Ezra Klein : [Russell] Shorto... [thinks that in] the Netherlands.... [T]here's "a cultural tendency not to stand out or excel...the very antithesis of the American ideal of upward mobility." But... Americans are in the odd position of fervently believing in upward mobility while not actually having very much of it. Eruopeans, conversely, don't really believe in economic mobility but have plenty of it.... Brookings... examined the relative mobility in other Nordic countries. And the United States doesn't come out that well.... The United States believes itself to be uncommonly meritocratic. But compared to European countries who don't believe themselves very meritocratic, it actually exhibits less income mobility....
If you believe that your country is extremely mobile, you're likely to believe the results of the economic competition are relatively fair. As such, you won't want to slap the rich with particularly high tax rates and you won't be terribly concerned about spreading economic opportunity. After all, anyone can make it! On the other hand, if you don't believe your country is terribly mobile, then you're less likely to believe economic outcomes are fair. And if you don't believe the outcomes are fair, you're likely to tax the winners relatively heavily and plow those profits into things like universal health care and free college. Policies, in other words, that spread opportunity more widely and thus make your society more mobile. Put like that, it sort of makes sense. If you believe your society is already economically mobile, you don't spend a lot of time trying to solve the problem of insufficient economic mobility. if you don't believe that, then you implement policies meant to increase mobility. What's odd is that the public perceptions in Europe and America don't seem to be changing much in response to actual outcomes.
Peter Orszag congratulates Emmanuel Saez: "Emmanuel's energy, intelligence, and dedication are deeply impressive—as was his ability to explain, despite his French accent, a complicated research project that I worked on with him to a group of H&R Block workers administering it..." But perhaps Emmanuel's most impressive accomplishment is that he has been personally denounced on the editorial page of the Wall Street Journal.
OMB - Blog Post - Congratulations to Emmanuel Saez: SMy co-author and friend Emmanuel Saez was awarded the John Bates Clark Medal on Friday. The prize, which is awarded to the best American economist under the age of forty, is one of the highest honors the economics profession can bestow upon one of its own. Emmanuel is deeply deserving of the honor—his work on income inequality and taxation has helped to shape my own thinking on these matters, and it had no small influence on the President's Budget.
Emmanuel is perhaps best known for his detailed examination of how wages at the top end of the U.S. income distribution have evolved over the past century. He and his co-author Thomas Piketty discovered that the overall pattern for the share of income accruing to those in the top 10 percent is U-shaped (see chart 1 below). Thus, the share going to the top 10 percent was around 45 percent from the mid-1920s to 1940, but then declined to approximately 33 percent during World War II. Emmanuel attributes this fall-off to the sharp reduction in capital incomes brought about by the war and the revenue increases needed to finance the war effort. After the war, the share of income accruing to the top 10 percent remained essentially flat until the late 1970s, when it began climbing dramatically, ultimately surpassing its pre-war highs. Indeed, in 2006, the top 10 percent earned 50 percent of national income, a higher share than even in 1928, the peak year of the "roaring twenties" stock market bubble.
Chart 1: Share of Total U.S. Income Accruing to the Top 10%, 1917-2006
Perhaps even more interesting than his findings about the evolution in earnings for the top 10% is what he found when he isolated data from just the top 1 percent of earners—namely, that virtually all the historical fluctuation in the share of income going to the top 10 percent was due to fluctuations in income within the top percentile alone (see chart 2 below). Stated differently, the dramatic changes in income inequality seen in the United States over the last century are almost entirely a function of how well the very highest earners did at any given point in time.
Chart 2: Decomposing the Top 10% of U.S. Income Share into Three Groups, 1913-2006
And in the most recent past, the very highest earners did very well indeed, capturing almost three-quarters of total income growth in the economic expansion of 2002 to 2006, while the remaining 99 percent of the U.S. population split among themselves the final 25 percent of the increase. (What makes this trend all the more concerning is something that Emmanuel and his co-authors demonstrated in another paper: that this dramatic increase in incomes at the very top has not been mitigated by an increase in income mobility, which can be seen in the relatively stable probability of staying in the top 1 percent of earners from one year to the next since the early 1970s.)
Emmanuel's work on income inequality has helped to point the way for the Administration in its pledge to rebalance the tax code, with a tax cut going to 95 percent of working Americans while asking those at the very top to contribute more. The inequality that has arisen over the past three decades is not going to go away overnight, and it has been driven by many factors—including a decline in the growth rate of college-educated workers. But where the prior administration used changes in the tax code to exacerbate these trends, this Administration thinks that the tax code should be used to mitigate them because an economy in which all can enjoy success is one that is strong for us all.
Emmanuel's energy, intelligence, and dedication are deeply impressive—as was his ability to explain, despite his French accent, a complicated research project that I worked on with him to a group of H&R Block workers administering it. I look forward to reading his work for years and decades to come.
One would imagine that a shift in a single generation from the top living 8 to the top living 24 times as high as the middle would have produced a substantial leftward shift in economic politics, but instead the reverse has happened. Our social politics has moved steadily leftward; our economic politics here in the United States has not.
The most deserving and valuable people in America, according to National Review, aren't our firefighters, police officers, nurses, soldiers, and teachers. Instead, they are our lawyers, bankers, executives, and top salespeople.
Nice to see it hung out on the line for once.
Lisa Schiffren:
Who Are the "Working Affluent"?... who earn the $250,000 per year or more that makes them "rich," and subject to new high rates of taxation? And why is a president who needs them to keep on producing at the prodigious rates both society and the economy require, treating them as if they -- not the slackers, the entitled, and the net tax consumers -- were the problem?... Corner readers.... The doctors, lawyers, engineers, executives, serious small-business owners, top salespeople, and other professionals and entrepreneurs who make this country run work considerably harder than pretty much anyone else (including... all politicians).... They pushed through grueling hours and unpleasant "up or out" policies in their twenties and thirties at top law firms, banks, hospitals, and businesses to earn salaries in the solid six figures (or low seven) today....
So, what happens when the heart surgeons, dentists, litigators, and people who employ 10 or 20 other people in their mid-size businesses decide that they don't want to pay for the excessive, pointless spending that the president finds so compelling? Instapundit [Glenn Reynolds] speculates on people "going John Galt." I think golf -- a time-intensive sport that the hard-working have eschewed for the past decade or two because it took too long -- will make a comeback...
Glenn Reynolds's wife, Helen Smith, takes it one step further!:
Dr. Helen: I often tip generously both because I have been a waitress and because I think it is important to reward people who work. However, [now that] Obama [is] in... tipping less or not at all would be a good way to save money as a way of "going John Galt."... If Obama is elected... in lieu of a tip I should leave a note like the following:
HOPE AND CHANGE FOR AMERICA: Spreading the Wealth Around.
In lieu of a tip, $_ has been donated to the Re-Elect Obama for President Campaign. Thank you for supporting the man and the movement that are bringing America together!
If enough people leave notes like this, I'm sure it will galvanize waitpeople everywhere in support of The One!
UPDATE II: As a commenter said, this post really seems to have hit a nerve. I am guessing that a number of lefty types are upset that their livelihood may be threatened. In Rules for Radicals Saul Alinsky asks, "Does this particular end justify this particular means?" Perhaps for those of us who are right-leaning, the answer is "yes"... it certainly worth exploring...
The growth in tax revenues from 2002 through 2007 were some of the largest in history. The tax system became much more progressive, with the top 20% of income earners paying 85% of the taxes -- a rate much higher than during the Clinton years -- all while keeping capital-gains rates low.
I'll blame the WSJ opinion editors for the verb-subject disagreement in the first sentence. But I'm assuming the facts came from Gregg. Except they're not quite facts—and since this sort of tax disinformation is pretty common, I couldn't resist wasting an hour digging up the data to refute them.
Non-fact No. 1: The tax revenue gains from 2002 through 2007 weren't "some of the largest in history," unless you define "some" extremely broadly. Adjusted for inflation, U.S. government revenue rose 20% from 2002 to 2007. That ranks 24th among the 58 rolling five-year periods between the end of World War II and 2007. Just barely above average.... Over the full eight years of the Bush administration, it appears likely that federal revenue growth will be just about zero. Over the eight Clinton years it was 58%.
Non-fact No. 2: The percentage of federal taxes paid by the top 20% of the income distribution in 2005 (the most recent year covered by the Congressional Budget Office's annual examination of tax rates and the income distribution) was 69%. The percentage of federal income taxes was 86%....
The cuts in tax rates on capital gains and dividends during the Bush years accentuated this kink, so on the whole a fair-minded observer would have to say the tax system became somewhat less progressive. Which isn't what Judd Gregg said.
The Financial Times is the best newspaper in the world--but once every three months its "How to Spend It" supplement turns me, for a week, into someone who believes that a just social order would have everybody paid identical hourly wages and dressed identically--preferably in overalls--with kerchiefs over their hair:
Alex Bertram of ING Capital appears to share my view:
FT.com / Comment & analysis / Letters - You have disrupted the cosmic order: Mr Alex Bertram: Sir, Ken Lotery questions your editorial judgment (Letters, November 8/9). I go one step further. I place the Financial Times wholly responsible for the entire global financial and economic meltdown... you published a magazine called How to Spend It. Such reckless adulation of consumption was bound to disrupt the cosmic order. Long after its passing, we will remember it as fondly as such folly as "Reinvention of risk management", "Decoupling", and "The end of the business cycle".
Thank you FT, you went and jinxed it for all of us.
Alex Bertram,
Vice-President Infrastructure Advisory,
ING Capital.
He makes his play for the Stupidest Man AliveTM crown:
Robert Samuelson: As The Rich Get PoorerMaking the rich poorer doesn't make everyone else richer: For years, we've debated rising economic inequality. On one side, liberals denounce it as unjust. Redistribute wealth to the poor and middle class, they say. On the other, conservatives minimize its importance...
Not true: for years conservatives have denied its existence.
What matters most [conservatives say] is overall economic growth, they retort. Well, the conjunction of the presidential campaign and the financial crisis is giving the debate a curious twist. Liberals have triumphed politically; soaking the rich has become more acceptable. But conservatives may have won the intellectual argument; making the rich poorer doesn't make everyone else richer...
Making the rich poorer by deregulating financial markets so that a bunch of overleveraged Wall Street firms fail at risk management and cause a financial crisis doesn't make anybody richer. Making the rich poorer by taxing them more and devoting the money to debt reduction, infrastructure, and education does make everybody else richer--as we learned in the 1990s.
Robert Samuelson goes on:
Thousands of well-paid investment bankers, traders, portfolio managers and securities analysts are losing their jobs... executive compensation may be similarly squeezed. Profits are down; the political climate is hostile.... Judged only by economic inequality, the financial crisis is a godsend. It will probably narrow the gap—though still vast—between the rich and everybody else. But what good will that do? Economic inequality also declined in the Great Depression. The country wasn't better off. By and large, the poor aren't poor because the rich are rich. They're usually poor for their own reasons: family breakdown, low skills, destructive personal habits and plain bad luck.
The presumption implicit in the criticism of growing economic inequality is that society's income is a given and, if the rich have less, others will have more.... The larger truth is that much of the income of the rich and well-to-do comes from what they do. If they stop doing it, then the income and wealth vanish. No one gets it. It can't be redistributed because it doesn't exist. Everyone's poorer...
