this alone, that justifies a higher premium on the riches additional hour worked than say, the additional hour worked by the middle class or especially the poor.

So when you look at it from this new light, you see a completely different picture. First, as the chart shows, the bottom quintile has actually reduced their working hours since the 1970's. So it makes sense that their income, relative to the rich, has significantly decreased. The 2nd quintile doesn't show much of a gain relative to the rich. It's not really until you get to the 3rd and 4th quintile that you start seeing increases in hours worked relative to the rich. In other words, this explains the income inequality disparity between the richest and poorest, leaves unchanged the 2nd quintile, but lacks an explanation for those in the 3rd and 4th quintile.

HispanicPundit said...

Lastly, its important to stress that what I am arguing here is not unorthodox. I am taking what the majority of economists have been saying for years. Regarding the marriage rate, for example, Wiki writes:

Inflation adjusted income data from the Census Bureau shows that household income has increased substantially for all demographics, with larger gains experienced by those with higher incomes. The emergence of dual-earner households has had a substantial impact on increasing household income, especially among households in the upper 20%. Along with the entrance of women into the labor force, the discrepancy between those households with one and those with multiple earners was amplified significantly.

The words "substantial" and "significantly", are theirs, not mine.

Regarding immigration, Wiki writes:

The large increase in immigration over the past several decades, with foreign born workers increasing from about 5% of the workforce in 1970 to over 15% in 2005, has also increased income disparities, as the majority are immigrating from poor countries, come to the US, and attempt to work their way out of poverty and into the middle class. But government policy over the decades have also had its effects.

The same can be said of trade, education, and other factors listed above.

HispanicPundit said...

Jon still refuses to answer my question, which I continue to await. For the third time now: do you think it's disingenuous of EPI to exclude healthcare costs from their income inequality calculations? In addition, do you think its disingenuous of EPI to exclude 401k's and pensions from their income inequality calculations?

Remember, this is important because it directly addresses the heart of our disagreement. It shows, for example, that " while people are working harder and longer and at the same time they are even more productive by a wide margin their income gains are" not "anemic". They just have been going to the rising costs of healthcare and been included in other forms of fringe benefits, like 401k's and pensions. Yet EPI completely excludes them. I say this shows bias and disingenuous on their part. I want to see if you do too.

Jon writes, So in answer to your question about zero sum, why would I want a system that skews all the benefits to the rich and leaves the rest unchanged? Why not rather have a system where everybody enjoys the gains? That's why I care about it even though it is not zero sum.

But that assumes zero sum Jon. In other words, the pie is not fixed. Just because the rich make more, that doesn't mean the rest have less. The pie grows. Wealth is created. Take for example, google. The founders Brin and Page, by creating google created wealth. Their existence in no way makes braces for your kids more expensive. In no way, makes college education more expensive. In fact, it makes us all richer. I google for free and enjoy that increase in standard of living that my parents never had.

The fact that they are the top 0.01% of the population is irrelevant from my standard of living perspective. Their existence, their wealth, has also made me wealthier. The pie has grown.

Jon said...

Darf, I don't know why you are saying that the pension barely outperforms the 401k. From 1988 to 2004 the 401k had a 9.7% annual return vs 10.7% for the pension plan. That's not insignificant. You say it's too short at time span, but it's basically the entire time for which 401k's have been available. What else can you do? Additionally it covers the 90's boom and lacks the 2008 crash. With 401k's more heavy in equities we expect them to do better up to 2004. So if we were to push the analysis out to today we'd probably see a wider difference. But 1% annual return improvement is a pretty big deal as far as I'm concerned.

Jon said...

You say that the upper quintile makes up only 0.1% of the population. No, they don't. The quntile by definition is the top 20% of the population. So that's my point. Sure, 6 or 7 CEO's are doing great, but that has a negligible impact as far as the analysis I'm doing.

You either didn't grasp my point regarding the increasing rate of the college educated marrying others that are college educated or you didn't address it. I just want to point that out. If you don't understand let me know and I'll try to clarify.