The income and wealth of Wall Street has vanished not because the "rich" of Wall Street have stopped doing what they do, but because the too many of the "rich" of Wall Street did do what they do: it is their failures of risk management that have made everybody poorer.
Every column of Robert Samuelson that Newsweek and the Washington Post publish hastens their demise--and harms the reputation of all their reporters.
Matthew Yglesias: As we saw a week ago, Doug Holtz-Eakin, speaking on behalf of John McCain, said that the inability of the number of people graduating from college to keep pace with the growth in the skills premium for college graduates is the sole cause of growing inequality. As I said at the time, this is wrong. The evidence is clear that other things are going on. But it’s also clear that this is one factor. And given that it really is an important part of the puzzle, and that the McCain team thinks it’s the entire puzzle, you’d think that John McCain would have a real higher education policy. But he doesn’t. Until now. But today, via Steve Benen, McCain unveils his “plan” for affordability:
As president, Mr. McCain would take a bully pulpit approach to student aid, aides say. Rather than propose any new federal money, he would jawbone and publicly try to coax colleges to slow their rate of tuition increases using the federal tax exemptions they receive as leverage….
Mr. McCain is also calling for the Pell Grant, which assists low-income students, to be high enough to cover in-state undergraduate tuition…. Mr. McCain, however, has not proposed any new money for the Pell program.
Long story short, I think we can expect inequality to keep growing.
David Frum has important news: cutting marginal tax rates on the rich and running up huge budget deficits that drain the pool of national savings is NOT repeat NOT the way to get strong, balanced, equitable economic growth in America:
>The fundamentals are not sound: **David Frum:** It’s natural for political professionals to emphasize the importance of campaign tactics and events.... Tactics and events are what they are paid to create and manage. And sure, at the margin, tactics and events make a difference... even prove decisive.... But most presidential elections are not that close—and in these more normal elections, what matters most are real-world events and the candidates’ responses to them.
>Sarah Palin could peel the bark off Joe Biden Thursday night. That won’t alter the harsh financial news of the week—or much compensate for John McCain’s feckless response to it.... The core difficulty McCain faces in 2008 is this: Even before the Wall Street crisis, the American economy in the Bush years had under-performed from the point of view of the average worker. While national output rose strongly, most of the gains went to the top five percent of American households.
>We can debate the reasons the bottom 95 percent did so poorly. I myself believe that lax immigration policies have been a crucial and under-discussed part of the story. But whatever the reason, most Republicans have been unprepared even to acknowledge these facts.... They insisted that the Bush economy was “the greatest story never told.” The failure to acknowledge facts was also an indispensable precondition to the Wall Street crisis. If in 2005 or 2006 you warned a senior Republican that incomes were stagnating, he might very well have answered: “Those figures have to be wrong. Look—consumption keeps rising!” He’d have been right about that. As incomes stagnated, Americans financed their lifestyles by borrowing against their apparent increases in wealth, as measured by the rising values of their houses. That was the problem! But maybe not as big a problem as another piece of the “greatest story never told”: the increase in home ownership beyond the traditional range of 60 percent of households to record highs of 67 percent or more. That last seven percent consisted of beneficiaries of the new subprime mortgages, which omitted down payments and other indicia of credit-worthiness.
>It was because Republicans had difficulty assimilating these facts that so many responded to crisis by insisting that the “fundamentals are sound.” To have perceived that the fundamentals were not sound would have entailed rethinking the experience of the past half-decade. Nobody was equipped to do that—John McCain least of all. In the crisis, instead, McCain fell back on his instinct to hunt for malefactors and villains. That hunt did not lack for quarry. Yet it also was bound to miss the real story of this economy—and this election
Casey's may be the stupidest argument for McCain I have ever seen that is not clearly false.
Outsourced to Kathy G.:
The G Spot: The fine line between clever and stupid: In today's Wall Street Journal, University of Chicago economist Casey Mulligan has an op-ed entitled "Vote Republican if You Want Equal Pay." Mulligan looked at Census data on women's pay relative to men's in every presidential administration from LBJ to the present. And lo and behold, he found that women's relative pay increased far more under Republican presidents than Democrat ones.
What to make of this? Well, I for one am thrilled that, after all these years, University of Chicago economists and the Wall Journal editorial page are demonstrating such a touchingly fervent devotion to the cause of women's pay equity -- that's an unexpected development, to say the least. And the piece certainly stands squarely in the grand tradition of the cutely counterintuitive op-ed -- no doubt about that. But, to paraphrase David St. Hubbins in This Is Spinal Tap, there's a fine line between clever and stupid. And in this piece, Mulligan has crossed it.
For decades, the Republicans have proved themselves time and time again to be no friends of women's pay equity. This, after all, is the same party that thought appointing Clarence Thomas as head of the Equal Employment Opportunity Commission was a swell idea. It's also the party that appointed Thomas and the other four Supreme Court Justices who, in the recent Lilly Ledbetter case, voted to severely restrict women's ability to sue their employers for pay discrimination. And it's the party that, earlier this year, defeated the Ledbetter Fair Pay Act, a law that would have overturned that Supreme Court decision and restored the right to file gender-based pay discrimination lawsuits. John McCain and the vast majority of Republican senators and Congressional representatives strenuously oppose the Ledbetter Act.
Given the Republicans' strong anti-equality record, Mulligan's finding that Republican presidents increase pay equity for women surely demands an explanation. What is the causal mechanism here? But curiously, Mulligan is entirely silent on this point. He offers no explanation for these findings -- not even the usual blather about how Republicans let the magic of the market do its thing.
There's a good reason why Mulligan is so coy here. Economists who have studied the pay gap, such as Francine Blau and Lawrence Kahn, have noted that the closing of the gap is a function of two trends: rising earnings for women, and declining earnings for men. In the words of the economist Richard Freeman, beginning in the mid-1970s and continuing to the present, "An economic disaster has befallen low-skilled Americans, especially young men." As well-paying blue collar jobs became increasingly scarce, men's wages began to decline. At the same time, women were becoming increasingly well-educated and moving into previously male-dominated fields and professions in growing numbers.
As Larry Bartels has pointed out, the economic prospects of Americans at the lower end of the income scale fare much better when Democrats are in charge, and much worse under the Republicans. And this, I think, is the explanation as to why women's relative pay increases more during Republican administrations. It's not that Republican economic policies help women all that much -- it's that they hurt working class men. A lot.
In short, Mulligan's findings can be explained not by some covert feminist agenda on the part of the Republicans, but by their time-honored tradition of enthusiastically screwing over the working class. And though the outrageously specious and disingenuous nature of Mulligan's argument may be infuriating, but he's certainly not alone in pushing this brand of Republican faux feminism.
From their empowerful female vice presidential candidate who's a fervent believer in forced childbearing for 12-year old rape victims; to the many conservative commentators who in the blink of an eye have become Susan Faludi-like scourges of sexism in the media; to the Christian right leaders who, in their newfound refusal to condemn working mothers and teen pregnancy, have embraced the virtue of nonjudgmental tolerance with an ardor that would put the most urbane Manhattanite to shame -- it's all of a piece. Feminism lite -- it's the flavor of the month. You go girl!
For sheer unadulterated chutzpah, no one will ever beat the wingnuts. Their bogusity knows no bounds.
Which Eight Years Did McCain Prefer?: The Bureau of Labor Statistics has released its monthly employment data, and the picture is bleak: the American economy lost 84,000 jobs in August, and the employment rate jumped to 6.1%, the highest in five years. While productivity is up 4.3% since last year (people are working harder with better, more efficient technology), real wages have sagged, dropping .4%.... Take a look at the comparison in job growth from Bush’s presidency to the eight years before George W. Bush...
Stagnation nation - Paul Krugman - Op-Ed Columnist - New York Times Blog: Some clarification about just why the latest income/poverty/insurance report was so bad. There was a significant rise in income among Americans over 65 — those who get much of their income from Social Security. In fact, they’ve been seeing income gains all through the Bush years. But working families haven’t.
The picture... shows the median real income of households with the head of household aged 35-44. I’m using that as a proxy for working-age households in general, which the Census unfortunately doesn’t give in an easy-to-use form in its historical tables. As you can see, income has its ups and downs, but in the past each peak was higher than the last one. That was even true, barely, in the energy-crisis-ridden 1970s. But in this decade, incomes first fell in the recession, then basically flattened out at a level well below its previous peak. That’s really a miserable performance.
Statement From Senator Obama on the Census Income, Health Insurance and Poverty Numbers
Today’s news confirms what America’s struggling families already know – that over the past seven years our economy has moved backwards. We have now lived through first so-called economic ‘expansion’ on record where typical families saw their incomes fall, and working-age households lost more than $2,000 from their paychecks. Another 816,000 Americans fell into poverty in 2007 – including nearly 500,000 children – bringing the total increase in Americans in poverty under President Bush to 5.7 million. And on Bush’s watch, an additional 7.2 million Americans have fallen into the ranks of the uninsured. This is the failed record of George Bush’s economic policies that Senator McCain has called ‘great progress.’ While Senator McCain is promising four more years of the failed Bush economic policies, my economic plan will restore bottom up economic growth that benefits all Americans by cutting taxes for working Americans, providing affordable, accessible health care for all, and investing in new energy, education and infrastructure so we can create millions of good jobs here in America,” said Senator Barack Obama.
Highlights from the Census report:
Between 2000 and 2007, median income for working age households fell by $2,176. When elderly households are included, median income declined by $324 over the same period. This is the first economic expansion on record where typical households have seen their incomes decline. Under the Clinton Administration, median household income increased by $6,200.
African American household income fell by $1,804 between 2000 and 2007; Hispanic household income fell by $1,256 over the same period
Based on declining wages over the first 7 months of this year, median household income is likely to fall by at least $700 in 2008, bringing total income lost for the typical household under the Bush Administration to over $1000.
An additional 816,000 Americans fell into poverty in 2007, bringing the total increase in Americans in poverty under President Bush to 5.7 million.
500,000 children fell into poverty in 2007. There are 1.7 million more children living in poverty than in 2000.
Between 2000 and 2007, an additional 7.2 million Americans have fallen into the ranks of the uninsured. This is the largest increase in the number of people without health insurance of any Presidential Administration on record.
The share of Americans with private health coverage fell from 67.9% in 2006 to 67.5% in 2007. This share has fallen every year that President Bush has been in office, declining a total of 5 percentage points since 2000.
940,000 African Americans have lost health insurance since 2000, along with 3 million Hispanics
Income Concentration at Highest Level Since 1928, New Analysis Shows: Average pre-tax incomes in 2006 jumped by about $60,000 (5.8 percent) for the top 1 percent of households, but just $430 (1.4 percent) for the bottom 90 percent, after adjusting for inflation, according to a new update in the groundbreaking series on income inequality by economists Thomas Piketty and Emmanuel Saez. Their analysis of newly released IRS data shows that in 2006, the shares of the nation’s income flowing to the top 1 percent and top 0.1 percent of households were higher than in any year since 1928...
How to reform a winner-takes-all economy: Two of President George W. Bush’s economic goals... will be to convince anxious American workers that they should not lose faith in an open, global economy and that they should support tax reform that moves the US closer to eliminating all taxation on investment. What must be recognised, however, is the growing degree to which these two policy goals are in conflict. While the president is essentially right to stress that we cannot turn our back on open markets and globalisation, his rhetoric and policy framework ignore the increasing winner-takes-all and loser-loses-all tendencies in the US economy.
Last year, the wealth of the richest 400 Americans climbed to nearly double the 1982 level as a share of US gross domestic product; but we also saw those suffering losses taking steeper falls. Jacob Hacker of Yale University has found that when US families suffer a drop in income, they face 40 per cent declines on average. At the same time, Lawrence Katz, the Harvard economist, has documented the increasing polarisation in the US labour market as earnings grow at the high end while opportunities for middle-class jobs dry up.
Such extreme gains and losses are often due to significant differences in education or skill but as Robert Shiller, the Yale economist, has written, the unpredictability, speed and vastness of global markets have also enhanced the role of luck, or slight timing advantages, in determining who falls into the winners or losers circles.
Consider twin brothers with equivalent education and work histories, who each took good jobs six years ago--one, fortunately, with Google, the other, less fortunately, with Lucent. Since the investment community was still betting on Lucent in early 2000 and Google was just getting established, it is hard to say that skill led one worker to $2m in stock options and the other to a pink slip and a job retraining programme.
Even though such differential outcomes can seem unfair to many, this is a price we gladly pay for a free market economy. Our progressive tax system has been part of the way the US has balanced the desire for a free economy with the values of equity. Yet, eliminating taxation on investment income exacerbates--not moderates--winner-takes-all outcomes.
Consider our brothers. If the one at Lucent finds a new, $60,000 a year job, he could pay about 25 per cent in federal taxes (including payroll taxes). Yet, under Mr Bush’s tax policy, if his twin at Google can find a solid 6 per cent return investing his $2m, he can make at least $120,000 a year while paying a lower 15 per cent tax rate. If we move closer to Mr Bush’s vision of zero taxes on dividends, capital gains and inheritances, the Google twin could watch his gains accumulate tax-free year after year and then pass on his wealth to an heir, tax free.
Moving the US tax code in this direction is wrongheaded on both economic growth and value grounds. Progressive taxation is critical to marshall the resources to ensure that those who end up at Lucent or Delphi have the support and education to get second and third chances in the global economy. Without a greater cushion against falls in the global economy, workers may opt to take less risk on their future, just as entrepreneurs would risk less if they thought a single bankruptcy would land them in debtors prison.
Furthermore, a tax system that eases the Google’s tax-free wealth accumulation but forces his brother to pay higher taxes on income earned through labour betrays American values that honour the hard work of the middle class over policies that perpetuate an economic elite. A better tax reform plan would prevent the most privileged Americans from paying lower taxes on their investment than typical families pay on their wages, while encouraging savings and wealth creation for struggling workers. We could start by ending our current system of giving those in the highest tax brackets more than twice the tax deduction of typical workers and creating a flat tax incentive for savings – a 30 per cent credit for everyone. More important, we should provide automatic matching credits for moderate income workers to save--essentially creating a universal 401(k) plan for retirement savings accounts for all Americans.
So if the president really wants to build support for greater openness in the economy, he needs to focus on tax reform that expands the winners circle, not reform that expands the current winners fortunes.
The writer, a former national economic adviser to President Clinton, is a senior fellow at
the Center for American Progress and author of The Pro-Growth Progressive (Simon &
Schuster)
I was going to comment on this piece that Brad Setser had written:
RGE - Inequality in America: Unions in the American manufacturing sector used to have the bargaining power to secure a middle class wage for their members. Not any more. And no one else -- apart from corporate CEOs, hedge fund managers and star athletes -- seems to have all that much bargaining power either.
The chart that accompanies Justin Lahart and Kelly Evan's report on voter angst in Pennsylvania is worth the price of the Saturday Wall Street Journal.... It shows the enormous gulf between the income of the top 0.1% of the income distribution and the rest of the population. It also shows that family income, adjusted for inflation, has fallen by 4% for the bottom 90% of the population while rising 22.2% among the top .0.01%....
I am not sure than Mankiw's explanation -- a fall-off in educational achievement and slower growth in the supply of highly-skilled workers -- is sufficient. The top 5% of the American families are all reasonably well-educated. But even among the 5%, almost all the income gains have been concentrated at the top. A fall-off in educational achievement can perhaps explain why the real income of the top 10% of American families is rising (a bit) while the income of the bottom 90% isn't. But it cannot explain increasingly inequality among those at the top.
It isn't that hard to see why so many Americans think the US is on the wrong track. Most Americans didn't benefit from the expansion of the past few years. And now the economy isn't expanding...
Republicans had ideological majorities in Congress from 1981 through 2006 (at least). Republicans held the presidency for all except the eight Clinton years. The policies proposed by the executive, enacted by the legislature, and implemented by the courts over the past generation are Republican policies.
And, to Phil Gramm, these policies must have worked. Hence the cognitiv dissonance created by the fact that people appear to be dissatisfied--and the "nation of whiners" quote: it's an attempt to make sense of the fact that the policies must have worked and the fact that the policies do not seem to be popular.
Bill Scher:
Bill Scher: Phil Gramm Is Conservatism - Politics on The Huffington Post: Phil Gramm thinks that the economy is wonderful and those that feel otherwise are mistaken. This is does not make Gramm uniquely callous. It just makes him a conservative... conservatives... insist the economy tastes great, so shut up and eat it....
Larry Kudlow... "The U.S. economy is hitting on all cylinders as 2004 passes into 2005... amidst all this economic good news," a "declinist rant" was being perpetrated by "big-media." 15 months later... "It's always amazing to listen to conventional demand-side economic pundits and mainstream reporters who try as hard as they can to minimize the excellent performance of the American economy ever since lower marginal tax-rate incentives were put into place almost two-and-a-half years ago.... Of course, you can't please the worrywarts."
In December 2005, Fox News' Fred Barnes also pointed a finger at "the media" for marring the pretty picture: "...gas prices have fallen, I think new home sales, maybe it was old home sales, anyway, one of them set a record last month. And, and this 4 percent growth has been going on month after month after month after month. It's really an extraordinary economy. And yet, when you look at the polls you're so fond of, they show that the American people think they're fine, but that the rest of the people in the country are doing poorly economically. Why is that? ... Because, obviously people know how they're doing, but they have to rely on the media to tell them how the rest of the economy is outside their neighborhood. And the media has been entirely negative."...
[J]ust before the 2006 congressional elections, Barnes lamented... "The economy, strong as it is, hasn't produced a feeling of prosperity."...
June 2007... George Will concluded that Democrats had a "Prosperity Problem," based on Will's world of cherry-picked stats: "In the 102 quarters since Ronald Reagan's tax cuts went into effect more than 25 years ago, there have been 96 quarters of growth. Since the Bush tax cuts and the current expansion began, the economy's growth has averaged 3 percent per quarter, and more than 8 million jobs have been created. The deficit as a percentage of gross domestic product is below the post-World War II average. Democrats, economic hypochondriacs all, see economic sickness."...
[I]n January... David Gitlitz could only explain the looming recession on something other than economic reality: "If the U.S. is capable of talking itself into an economic downturn, we may be on the cusp of the first recession in history caused by a bad mood ... it's not difficult to understand why the economic mood of the country is so bad. It's nearly impossible to avoid the media's constant deluge of economic negativism..."
This is conservatism. The dismissal of economic burdens from others making less money than you. The belief that an ideal economy can thrive with a small boat of winners and a giant sinking ship of losers. The insistence that your economic dissatisfaction is illegitimate, and can only be explained by a brainwashing from the media or politicians.
Gramm's only unique remark was expanding the blame beyond "big media" and "the Democrats" to ... everybody. Calling America "a nation of whiners" only made glaring the fundamental elitism of conservatism.
But make no mistake. Gramm is conservatism.
It is precisely his attitude that has shaped conservative economic policies throughout the Bush Era. Massive tax giveaways to those earning more than $250,000. No investment to make education, clean energy and health insurance affordable to all citizens and businesses. No effective oversight of irresponsible corporations plundering the middle-class.
With the Bush Era ending, the choice is ours whether we want to continue being condescended to by conservatism in the coming years, or decide it is time for a progressive vision that puts our government and economy back in our own hands.
Megan McArdle: Department of kind of awful statistics: I should probably just shutter the blog and redirect it to Ta-Nehisi Coates, but he keeps coming up with neat stuff. This on black illegitimacy. The stunning statistic that 70% of black babies are born out of wedlock is driven, to be sure, by the fact that many poor black women have a lot of children. But it turns out it is also driven by the fact that married black women have fewer children than married white women.
Ta-Nehisi suggests a reason for this that makes sense to me:
I'm effectively--if not legally--married. Been with the mother of my eight year old son for ten years now. More on this later. (I promise!) But basically when he was born I felt that he was the bond between us. In other words, he literally was the marriage ring. We'd both love to have more kids, but we simply can't afford it. Furthermore, we don't have particularly wealthy parents to fall back on. I think that's the situation a lot of married black folks find themselves in. They simply feel that they can't have more kids.
It's well known that the black middle class has a lot less in the way of assets than whites of similar income levels--hardly surprising, given the legacy of generations of discrimination and poverty. But that also means that things that a lot of white middle class people take for granted--like help with a down-payment on a house when you have your first kid--are less available. Middle class black parents have less in the way of a parental safety net than their white equivalents, so they're less likely to have a second kid.
So even though the statistic is basically correct--as Ta-Nehisi says, "Even if married black parents had kids at the rate that white married parents did (or better yet, Hispanic parents), black babies would still make up a disproportionate share of kids borne out of wedlock"--it's still worth interrogating, because the picture is considerably more complex than is generally implied.
I read this, and I cannot help but be reminded of the low comedy of Genesis 2:18-24:
And the Lord God said, It is not good that the male earth-creature should be alone; I will make him an help meet for him. And out of the ground the Lord God formed every beast of the field, and every fowl of the air; and brought them unto the earth-creature to see what he would call them: and whatsoever the earth-creature called every living creature, that was the name thereof. And the earth-creature gave names to all cattle, and to the fowl of the air, and to every beast of the field; but for the earth-creature there was not found an help meet for him.
And the Lord God caused a deep sleep to fall upon the earth-creature and he slept: and he took one of his ribs, and closed up the flesh instead thereof; And the rib, which the Lord God had taken from the earth-creature, made he a woman, and brought her unto the the earth-creature.
And Adam said, This is now bone of my bones, and flesh of my flesh: she shall be called Woman, because she was taken out of Man. Therefore shall a man leave his father and his mother, and shall cleave unto his wife: and they shall be one flesh...
And respond that:
[H]oly Matrimony... is an honourable estate, instituted of God in the time of man's innocency... which holy estate Christ adorned and beautified with his presence, and first miracle that he wrought, in Cana of Galilee; and is commended of Saint Paul to be honourable among all men: and therefore is not by any to be enterprised, nor taken in hand, unadvisedly, lightly, or wantonly... like brute beasts that have no understanding; but reverently, discreetly, advisedly, soberly, and in the fear of God; duly considering the causes for which Matrimony was ordained:
It was ordained for the procreation of children, to be brought up in the fear and nurture of the Lord, and to the praise of his holy Name...
It was ordained for a remedy against sin, and to avoid fornication; that such persons as have not the gift of continency might marry...
It was ordained for the mutual society, help, and comfort, that the one ought to have of the other, both in prosperity and adversity...