I agree that single parenthood is greatest amongst the poor, but again, this is why I look to family working hours. A single family gets divorced and you now have 2 families, each with less working hours. Agreed. But what's the net effect when you consider all poor families, not just the poor families that were divorced. That is shown in the family working hours chart, which shows that for the very bottom quntile working hours are flat, but for the next three quintiles working hours are up dramatically. For the bottom quintile the fact is they just can't find work, which is part of the systemic problem I'm addressing.

You say we should consider working hours from a relative perspective. This is even worse for you. The middle quintile saw an increase in 500 working hours per year and the rich saw a 200 hour increase. OK. As a percentage of total hours worked the total hours for the middle are up 23% and hours for the rich were up 7.5%. Income for the middle is up about 20% over that time frame and it's up 40% for the rich. So yeah, you're right. We should look at a relative comparison. It shows how bad inequality really is. The gains in hours and productivity are heavily skewed in favor of the rich. With a much smaller percentage in working hours (a mere 1/3 of the middle quintiles) their income gains are twice that of the middle. That's pretty staggering.

Jon said...

You're dead wrong when you claim that since the rich earn more then to retain the same level of equality the middle would have to increase their hours more. If inequality was measured by the difference on actual dollars earned then you would be right, but I'm not looking at that. I'm looking at the % of income gained. Rich person makes $200K/yr and the poor makes $20K/yr. If they both work twice as long they should both double their income. But that's not happening. The rich double their income and make $400K/yr. But the poor are making $21K/yr. Not zero sum. Everyone has done better. But something is wrong.

You say that the rich should make more because since they already work longer hours 1 additional hour is more strenuous for them. Is that how you think the economy should work? Just because an additional hour is more strenuous, this doesn't mean they are bringing more value. If I run a machine for 80 hours a week moving to 81 is hard, whereas moving from 40 to 41 is not as bad. But in both cases there's 1 man hour of production and my compensation is supposed to be tied to the value I produce, right?

You say that the wiki article claims that income growth was described with words such as "substantial" and "significantly" for all demographics. But they have a chart right below this paragraph showing income growth by quintile. Maybe 5 or 10% in 25 years for the bottom quintile and 175% for the top quintile. I think their adjectives don't accurately describe the facts that they offered. I say 5 or 10% growth in 25 years is absolutely anemic.

I think your point regarding immigration is fair, but I don't think it explains the situation to a large degree. The middle quintiles are working a lot harder and are far more productive. Perhaps immigrants are largely either high income earners or low, but they aren't middle. Why is the middle working harder being more productive and seeing very little by way of income gains? I think you should expect that as you become more productive you have to work less to maintain the same standard of living. What we find is that people have to work more and even then it may not be enough to sustain their income level. That's a systemic problem. It's a predicted consequence of our system. And it's the analysis of the investment experts, like Citigroup.

Jon said...

I have already answered your question about the EPI twice, but I don't think you are understanding it so I'll try to explain it another way.

Suppose in the 50's all companies paid for your housing, health care, and food and your salary was additional money on top of that. Then we look at salaries and see the gap between rich and poor expand. The cost of housing, health care, and food could vary widely, but adjusted for inflation it would have no impact on our conclusion. The income value is adjusted for inflation, so the fact that everyone gets housing, health care, and food already but their income is dropping means their standard of living is dropping. If the cost of food tripled it wouldn't matter because the salary we consider is inflation adjusted. Leaving out food makes sense because it's a defined benefit that when isolated means it is treated in an inflation adjusted way.

In the case of a 401k, this is an additional employer provided benefit. But as it has come in the pension has phased out. Since this is worse than a pension the net effect is another reduction in pay.

With health care as additional costs are imposed on the employee (another drain on income) this has once again exacerbated the inequality problem.

So in my view leaving these factors out actually biases the conclusions in a manner that is favorable to your argument. Despite that inequality rises.