It's none of my business, I know. But I cannot help but think that people should be married and should have weddings, and say: "Propose, Mr. Coates, propose! At the very least it is a great excuse for a party--pot-luck receptions at home are at least as fun as the other kind!..."
Like many people, I am still somewhat puzzled and confused by Christian Broda and John Romalis:
China and cheap imports: Champions of equality: The U.S. presidential campaign has sometimes sounded like a contest to prove who despises trade the most.... This public debate has taken for granted that inequality... has risen as a result of globalisation. But has it really?.... How rich you are depends on two things: how much money you have and how much the goods you buy cost. If your income doubles but the prices of the goods you consume also double, then you are no better off. Unfortunately, the conventional wisdom on US inequality is based on official measures that only look at the first....
Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in America. Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994 – 2005..... Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart!
Poor families in America spend a larger share of their income on goods whose prices are directly affected by trade... the higher your income, the more you spend on services, which are less subject to competition from abroad....
This trend can partly be explained by China. In U.S. stores, prices of consumer goods have fallen the most in sectors where Chinese presence has increased the most.... The expansion of superstores – like Wal-Mart and Target – has also played an important role in accounting for the inflation differentials between rich and poor. Superstores sell the same products as traditional shops at much lower prices....
What is really worrying is that, despite these facts, we have had a backlash against China and Wal-Mart in America.... We need to remind politicians and the public that the gains from trade are broadly shared. Every time the discussion over trade is diverted towards the problems facing specific producers, be they farmers in France or textile workers in the U.S., we miss the central point. Trading allows everyone, and especially the poor, to buy things that they could not otherwise afford...
Let's run through the Heckscher-Ohlin logic:
Set the prices of luxuries as numeraire. Then the relationship between changes in log wages w and profits log r depends on changes in the log price p of necessities and on the shares of capital in the production of luxuries and necessities according to:
This means that the change in the wages of workers as a function of the change in the prices of necessities will be:
The real incomes of wage-earners depend not just on what happens to wages but what happens to the prices of things they buy, and so if a share θw of their income is spent on necessities:
And here's the catch. The necessities-share θw of wage-earners has to be less than one, but the change in log wages is greater than the change in log prices. So wage earners' real income goes in the same direction as necessities prices--no matter how fast the prices of necessities are falling:
When Broda and Romalis assert that trade is causing the prices of tradeable necessities to fall rapidly, they are either (a) breaking the H-O framework in some way, or (b) implicitly asserting that capital is the scarce factor in the United States and thus the factor of production whose returns are reduced by globalization.
It is not clear to me how they propose to break the H-O framework. And I do not find (b) plausible.
I prefer http://www.j-bradford-delong.net/2008_pdf/20080530_stolper to break the H-O framework in a Smithian division-of-labor direction: asserting that the scarce factors that lose from trade are organizational and technological expertise and that there is substantial implicit and explicit cross-ownership of factors that together make trade nearly win-win. But I don't see Broda and Romalis going there...
in recent years, Congress soured on trade. Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, laments, "The consensus is gone." Even some economists have begun to suggest that trade is playing a major role in widening the income gap between rich Americans and poor -- especially as more of our imports now originate in low-wage countries...
All discussions of the victims of trade ignore the considerable benefits: the exports we sell and the lower prices for consumers at home. Since poorer Americans spend a higher proportion of their incomes on low-wage imports (shoes from China, for instance), trade can also be seen as favoring the less well off.
Who are these economists who think that imports from low-wage countries are exacerbating US inequality? Lowenstein doesn't say. He doesn't even spell out their argument - maybe it's meant to be self-evident that poor Americans are the same as the "minority of Americans in threatened industries" whom Lowenstein says are the only people who benefit from protectionism. I might be misreading the article, but the impression I get is that Lowenstein thinks his anonymous economists are wrong, and that globalization doesn't exacerbate inequality within the US. The problem is, he never quite comes out and make that case. My gut feeling is that globalization, at the margin, decreases inequality between countries while slightly increasing inequality within countries.... A smart take on trade and globalization might well involve going forwards with the Doha round while at the same time doing a lot of work on reinforcing a social safety net which is currently failing a lot of blue-collar Americans. Just scaling back the protectionist farm bill would free up an enormous amount of money to spend on retraining, wage insurance, and other means of softening the blow to globalization's losers. And reducing agricultural tariffs would help reduce food inflation, too.
But of course these things don't fall cleanly on the left-right political spectrum that Lowenstein talks about.... The big problem is electoral politics: no one wants to antagonize the sugar and orange-juice lobby in Florida, or the corn lobby in Iowa. This isn't a case of left-wing politics versus right-wing politics, it's a case of economics versus politics. And, as usually happens in such cases, politics, at the moment, is winning...
Dani Rodrik is puzzled by--various of his past selves, I guess:
Dani Rodrik's weblog: Stolper-Samuelson for the real world: Warning: This is a long and wonkish entry, aiming at self-comprehension, and the product of one too many long plane ride. The Stolper-Samuelson theorem... [has] a version... that is remarkably general and powerful. It says that regardless of the number of goods and factors, at least one factor of production must experience a decline in real income from trade as long as trade induces the relative price of some domestically produced good(s) to fall (and as long as the productivity benefits from trade are restricted to the traditional, inter-sectoral allocative efficiency improvements, about which more later).... The stark implication is that someone will lose, even if the nation as a whole becomes richer.... The loser in question could be the wealthiest group in the land. But if the [imported] good in question is highly intensive in unskilled labor, there is a strong presumption that it is unskilled workers who will be worse off. And before you curse economic theory, note that this is really accounting--not economics at all.
I have been thinking about this result in connection with Broda and Romalis's remarkable finding that:
the rise of Chinese trade has helped reduce the relative price index of the poor by around 0.3 percentage points per year. This effect alone can offset around 30 percent of the rise in official inequality we have seen over this period.
The puzzle here, at least on the face of it, is that one would expect China's trade to have had the largest price impact on labor-intensive goods. And if so, wages of unskilled workers must have fallen even more, along the lines of the Stolper-Samuelson logic sketched out above. Can we still say that trade with China has helped reduce U.S. inequality?...
[If my] line of reasoning is correct, the main threat to workers is not a Stolper-Samuelson type permanent compression in wages, but the more temporary (and limited) wage losses incurred by displaced workers. This is the kind of problem that wage insurance is ideally suited for.
There is an easy way to cut through this palaver. Forget the baseline. Just think about three numbers: How much would either candidate collect in taxes as a share of the Gross Domestic Product? How much is government likely to spend? And, how much would they have to cut that spending to keep the national debt from ballooning.
TPC estimates that in 2013, Obama would collect revenues of 18.2 percent of GDP. McCain would bring in about 17.8 percent. Spending that year would be about 19.5 percent, according to the Congressional Budget Office, assuming the Iraq war will be winding down.
The key point, again: because of all those middle-class tax cuts in the Obama plan, he collects only 0.4% of GDP more in taxes than McCain. The tax collection comes from different people: lower and middle-income Americans would be substantially better off under the Obama plan. But where is the money for health care reform?
This is why I think that Obama ought to be proposing a big oil tax, with substantial parts of it used to pay for people's FICA and extend the EITC phaseout range. This:
raises revenue, and puts us in a much better position for long-run growth
improves national security by reducing our long-run dependence on foreign oil from unstable parts of the world
helps on the global warming front
makes America a less unequal country
I think that that the Democrats ought to offer America a choice between:
Paying higher gasoline prices but also paying less in Social Security taxes
Continuing to leave our national and economic security hostage in the hands of unstable political-military events in the Middle East--which requires that we spend a fortune continuing to project a huge amount of military power into the Persian Gulf for essentially forever.
Will Wilkinson / The Fly Bottle » Blog Archive » Liberaltarianism: Back the Future: Here are the sort of political/economic thinkers whose substantive views I find most congenial: Friedrich Hayek, Milton Friedman, James M. Buchanan. If I tell most highly-educated people that these are the thinkers whose views of desirable institutions are most like mine, they might infer that I am some kind of rabid libertarian ideologue. But when I actually defend something like the arguments for an economic safety net each of these giants of libertarian thought actually set forth, lots of libertarians accuse me of not really being libertarian at all. And many liberals act surprised, as if I’m being saucily iconoclastic by wandering so far off the reservation. I can tell them that Hayek was actually in favor of a guaranteed minimum income and that Friedman basically invented the idea behind the EITC, but they’ll still think I’m some kind of congenial squish. But what I am is a market liberal just like Hayek, Friedman, and Buchanan — the same intellectual role models who make me a rabid libertarian ideologue. So, which is it?
Frankly, “liberaltarianism” and “progressive fusionism” don’t really amount to much beyond what Hayek, Friedman, and Buchanan thought anyway. So the fusionism here isn’t really a fusion of anything. It’s just seeing our way back to a pre-existing economically literate political liberalism.
Here’s my conjecture about why this now looks more like an attractive position than it might have a few years back.
The 20th century libertarian-conservative alliance was based on anti-communism/socialism. The reasonable, sophisticated consequentialist pragmatism of the great 20th century market liberals seemed an insufficient bulwark against the slippery slope from the liberal, capitalist welfare state to full-on illiberal, totalitarian socialism. (Indeed, Hayek himself made the slippery slope argument powerfully, though unsoundly.) So there was a good deal of motivation for radical anti-socialists to coordinate around strongly categorical prohibitions against state coercion.
Misean economics, disinfected of the open-minded empirical consequentialism of Mises’ Liberalism, and filtered through Ayn Rand and Murray Rothbard’s peculiar views of rights and coercion delivers a powerfully moralized brief for capitalism that calls into question even taxation for the purpose of financing genuine public goods. That Rothbardians and Randians have wasted so much time fighting with each other on the question of the minimal state versus anarcho-capitalism obscures their unity on a rights-based bulwark against the slide from the welfare state to socialism. Sadly, “libertarianism” has become identified rather strongly with this ideology — an ideology some of the thinkers most strongly identified with libertarianism, like Hayek and Friedman, never shared.
The death of socialism as a viable competitor to the liberal-capitalist welfare state makes continued slippery-slope-to-socialism thinking look densely anachronistic. Other liberal welfare states, like the UK, Sweden, Denmark, Australia, New Zealand, etc., have moved in a rather more market-liberal direction, becoming rather less of a soft-socialist middle-ground between the American model and full-on economic socialism. The question these days is whether the U.S. will have the good sense to adopt more rational market-based old-age pension policies, like Sweden or Australia, or lower corporate tax rates to a level more in line with the rest of the wealthy world. Slightly higher personal tax rates and slightly more redistribution is a possibility, but a slide into socialism just isn’t on the table. In this context, the negative income tax looks much less like a dangerous concession to the world-historical forces of evil.
Meanwhile, with the obsolescence of the anti-communist alliance with conservatives, many libertarians have sloughed off much of their previously tactically useful sympathy for socially conservative initiatives. Freed to be full-on social liberals, many libertarians are left sensing a much deeper cultural affinity for the left than the right. And this leads naturally to seeing more clearly their ideological affinities with welfare liberals. And then you read thinkers like Hayek, Friedman, and Buchanan, and you think: Oh, yes. This is extremely sensible. And now that the welfare-liberal elite has become rather more economically literate and is no longer sighing over five year plans, there is no reason to think they cannot find this sensible, too.
So that’s where I’m at. An old-fashioned market liberal who thinks Hayek, Friedman, and Buchanan get it right, and who thinks Rawlsian welfare liberals should be able to recognize themselves in these thinkers.
Anybody have a report on this morning's EPI income inequality event?
EPI Ideas: Rising Economic Insecurity: May 29, 2008 10:00 AM - 1:00 PM. Please join us on Thursday, May 29, for an Economic Policy Institute forum with noted authors, journalists and thinkers who will discuss their latest findings on the current challenges to American families' economic security.
Moderator: Louis Uchitelle. Panelists: Jacob Hacker, Elisabeth Jacobs, Peter Gosselin, Brink Lindsey.
Steven Greenhouse, The Big Squeeze. Kim Bobo writes
Dispatches from the Workplace: The Big Squeeze: Steven Greenhouse[']... The Big Squeeze: Tough Times for the American Worker is the best book to be written on the crisis of low-wage work.... The book begins with the stories of workers like Mike Mitchell, who was fired after being injured on the job in order to minimize worker’s comp bills, and Dawn Eubanks, who is required to work “off the clock” in order to keep her job. Then there's John Arnold, who works under a two-tier contract earning a little more than half what colleagues working right next to him earn, and Antonia Lopez Paz, who isn’t allowed to leave her poultry line even to go to the bathroom. Finally we meet retiree Don Jensen, who has had to take a $10 an hour job as a bank teller after his retirees’ health [cost] went from $180 to $8,280 a year, and Myra Bronstein, who was required to train her own replacement from India in order to qualify for severance.
Greenhouse then provides an overview of what’s going on for workers:
One of the least examined but most important trends taking place in the United States today is the broad decline in the status and treatment of American workers—white-collar and blue-collar workers, middle-class and low-end workers—that began nearly three decades ago, gradually gathered momentum, and hit with full force soon after the turn of this century. A profound shift has left a broad swath of the American workforce on a lower plane than in decades past, with health coverage, pension benefits, job security, workloads, stress levels, and often wages growing worse for millions of workers...
And my copy of Peter Gosselin's High Wire just arrived yesterday...
Of the Stationary State: Hitherto [1848] it is questionable if all the mechanical inventions yet made have lightened the day's toil of any human being. They have enabled a greater population to live the same life of drudgery and imprisonment, and an increased number of manufacturers and others to make fortunes. They have increased the comforts of the middle classes. But they have not yet begun to effect those great changes in human destiny, which it is in their nature and in their futurity to accomplish. Only when, in addition to just institutions, the increase of mankind shall be under the deliberate guidance of judicious foresight, can the conquests made from the powers of nature by the intellect and energy of scientific discoverers, become the common property of the species, and the means of improving and elevating the universal lot.
The "[1848]" in square brackets was added by W.J. Ashley in 1909 to indicate that that that first sentence, with its "Hitherto," had been in the book since its first 1848 edition. Mill's time references, Ashley explained, were:
occasionally a little bewildering: a "now" in his text may mean any time between 1848 and 1871. In every case where it seemed necessary to ascertain and to remind the reader of the time when a particular sentence was written, I have inserted the date in the text in square brackets...
Political Economy came out in seven editions: 1848, 1849, 1852, 1857, 1862, 1865, and 1871. In none of them did Mill himself think that it was worth changing "hitherto" to "formerly."
If you are in DC the week after next on May 29, this looks very useful:
Economic Policy Institute forum.... Breakfast & Registration: 10:00 - 10:30 AM. Presentations & Discussion: 10:30 AM - 12:30 PM. Book signing: 12:30 - 1:00 PM
Moderator: Louis Uchitelle, The New York Times...
Panelists:
Jacob Hacker, Professor of Political Science, Yale University, Institution for Social and Policy Studies; Elisabeth Jacobs: Fellow, Harvard University, Multidisciplinary Program on Inequality & Social Policy. Hacker and Jacobs will present and discuss their new study: "The Rising Instability of American Family Incomes, 1969-2004."
Peter Gosselin, Los Angeles Times. Gosselin will discuss his new book, High Wire. The Precarious Financial Lives of American Families (Basic Books, June 2, 2008) (available for purchase and signing at event).
Discussant: Brink Lindsey, Cato Institute. Author of The Age of Abundance: How Prosperity Transformed America's Politics and Culture. (Collins)
Economic Policy Institute
1333 H Street, NW
East Tower, Suite 300
Washington, DC 20005
I just dropped the Fifteen-Year-Old off at her Local Public High School for her practice 生員 (shēngyuán) exam, her net step in qualifying for the imperial bureaucracy so necessary to give her options to choose a life that she really wants to live in our society. She won't necessarily ace this particular exam--unlike her brother, who was a shoe-in for 案首 status...
Excuse me. Wrong branch of the multiverse. Let me retune my set and focus in on this reality...
Ah. There we are...
Ahem...
I just dropped the Fifteen-Year-Old off at her Local Public High School for her practice standardized test, her next step in attaining the "meritocracy" so necessary to give her the options to choose a life that she really wants to live in our society. She won't necessarily ace this particular exam--AP World History--unlike her brother, who was a shoe-in for a 5. Her turn will come next year with AP Calculus AB--she has more of a pattern-seeing while he has more of an applicable-fact-nugget recalling mind. But both of them are, if I may boast as a father, very kind and thoughtful teenagers and scary-smart in their respective ways--and I say this as somebody who was once the best high school math student in all of Washington DC. (Which may not be saying that much: I learned the next year in my corner of the Weld dormitory that the best high school math student in all of Washington DC was about equal to someone who had been "undistinguished" in math at Moscow Science-Mathematics High School #2--who said his best subject was English. And then there were the stars of Math 55... people like Seth Lloyd... who can only be described as "transhuman"... intelligences vast, warm, and sympathetic... but I digress...)
She is not a shoe-in for a 5 because (a) her world history class was not an AP class, and (b) she does not have the single-minded focus on history, politics, and current events in her outside reading necessary to ensure a 5 in the absence of having covered the AP syllabus in her course. But she has a good shot. And, most important, practice makes perfect. To have done this before when it comes time to take a standardized test where it really counts is an important edge--one of the rules that is not written down anywhere. (One of the rules, moreover, that Princeton has done its best to hide via false fake propaganda for generations about how some of its tests are not achievement but instead "aptitude" tests.)
We economists have been staring in stupefaction and horror over the past generation as the college-high school wage premium in America has risen from 30% to 90% with little if any visible increase in college attendance rates. Incentives do not appear to be having the result in terms of increasing the supply of the educationally-skilled that we economists believe the natural order demands that they must have. There are four potential explanations:
Myopia--the (growing) up front, cash costs of college and the resulting debt incurred loom much larger in individuals' calculations than they should.
Aptitude--the ability to reap the economic gains we economists attribute to a modern American college education is in fact much more narrowly concentrated than we economists believe, because of how people's brains grew when they were young. Thus the marginal college student reaps no long-run surplus from attendance.
Fear--individuals falsely fear that the ability to reap the economic gains we economists attribute to a modern American college education is in fact much more narrowly concentrated than we economists believe, because of how people's brains grew when they were young. Thus the marginal college student falsely fears that he or she reaps no long-run surplus from attendance.
People don't know the rules.
I'm not sure what I mean by the last. But here is a first cut:
Back in imperial China, if your parents could afford it, and if you were male, you found a tutor to teach you by studying the Confucian classics. You learned the six arts--music, math, writing, ceremony, equitation and archery--the five studies--strategy, law, geography, agriculture, and taxation--and learned how to write your eight-legged-essays. You passed through 生員 (shēngyuán), 舉人 (jǔrén), and then 進士 (jìnshì). At the end you became part of the landlord-bureaucrat-literary intellectual class that ruled China: collecting taxes, collecting rents, advising the emperor, commanding armies, dispensing justice. Those were the rules.
What do today's Americans--the parents of those who are choosing not to go or not to make a great effort at college--think the rules are today? Back in the 1980s Bruce Springsteen in his concerts used to claim that his parents were still following him around the country, telling him that he could still go to college and become (from his father) a lawyer or (from his mother) an author. They understood the rules--the career strategy of trying to live the life you love by becoming a global rock star is not a realistic one, but there are lots of people to be sued and lots of books, manuals, and pamphlets to be written. How many of the parents of today's American fifteen-year-olds are going to do the same?
Lots of people are going to go see the "Sex and the City" movie this spring. How much does it teach anybody about what these people actually do for a living? They look decorative. They suffer from emotional angst. But Miranda has status and options not because she is decorative and perky with red hair and suffers from emotional angst but because of a nonhuman ability to deal with mind-numbing trivia and an iron butt. Samantha has status and options not because she is decorative, flirty, and... well, actually yes, but also because she has a mind for organizational detail and an ability to instantly direct what needs to be done to solve minor crisis of the day #376. Carrie has status and options not because she is decorative--none of her readers can see her, remember, except on the side of a bus--and suffers from emotional angst but because she is very good at putting the fabric of her life into prose on deadline in a way New York readers find interesting. Charlotte has status and options not because she is decorative and suffers from emotional angst but because she has the right manners, the right connections, and a very good eye for visually interesting art. John James Preston--well, it is never clear what he does at all, is it? He likes jazz. He smokes cigars. Cash is not a constraint at all.
Economic Snapshots: This month’s crop of new college graduates will confront a more inhospitable job market than their predecessors faced in 2001, the beginning of the last recession.... [T]he labor market for recent college graduates (ages 23-29) was weaker in 2007 than before the last recession in 2001. Inflation-adjusted average hourly wages for young college graduates... are still lower by about $0.60 for women and $1.60 for men than they were six years ago... a college degree has become less of a guarantee of receiving health and retirement benefits on the job... college graduates in entry-level jobs... less likely to receive employer-provided health insurance... over 5 percentage points lower than in 2001, and less than half of young college grads now receive any form of pension coverage on the job (see Figure B).
The fact that new college grads are doing poorly is a troubling sign, since those with higher education and more skills required in the new economy... are expected to be faring well...
The anemic response of skill investment to skill premium growth | vox - Research-based policy analysis and commentary from leading economists: The earnings premium for skilled labour has increased dramatically in recent decades. Yet... Americans are not acquiring significantly greater skills in response to this change.... Since 1980, the demand for skilled labour has risen faster than the supply of skills, fuelling a steady increase in the earnings premia found for measures of skills such as schooling or cognitive test scores. The rapid rise in the skill premium represents a substantial increase in the economic incentive to acquire skills.... [B]etween 1980 and 2000 the internal rate of return for completing high school rather than dropping out after tenth grade has increased from approximately 40% to 55%.... How rapidly and how much young adults respond to this increase in the returns to skills and how this response varies across the population have important implications....
In Altonji, Bharadwaj, and Lange (2008), we... look at factors that influence skill acquisition, such as parental education and growing up in a two-parent family... make use of measures of the ease with which young adults transition from schooling into the labour market.... [O]verall the 1997 youth cohort is more skilled than the 1979 cohort... at the median... skill[s]... increased by about 6.5 percent. Is [that]... a behavioural response by youth to the widening skill premium?... [N]o.... [M]embers of the more recent cohort have significantly more educated parents than young people in 1979.... Holding parental education, race and gender, and family structure constant, the supply response to the increase in skill premia between cohorts was small: about 1% on average and about 1.5% at the median.... It seems that very large increases in skill premia are necessary to induce young workers to increase their investments in skills substantially.... This implies that, all else equal, the large degree of earnings inequality observed today is likely to persist far into the 21st century....