My claim does not assume zero sum in any sense. Suppose in Year 1 we have $100 to split 5 ways. It's divided as follows, from rich to poor. $50, $30, $10, $8, $2. The next year the economy grows to $120. It's divided $66, $32, $11.40, $8.50, $2.10. I object to that. The gains are being funneled to the upper classes. The lower class is getting thrown a bone. There's nothing zero sum about it. But it's a crappy system. The earlier system, where gains were enjoyed by all income groups, was better.

Jon said...

Correction on my relative working hours claim. I was looking at the middle quintile, which saw a 700 hour increase (again, pretty staggering). I meant to use the average of the 3 quintiles, which is about 500, but when I plugged it in to the calculator I used 700. So I should say:

The middle quintiles started at around 3000 working hours and ended about 3500, so that's an increase of 17%. The top quintile went from about 4100 to 4300, which is an increase of about 7.3%. So the middle income had an income increase of about 20% for 17% increase in working hours. The rich had a 40% increase with 7.3% increase in working hours.

Darf Ferrara said...

The fact that IRA's are not included when compared to pensions make the conclusion that the average performance of 401k's vs. pensions murky at best. Secondly, 401k's allow individuals the freedom to invest the amount according to their own preferences, rather than at other persons preferences. In other words, they can trade present dollars for future discounted dollars. Third, the pensions don't appear to have been funded as well as you thought. You can look up public pension crisis if you'd like.

Jon said...

I don't think it makes sense to include IRA's as part of compensation. These are funded from your income. They are not an employer provided benefit.

Also only the rich make enough to put funds in an IRA. The poor don't own them. This is another government policy that favors the rich.

Sure, you get choices. By a Fidelity fund with 1% management fees or buy company stock and take on a lot of risk or go into money markets with little returns. Maybe you like having those choices, but some don't and it doesn't matter in any case. Your company doesn't want to provide a pension for you. They'll have you manage your own. Overall we'll be worse off, though some will do better.

Some pensions have gone belly up, but some 401k's have been disastrous for individuals as well. You have to look at the overall effect.

Darf Ferrara said...

According to the article

"94 percent of the money flowing into traditional IRAs was rolled over from employer-sponsored plans in the period 1997-2003."

This means that traditional IRA's are an extension of the other retirement plans. Since IRA's make up the largest section of the contributions, their absence from the analysis is difficult to deal with statistically.

You are missing the point of the pensions going belly up. The 401K losses are accounted for. The pension liabilities are likely not yet accounted for.

Jon said...

401k monies rolled into an IRA when you switch employers is not income. Maybe that makes things tough to evaluate. But the evidence we have based on pension performance and 401k performance is that pensions out perform 401k's. 1988 to 2004 is a fairly wide margin and 1% is substantial. So there's no reason to think the added 401k benefit offsets the pension loss.

Darf Ferrara said...

1988 to 2004 would be a wide margin if the average worker only worked for 16 years. Otherwise it looks pretty meager. If you had ever looked at any statistical analysis of other financial time series you might be a little more modest. As it stands pensions vs. 401k is approximately neutral wrt income inequality.

HispanicPundit said...

Sorry, I misspoke. I meant the concentration of the upper quintile is only like 0.1% (or even 0.01%) of the population. It is my understanding that what really drives income inequality is more specific than merely the upper quintile, it's actually a small segment of the upper quintile...something like 0.1% or even 0.01% of the population. My point was that a CEO of Google, or Yahoo, or AIG, etc could easily move up into this small segment and significantly drive income inequality.

In short, here is my argument with regard to the educated segment of immigration: a) they make a disproportionately large amount of venture capitalists (have started one in four of all U.S. public companies that have been venture-backed over the past 15 years), b) they are considered some of the most educated in the United States (not just masters degrees, but Phd's and largely concentrated in the sciences) , c) they are disproportionately ambitious.