[T]he difference in the skills of the 1980 and 2004 youth cohorts is larger at the top of the skill distribution than at the bottom... due to the changing distribution of parental education.... [T]he changing distribution of skills in the population will exacerbate rather than counteract the trend towards increasing earnings disparities....
At this point we can only speculate as to why the response in skills to the increase in skill premia is so small... non-pecuniary costs of skill investments... liquidity constrained... myopic... other reasons... consistent with a number of studies (e.g. Kane (1994), Dynarski (2003)) that find that schooling decisions are quite sensitive to direct costs of schooling and tuition subsidies.... Cunha and Heckman (2007)... [perhaps] parental investment during early childhood shapes the potential to acquire additional skills later in life....
At this point, the question of why the supply response to the increase in the labour market returns to skill has been so small is an open one. In our opinion, it ranks among the most important empirical issues facing labour economists today.
This raises the possibility that the only easy way to reduce market inequality is to greatly increase the supply of the skilled and educated in the long run by making higher education free--which is a very dubious policy on the inequality front, because it starts with a honking huge transfer from the average taxpayer today to the relatively rich well-educated of tomorrow.
Peter Gosselin’s admirable objective is to show how many people of all income levels are now insecure and afraid in an economy that Americans are constantly told, by Republicans and Democrats alike, has long been back on track.... But, in truth, the American economy has not been on track for a generation now....
The main theme of Gosselin, a veteran reporter for the Los Angeles Times, is the rise of deep-seated financial, health and material risk. He gathers the many pieces of the new economic America together quite beautifully, even elegantly, and brings them alive with interesting and not the usually predictable individual examples....
[T]here are the 401(k)s. Gosselin says the major shift in America toward a riskier society regards retirement. Three out of five employees who are fortunate enough to have a private retirement plan now don’t have a pension at all but rather a defined contribution plan like a 401(k).... Many and probably most will save too little and invest unwisely.... But what makes Gosselin so interesting is that he digs further for the pertinent government failures. For example, the Employee Retirement Security Act (ERISA), passed in 1974 originally to protect workers, now, as he writes, protects big companies.... A former insurance consultant told me recently that some employees are paid at insurance companies according to how many claims they can deny. I was shocked. Naive me, and after all these years. Of course, that is how the companies operate. Create incentives to maximize profits.
Gosselin’s central claim is based on some research he did to show that the proportion of American families whose incomes are likely to fall substantially has risen sharply since the 1970s....
Gosselin, however, puts his finger on it. Poverty is not about black-and-white deprivations in the contemporary world. The poor in America live in total chaos... “pay cuts and eviction notices, car troubles and medical crises, hirings and firings--that keeps reversing their families’ advances, rattling their finances, nudging them toward the economic brink.”... What do the poor borrow for? A good restaurant meal? A pair of impossibly expensive sneakers? Maybe, once in a while. But Gosselin looks into a case or two: $170 to fix the steering on the car, a $300 cash advance for the rent, another $1,000 to bring a wife to the U.S. from Central America....
The costs of education, health care, drugs and public investment have gone up much faster than incomes. So people can buy clothes, food or electronics more easily, but they can’t buy health care, or they have to move into an expensive house to get a good k-12 education for the kids.... This is why Barack Obama is right when he talks about bitterness and anger, and why claims that the political attitudes are only about culture shifts is wrong.
Now the experience of the 2000s has brought the message home. Wages haven’t gone up at all in the 2000s, despite record profits and decent productivity growth. Family incomes are down. These are unprecedented in the modern economy.
And all this follows a generation of rising insecurity, uncertainty, unrewarded effort and for many a treadmill of growing despair, cynicism and occasional chaos that this author describes so clearly, even elegantly. Gosselin’s gotten the new American condition better than anyone else I’ve read.
He writes, over at Martin Wolf's place at the Financial Times:
FT.com | The Economists’ Forum | Food crisis is a chance to reform global agriculture: Paul Collier: The sharp increase in the world price of staple foods is an inconvenience for consumers in the rich world, but for consumers in the poorest countries, especially in Africa, it is a catastrophe. Despite the predominance of peasant agriculture, most African countries are net food importers and food accounts for over half of the budget of low-income households. This is the result of decades of agricultural stagnation combined with growing populations. Although many of the net purchasers are rural, evidently the problem is at its most intense in the urban slums. These slums are political powder kegs and so rising food prices have already triggered riots. Indeed, they sow the seeds of an ugly and destructive populist politics.
Why have food prices rocketed? Paradoxically, this squeeze on the poorest has come about as a result of the success of globalization in reducing world poverty. As China develops, helped by its massive exports to our markets, millions of Chinese households have started to eat better. Better means not just more food but more meat, the new luxury. But to produce a kilo of meat takes six kilos of grain. Livestock reared for meat to be consumed in Asia are now eating the grain that would previously have been eaten by the African poor. So what is the remedy?
The best solution to a problem is often not closely related to its cause (a proposition that that might be recognized in the climate change debate). China’s long march to prosperity is something to celebrate. The remedy to high food prices is to increase food supply, something that is entirely feasible. The most realistic way to raise global supply is to replicate the Brazilian model of large, technologically sophisticated agro-companies supplying for the world market. To give one remarkable example, the time between harvesting one crop and planting the next, in effect the downtime for land, has been reduced an astounding thirty minutes. There are still many areas of the world that have good land which could be used far more productively if it was properly managed by large companies. For example, almost 90% of Mozambique’s land, an enormous area, is idle.
Unfortunately, large-scale commercial agriculture is unromantic. We laud the production style of the peasant: environmentally sustainable and human in scale. In respect of manufacturing and services we grew out of this fantasy years ago, but in agriculture it continues to contaminate our policies. In Europe and Japan huge public resources have been devoted to propping up small farms. The best that can be said for these policies is that we can afford them. In Africa, which cannot afford them, development agencies have oriented their entire efforts on agricultural development to peasant style production. As a result, Africa has less large-scale commercial agriculture than it had fifty years ago. Unfortunately, peasant farming is generally not well-suited to innovation and investment: the result has been that African agriculture has fallen further and further behind the advancing productivity frontier of the globalized commercial model. Indeed, during the present phase of high prices the FAO is worried that African peasants are likely to reduce their production because they cannot finance the increased cost of fertilizer inputs. While there are partial solutions to this problem through subsidies and credit schemes, large scale commercial agriculture simply does not face this problem: if output prices rise by more than input prices, production will be expanded because credit lines are well-established.
Our longstanding agricultural romanticism has been compounded by our new-found environmental romanticism. In the United States fears of climate change have been manipulated by shrewd interests to produce grotesquely inefficient subsidies for bio-fuel. Around a third of American grain production has rapidly been diverted into energy production. This switch demonstrates both the superb responsiveness of the market to price signals, and the shameful power of subsidy-hunting lobby groups. Given the depth of anti-Americanism in Europe it is, of course, fashionable to criticize the American folly with bio-fuels. But Europe has its equivalent follies.
First, the European Commission is now imitating the American bio-fuels policy. At present the programme is small enough to be unimportant, but we need to pull it back before it does real damage. We have surely learnt enough about European agriculture to realize how important it is to kill this incipient scam before we are engulfed by it. But the true European equivalent of America’s folly with bio-fuels is the ban on GM. Europe’s distinctive and deep-seated fears of science have been manipulated by the agricultural lobby into yet another form of protectionism. The ban on both the production and import of genetically modified crops has obviously retarded productivity growth in European agriculture: again, the best that can be said of it is that we are rich enough to afford such folly. But Europe is a major agricultural producer, so the cumulative consequence of this reduction in the growth of productivity has most surely rebounded onto world food markets. Further, and most cruelly, as an unintended side-effect the ban has terrified African governments into themselves banning genetic modification in case by growing modified crops they would permanently be shut out of selling to European markets. Africa definitely cannot afford this self-denial. It needs all the help it can possibly get from genetic modification. Not only is Africa currently being hit by rising food prices, over the longer term it will face climatic deterioration in the context of a rapidly growing population.
While the policies needed for the long term have been befuddled by romanticism, the short term global response has been pure beggar-thy-neighbour. It is easier for urban slum dwellers to riot than for farmers: riots need streets, not fields. And so, in the internal tussles between the interests of poor consumers and poor producers, the interests of consumers have prevailed. Governments in grain-exporting countries have swung prices in favour of their consumers and against their farmers by banning exports. These responses further politicize and fragment an already confused global food market. They increase the risks of investing in commercial-scale food production and drive up prices further in the food-importing countries. Unfortunately, trade in agriculture has been the main economic activity to have resisted being subject to global rules. We need stronger and fairer globalization, not less of it.
Jim Hamilton has some smart things to say about food riots and U.S. agricultural and energy policy:
Econbrowser: Food prices: How should a well-fed American react when some of the world's poorest citizens in Haiti and Bangladesh riot over the rising price of food? be sure, there are many factors influencing food prices. But to me it's natural to begin with the element that represents a deliberate policy choice on the part of the United States. I refer to America's decision to divert a significant part of our agricultural production for purposes of creating a fuel additive for motor vehicles. USDA Chief Economist Joseph Glauber predicts that 4.1 billion bushels, or 31% of the entire U.S. corn crop, will be devoted to ethanol production for the 2008/09 season.
On one level, the question of whether it is morally acceptable for us to divert the food that might have fed the hungry for purposes of driving our SUVs is no different from similar questions about any of a number of other details of how the well-off dispose of their wealth. But I'm thinking that the profound inefficiencies associated with this particular disposition of resources may also be relevant. As a result of ethanol subsidies and mandates, the dollar value of what we ourselves throw away in order to produce fuel in this fashion could be 50% greater than the value of the fuel itself. In other words, we could have more food for the Haitians, more fuel for us, and still have something left over for your other favorite cause, if we were simply to use our existing resources more wisely.
We have adopted this policy not because we want to drive our cars, but because our elected officials perceive a greater reward from generating a windfall for American farmers. But the food price increases are now biting ordinary Americans as well. That could make those political calculations change, and may present be an opportunity for a nimble politician to demonstrate a bit of real leadership. I notice, for example, that although Senator Barack Obama (D-IL) was among those who voted in favor of the monstrous 2005 Energy Bill that began these mandates, Hillary Clinton (D-NY) and John McCain (R-AZ) were among the 26 senators who bravely voted against it.
Wouldn't it be refreshing if one of them actually tried to make this a campaign issue?
March 07, 2008 Free Trade and Fair Trade: SIEPR 2008 Economic Summit Conference
J. Bradford DeLong
The question of "free" versus "fair" trade, has three baskets: an environmental regulation basket, a labor-standards and freedom basket, and a "wages basket."
The first two can, I think, be disposed of quickly. We don't want those able to bribe governments in other countries to poison people or the globe by turning other countries into pollution havens. We don't want environmental standards to be used to freeze the world distribution of wealth and keep people in other countries hungry, illiterate, and barefoot. The difficulties that remain are those of implementation.