Does this mean they are largely responsible for income inequality? On that we would need more data (in fact, I would argue that its not largely, but it is a factor). But I think it's safe to say that they contribute some to income inequality. Wiki and a majority of economists support my claim. So when you write, I think your point regarding immigration is fair, but I don't think it explains the situation to a large degree. We fundamentally agree.

HispanicPundit said...

Regarding working hours, your merely reiterating the point I have already conceded, I had said: " It's not really until you get to the 3rd and 4th quintile that you start seeing increases in hours worked relative to the rich. In other words, this[working hours alone] explains the income inequality disparity between the richest and poorest, leaves unchanged the 2nd quintile, but lacks an explanation for those in the 3rd and 4th quintile."

In other words, I agree that if all we had was working hours alone, the 3rd and 4th quintile would need more explanation. But before we move onto that, you agree that if we look at working hours alone, it explains why the poorest have lost relative gain, correct?

(btw, the misunderstandings here are all my fault, not yours - I was writing my post late last night, while taking care of a 2 year old and a 2 week old...thoughts sometimes came out faster than I could write)

Regarding marginal hour worked, you write, You say that the rich should make more because since they already work longer hours 1 additional hour is more strenuous for them. Is that how you think the economy should work? Just because an additional hour is more strenuous, this doesn't mean they are bringing more value.

But this is how the economy works. Think about it like this: if you are a laborer, and you work more than 8 hours a day, the company has to pay you overtime, don't they? It's the same concept. The more hours are needed, the more the marginal hour requires a premium. Don't think about it as "more value", think about it as "what does it take to get me to give up even more of my leisure time".

If you work 8 hours a day, and the company asks you to work an additional 9th hour, how much would you require? What if you worked 12 hours and the company asks you to work an additional 13th hour? What about 14 hours and are asked to work an additional 15th hour? 16 hours with an additional 17th? Surely the more "base hours" you work, the more you demand for that additional hour. You can probably get away with 8 hours of leisure, 8 hours of sleep, and 8 hours of work fairly well. But the more you lose leisure, the more valuable each additional hour of leisure is to you. So you require a higher pay premium to give it up. Its what economists call "marginal value". The less leisure time you have, the higher your marginal value of leisure is to you. So the more you require to give it up. The rich are already at the tail end of working hours, so youd expect that their marginal hour is alot more than say the next quintile.

I think this is both intuitive and just. After all, there are only 24 hours in a day.

HispanicPundit said...

Regarding zero sum, it still implies that. Remember, I made the Google example above. I could have also made the J.K. Rowlings example. Or the Bill Gates example. Or Alex Rodriguez example. Or Johnny Depp example. Their gains are also our gains. Of course they get more, but they actually did the inventing. In other words, their gains do not subtract from our gains - in fact, they also make our lives better. Do you atleast agree to that?

HispanicPundit said...

Regarding EPI and 401k's, you write: In the case of a 401k, this is an additional employer provided benefit. But as it has come in the pension has phased out. Since this is worse than a pension the net effect is another reduction in pay. But is this true? You cant just say it. You have to prove it. Because my intuition is the opposite, namely: there is a far greater percentage of people covered by 401k's than ever covered by pensions. And if you include both, pensions and 401k's, that percentage has been dramatically increasing since the 1970's. You say no, I say I want proof.

Regarding EPI and healthcare, you write: With health care as additional costs are imposed on the employee (another drain on income) this has once again exacerbated the inequality problem. This is a complete cop out. This just confirms what we already know: healthcare costs are rising for everybody, employee and employer. So this just makes my argument stronger: why not include the healthcare costs the employer pays as part of wages? They are certainly part of "wages" from an employer perspective and from how leftists argue (just look at the Walmart vs healthcare debates), that's the direction they want wages to go (first to healthcare costs, then pay).

So you gotta give me something better than this Jon. Or just do the easy thing: admit that EPI is disingenuous for excluding healthcare costs. It seems rather obvious to me and the mere fact that you're doing everything you can to avoid admitting the obvious is quit telling.