Similarly, we want expanding trade to be a force for opportunity rather than for oppression: we like it when expanded trade gives ordinary people a path to a better life; we don't like it when expanded trade gives rich and powerful people in the cloud city of Stratos an incentive to round others up and put them to work in the xenite mines. As then-Principal Deputy IMF Managing Director Stanley Fischer warned the great and good at the 2000 Federal Reserve Bank of Kansas City's Jackson Hole Conference, there is nothing in the ILO's principles that we cannot and very little that we should not be eager to endorse, all of us. The difficulties that remain are, once again, those of implementation.
The question of trade and wages remains: To what extent are rich countries obligated to open their markets to poor countries when the consequence is falling wages for the poor in the rich--bearing in mind that the poor in the rich are often wealthier and have more opporunity than the rich in the poor? To what extent do rich countries do themselves well--serve their national interest--by opening their markets to poor countries even when the consequence is falling wages for the poor in the rich?
Let me make four remarks on this "trade and wages" basket:
First, between 1950 and 1997 trade and wages weren't an issue: our foreign trading partners raised their own relative wage levels at least as fast as globalization enhanced their influence, and there was no net effect of trade on wages--no link from greater openness to the global economy to greater inequality here at home.
Second, at times between 1950 and 1997 trade and wages became a political issue as a way of distracting attention from true problems. The voters of Michigan in 1985 did not want to hear that the problems of Michigan's manufacturing industries were home-grown--in the fecklessness of management and in the Reagan administration's budget deficits that pushed up interest rates which pushed up the value of the dollar and made the goods they made uncompetitive on world markets. They wanted, instead, to hear that the Japanese were doing something clever and illegitimate.
Third: since 1997 or so the link between expanded imports and wage inequality has become real, as our imports now embody a much larger amount of factors competing with our own lesser-skilled than they used to. How large? I don't think we know. Paul Krugman is now writing a paper for the Brookings Institution in which he essentially throws up his hands at the question. But there are two points worth noting: (a) the effects of trade on pre-tax wage inequality are much smaller than the effects over the past generation of changes in the tax system on after-tax income inequality; (b) the effects of trade on inequality of opportunity are much less than the effects of educational inequities on inequality of opportunity.
Fourth, to the extent that we in the United States begin thinking of trade restrictions as a way to fight inequality, we are setting ourselves up for extraordinary trouble late in this century--extraordinary damage to our long-run national security.
Think of it this way: Consider a world that contains one country that is a true superpower. It is preeminent--economically, technologically, politically, culturally, and militarily. But it lies at the east edge of a vast ocean. And across the ocean is another country--a country with more resources in the long-run, a country that looks likely to in the end supplant the current superpower. What should the superpower's long-run national security strategy be?
I think the answer is clear: if possible, the current superpower should embrace its possible successor. It should bind it as closely as possible with ties of blood, commerce, and culture--so that should the emerging superpower come to its full strength, it will to as great an extent possible share the world view of and regard itself as part of the same civilization as its predecessor: Romans to their Greeks.
In 1877, the rising superpower to the west across the ocean was the United States. The preeminent superpower was Britain. Today the preeminent superpower is the United States. The rising superpower to the west across the ocean is China. that was the rising superpower across the ocean to the west of the world's industrial and military leader. Today it is China.
Throughout the twentieth century it has been greatly to Britain's economic benefit that America has regarded it as a trading partner--a source of opportunities--rather than a politico-military-industrial competitor to be isolated and squashed. And in 1917 and again in 1941 it was to Britain's immeasurable benefit--its veruy soul was on the line--that America regarded it as a friend and an ally rather than as a competitor and an enemy. A world run by those whom de Gaulle called les Anglo-Saxons is a much more comfortable world for Britain than the other possibility--the world in which Europe were run by Adolf Hitler's Saxon-Saxons.
There is a good chance that China is now on the same path to world preeminence that America walked 130 years ago. Come 2047 and again in 2071 and in the years after 2075, America is going to need China. There is nothing more dangerous for America's future national security, nothing more destructive to America's future prosperity, than for Chinese schoolchildren to be taught in 2047 and 2071 and in the years after 2075 that America tried to keep the Chinese as poor as possible for as long as possible.
And let me stop there.
2008 SIEPR Economic Summit: Critical Issue Sessions and Panelists:
March 7: 4:30-5:45pm: Session II: Is Free Trade Fair Trade?
* Moderator: Dixon Doll, SIEPR Board member
* Brad DeLong, Professor of Economics, University of California, Berkeley
* Alan Taylor, Professor of Economics, University of California, Davis
* David Dollar, Country Director, China and Mongolia, World Bank
Frances C. Arrillaga Alumni Center, 326 Galvez St., Stanford Campus
Critical Issue Sessions and Panelists: March 7: 4:30-5:45pm....
Session II: Is Free Trade Fair Trade?
* Moderator: Dixon Doll, SIEPR Board member
* Brad DeLong, Professor of Economics, University of California, Berkeley
* Alan Taylor, Professor of Economics, University of California, Davis
* David Dollar, Country Director, China and Mongolia, World Bank
Paul Krugman (2008), "Trade and Wages, Reconsidered": [T]he change illustrated in Figure 15 seems to resemble the actual change in North-South trade since the early 1990s.... The share of advanced
country GDP spent on imports from developing countries rises sharply, because components are shipped to developing countries for assembly, and the assembled goods are then exported back tothe first world.... [T]he actual effects on workers in the advanced economy would reflect a sort of Stolper-Samuelson effect: the real wages of... unskilled workers would fall.... outsourc[ing] labor-intensive industry segments to the third world would depress the demand for less-skilled workers, a shock not captured by data that lumped labor-intensive assembly operations together with skill-intensive component manufacture [in the same industry]....
[N]ote, however, that this example does suggest that the type of calculation performed by Bivens (2007), in which the distributional effects of trade are assumed to be essentially proportional to the import share... may exaggerate the distributional effects of recent trade growth. In this example, the trade share grows fourfold, but the distributional effects do not grow in proportion.... [M]uch of the
content of the new imports from developing countries is actually skill-intensive production from advanced countries.... If the United States imports computers from China, and China assembles computers largely from components made in Japan, only the assembly share of the sales price reflects labor-intensive imports....
Nonetheless... the rapid rise in manufactures imports from developing countries probably is, indeed, a force for growing inequality... factor content calculations suggesting otherwise are missing the essence of what is happening....
What really comes through from the analysis here, however, is the extent to which the changing nature of world trade has outpaced our ability to engage in secure quantitative analysis--even though this paper sets to one side the growth in service outsourcing.... Plain old trade in physical goods has become remarkably exotic. In particular, the surge in developing-country exports of manufactures involves a peculiar concentration on apparently sophisticated products, which seems at first to put worries about distributional effects to rest. Yet there is good reason to believe that the apparent sophistication of developing country exports is, in reality, largely a statistical illusion, created by the phenomenon of vertical specialization....
How can we quantify the actual effect of rising trade on wages? The answer, given the current state of the data, is that we can’t... [I]t’s likely that the rapid growth of trade since the early 1990s has had significant distributional effects. To put numbers to these effects, however, we need a much better understanding of the increasingly fine-grained nature of international specialization and trade.
The Politics of Trade in Ohio: Now come Mr. Obama and Mrs. Clinton... tough talk about foreign trade... you'd have to conclude that they believe that Nafta and other trade agreements have caused Ohio's huge economic problems.
"She says speeches don't put food on the table," Mr. Obama said in Youngstown. "You know what? Nafta didn't put food on the table, either." Later, he went further, claiming that Ohio's workers have "watched job after job after job disappear because of bad trade deals like Nafta."
Mrs. Clinton's advisers, meanwhile, have been putting out the word that she tried to persuade her husband not to support Nafta -- which liberalized trade with Mexico and Canada -- when he was running for president....
[However, n]either candidate calls for a repeal of Nafta, or anything close to it. Both instead want to tinker with the bureaucratic innards of the agreement.... They call the country's trade policy a disaster, and yet their plan to fix it starts with, um, cracking down on Mexican pollution....
The first problem with what the candidates have been saying is that Ohio's troubles haven't really been caused by trade agreements. When Nafta took effect on Jan. 1, 1994, Ohio had 990,000 manufacturing jobs. Two years later, it had 1.03 million. The number remained above one million for the rest of the 1990s, before plummeting in this decade to just 775,000 today. It's hard to look at this history and conclude Nafta is the villain. In fact, Nafta did little to reduce tariffs on Mexican manufacturers, notes Matthew Slaughter, a Dartmouth economist. Those tariffs were already low before the agreement was signed.
A more important cause of Ohio's jobs exodus is the rise of China, India and the old Soviet bloc, which has brought hundreds of millions of workers into the global economy.... [Y]our credit card's customer service center isn't in Ireland because of a new trade deal. All this global competition has brought some big benefits, too. Consider that cars, furniture, clothing, computers and televisions -- which are all subject to global competition -- have become more affordable, relative to everything else. Medical care, movie tickets and college tuition -- all protected from such competition -- have become more expensive.
So what can be done for Ohio?
There is actually a fair amount of agreement among economists on this question. The solution should involve more government investment in infrastructure, the medical sciences, alternative energy and other areas that could produce good new jobs. A more strategic approach to investment, one less based on the whims of individual members of Congress, would also help....
Over the last week, the candidates' talk has, at times, been silly and even inaccurate. And Ohio's problems would certainly be easier to solve if, as Luis Proenza, president of the University of Akron put it, the candidates were "more true to reality and less prone to invective." But the larger problem is that Ohio%u2019s voters have good reason to be angry. For years, they have been promised that globalization was making the United States a richer country. They're still waiting for their share of the bounty.
...the bits of data I'd give the Senator tomorrow would probably include the following:
Home forclosures rose 68 percent in November from the previous November.... Because the US savings rate is so low, people have been relying on their houses as a source of wealth and equity. When adjustable rate mortgages reset, wages remained relatively stagnant, and other costs (like healthcare) continued to rise, people lost their houses. That's a financial and emotional hit that most people won't ever forget.
[Editorial intrusion: foreclosures have risen from a rate of 1.5 million a year last year--about 2.5% of homes being foreclosed upon in a year--to 2.5 milliion a year--about 4% of homes being foreclosed upon in a year--this year. Mortgage resets are proceeding at a pace of about 2 million a year.]
20 million Americans will use credit cards to pay for home heating this winter. This is obviously a double-whammy. Energy costs are up - frankly, due to demand more than anything else - and people don't have the available cash to make up the difference. This cash flow issue (probably caused by higher mortgage and rent costs, higher health care costs, and stagnant wages) will effectively increase home heating costs by up to 20 percent when you consider interest carried over a few months...
More Americans will have catastrophic health expenses in 2008. Nearly 1 in 4 Americans under the age of 65 live in a family that will spend more than 10 percent of that family's pre-tax income on health expenses. More than 80 percent of these people have health insurance. This sounds like a health statistic, but it's unquestionably an "economic indicator" in my book...
[The better statistic for the senator, I think, is "17.8 million non-elderly Americans—-more than three-quarters of whom have health insurance—-are in families that will spend more than 25 percent of their pre-tax income on health care costs in 2008.]
It is an old question: why does America regard itself as a land of upward mobility and opportunity when it does not seem to be the case, relative to western European countries?
Clive Crook (November 29, 2007) - Opportunity and equality: [T]he most surprising evidence on economic mobility compares the United States with other countries. The findings do not give strong support to the idea that America is the land of opportunity. Movement out of the top and bottom quintiles is lower than in many other countries, including Canada and (maybe) Britain. Yes, there is opportunity, and people do move up--but not as readily (out of the lowest quintile, anyway) as elsewhere...
Some of what may be going on is that America is--or has been--relatively welcoming to immigrants. Immigration is all by itself an enormous upward mobility event. And that is not factored into the standard transition matrix analyses.
Crooked Timber » » Help a Blogger Out: Gary Farber has been scraping by for a while on your previous generous donations, CT readers, but he’s in a world of hurt at the moment, so show some love.
In perhaps related news, some people just don’t know anything about being broke:
“The risk is that you could be modifying loans for people who don’t need it,” said Sharon Greenberg, director of mortgage strategy at Barclay’s. “There’s only so much you can do without talking to the borrower. You’re spending $60 a month on cable TV; can you get by with less? You’re spending $200 a month on food for two people, but food costs in your area show that you should be able to get by with $100 a month. These are the kinds of conversations that loan-servicing companies have to have with borrowers.”
Food costs in your area show that when there are no crawdads, you should be able to eat sand. No refinancing for you, Mr. Moneypants McRichington!!
Alas, Celia Dugger doesn't tell us (a) how large Malawi's fertilizer subsidies are, or (b) who pays for them. So it's very hard to assess what is going on.
He tackle's Barone's claim that "maybe" the fall in social mobility in America is due to the fact that a high IQ genetic elite has risen to the top of the fair meritocracy that is our society. And Mark's head explodes:
Michael Barone: [P]olls show that Americans think their chances of moving up are better than a generation ago. Statistics tell a different story: There is a higher correlation today between parents' and children's income than in the 1980s, and the income gap between college graduates and non-graduated doubled between 1979 and 1997.
"America," concludes Parker, "is becoming a stratified society based on education: a meritocracy."... [This] is exactly what Richard Herrnstein and Charles Murray predicted for America in their controversial book The Bell Curve, published 11 years ago. Herrnstein and Murray noted that intelligence is both measurable and in some large but unquantifiable part hereditary, an unexceptionable finding for experimental psychologists but maddening to social engineers. As college education becomes open to all with the requisite intelligence, graduates will tend to marry graduates and produce children with similar intelligence, while others will tend to produce children without it.
"Unchecked, these trends," Herrnstein and Murray wrote, "will lead the U.S. toward something resembling a caste society, with the underclass mired ever more firmly at the bottom and the cognitive elite ever more firmly anchored at the top."... Are we there yet?... [M]aybe so.
Yet should we be so gloomy?... Not everyone has an emotional need to be on top: How many people, if they thought seriously about it, would really want the burdens of a CEO, however lavish the pay?... As Murray has written, all you need to do to avoid poverty in this country is to graduate from high school, get and stay married, and take any job. The intelligence needed to get a place in the cognitive elite may become more concentrated in a fair meritocratic society, but the personal behaviors needed to find a valued place in society are available to everyone. Meritocracy may mean less mobility, but that is bearable if, as Brooks says, "America is becoming more virtuous."...
The inheritance of inequality is strikingly large in America today: if the father's lifetime was 100% above the American average for his day, the son's lifetime income will on average be 65% above the American average for his day. That's a lot of inherited inequality. Is this unequal distribution of wealth, income, and status in the United States today the result of the fact that a genetic elite has risen to the top in a "fair" IQ-driven meritocracy?
No.
This high degree of inherited inequality isn't because high IQ genetic eliteness genes are being passed down from fathers to sons. As Samuel Bowles and Herbert Gintis (2002), "The Inheritance of Inequality," report:
The direct effect of IQ on earnings... presented in Bowles, Gintis, and Osborne (2002a)... is 0.15, indicating that a [one] standard deviation change in the cognitive score, holding constant... remaining variables... changes... earnings by about one-seventh of a standard deviation.... An estimate of the causal impact of childhood IQ on years of schooling... is 0.53 (Winship and Korenman 1999). A rough estimate of the direct and indirect effect of IQ on earnings... is then... 0.15+(0.53)(0.22) = 0.266....
h is the heritability of IQ.... The value cannot be higher than 1, and most recent estimates are substantially lower, possibly more like a half or less.... [C]ouples tend to be more similar in IQ than would occur by random mate choice.... [The] genetic correlation of parent and offspring [is] (1 + m)/2....
Using the values estimated above, we see that the contribution of genetic inheritance of IQ to the intergenerational transmission of income is (h2(1+m)/2)(0.266)2 = .035(1 + m)h2. If the heritability of IQ were 0.5 and the degree of assortation, m, were 0.2 (both reasonable, if only ball park estimates) and the genetic inheritance of IQ were the only mechanism accounting for intergenerational income transmission, then the intergenerational correlation [of lifetime income] would be 0.01, or roughly two percent the observed intergenerational correlation [of lifetime income between parents and children].
Two percent is simply not a large number. Factors that currently account for two percent of lifetime earnings inequality are simply not yet a big deal, and cannot be responsible for the fall in social mobility.
If there is ever to be a genetic elite, its members will surely exhibit two behavioral traits: a facility with math, and a near-intinctive tendency to do back-of-the-envelope quantitative checks of assertions. We can conclude only one thing from Barone's column: neither he nor his descendents (unless they get really lucky in their mates) are plausible candidates for membership in any "genetic elite".
It is worth pointing out that neither Richard Herrnstein nor Charles Murray are plausible candidates for membership in any "genetic elite" either. Let me turn the microphone over to impeccably right-wing Jim Heckman, who comments on The Bell Curve:
The Book fails for five main reasons. 1. The central premise of this book is the empirically incorrect claim that a single factor - g or IQ - that explains linear correlations among test scores is primarily responsible for differences in individual performance in society at large.... There is much evidence that more than one factor -- as conventionally measured -- is required to explain conventional correlation matrices among test scores.... They do not emphasize how little of the variation in social outcomes is explained by AFQT or g. There is considerable room for factors other than their measure of ability to explain wages and other social outcomes. 2. In their empirical work, the authors assume that AFQT is a measure of immutable native intelligence. In fact, AFQT is an achievement test that can be manipulated by educational interventions. 3. The authors[']... implicit assumption of an immutable g that is all-powerful in determining social outcomes leads them to disregard a lot of evidence that a variety of relevant labor market and social skills can be improved. 4. The authors present no new evidence on the heritability of IQ or other socially productive characteristics.... [T]hey... [compare] IQ... [to] a crude measure of parental environmental influences. This comparison is misleading. It fails to recognize the crudity of their environmental measures and the environmental component that is built into their measure of IQ, which biases the evidence in favor of their position. Moreover, the comparison as they present it is intrinsically meaningless. 5. Finally, the authors' forecast of social trends is pure speculation... the social policy recommendations have an ad hoc flavor to them.... The appeal to Murray's version of communitarianism as a solution to the emerging problem of inequality among persons is a deus ex machina flight of fancy that is not credibly justified.
Matthew Yglesias: Horatio Alger's IQ: One thing that always occurs to me when these race/IQ blowups occur is that this issue is kind of in the neighborhood of a different point that doesn't merely recapitulate the race science of yore, does seem to me to have real policy implications, and is really well-supported by the data. This is the fact that IQ test results are meaningfully predictive of various indicators of success in the United States and the main factors that influence how people score on these tests all happen in childhood or earlier (in the fetal environment, in the genes, etc.).
This then becomes one of several available lines of argument that the image of the United States as a magical place where hard work always pays off and the rewards go to those willing to put in the effort is wrong. What's more, the imagine of the United States as a fallen version of that magical place — a country that could become magical if we just improved urban high schools or adopted a better student loan system — is also wrong. Better high schools and better student loan systems are things worth doing on their own terms, but absolutely nothing one can do changes the fact that where people end up is substantially out of their hands...
This seems to me to be substantially wrong. The inheritance of inequality is strikingly large in America today: if the father's lifetime was 100% above the American average for his day, the son's lifetime income will on average be 65% above the American average for his day. That's a lot of inherited inequality. Is this unequal distribution of wealth, income, and status in the United States today the result of the fact that a genetic elite has risen to the top in an IQ-driven meritocracy?
No.
This high degree of inherited inequality isn't because high IQ genetic eliteness genes are being passed down from fathers to sons. As Samuel Bowles and Herbert Gintis (2002), "The Inheritance of Inequality," report:
The direct effect of IQ on earnings... presented in Bowles, Gintis, and Osborne (2002a)... is 0.15, indicating that a [one] standard deviation change in the cognitive score, holding constant... remaining variables... changes... earnings by about one-seventh of a standard deviation.... An estimate of the causal impact of childhood IQ on years of schooling... is 0.53 (Winship and Korenman 1999). A rough estimate of the direct and indirect effect of IQ on earnings... is then... 0.15+(0.53)(0.22) = 0.266....
h is the heritability of IQ.... The value cannot be higher than 1, and most recent estimates are substantially lower, possibly more like a half or less.... [C]ouples tend to be more similar in IQ than would occur by random mate choice.... [The] genetic correlation of parent and offspring [is] (1 + m)/2....
Using the values estimated above, we see that the contribution of genetic inheritance of IQ to the intergenerational transmission of income is (h2(1+m)/2)(0.266)2 = .035(1 + m)h2. If the heritability of IQ were 0.5 and the degree of assortation, m, were 0.2 (both reasonable, if only ball park estimates) and the genetic inheritance of IQ were the only mechanism accounting for intergenerational income transmission, then the intergenerational correlation [of lifetime income] would be 0.01, or roughly two percent the observed intergenerational correlation [of lifetime income between parents and children]...
If inherited genetically-based IQ were the source of the extra edge that the children of the rich get in our society, than we would expect a parent with 4 times average lifetime full-time earnings--say $200,000 a year--to have a kid with a lifetime average income of $51,500 instead of the average of $50,000. But it is not $51,500. It is $150,000.
I agree with Matt that "where people end up [in our society] is substantially out of their hands" (although not by any means completely): luck and inheritance of many kinds of things are incredibly important. But this does not mean that equality of opportunity is a mirage. For most of the things that are out of the hands of the individual are not out of our collective hands at all. Genetic influence on IQ is one of the big things that are out of our collective hands--and it turns out it is really not that big a thing at all.
Dani Rodrik suspects that they are smaller than Josh Bivens thinks they are:
Dani Rodrik's weblog: The pains from trade: The workhorse model of international trade (the 2x2 Heckscher-Ohlin model) has very stark implications for the effect of trade with poor, labor-abundant countries. Low-skilled workers in rich countries (read the U.S.) must end up as losers--not in relative terms, but in absolute terms. Moreover, the larger the overall gains from trade, the bigger must this adverse distributional effect be. In that world, it is inconsistent to claim there are large gains from globalization while downplaying the distributional impacts. Which is why many economists teach the model in their classrooms, but shift to other, more complicated models when they engage in the public debate about the effect of trade on wages.
A recent paper by Josh Bivens carries out a quantitative simulation of the basic 2x2 model which suggests that the increase in U.S. trade with the developing countries between 1995 and 2006 would have reduced labor earnings by 4 percent while increasing the payment for skills by 3 percent, for a 7% increase in the differential altogether. This is an interesting exercise, to be compared to that undertaken by my colleague Robert Lawrence. The latter gives much less of a role to trade, in large part because it finds there is little reduction in real earnings once adjustments for productivity, prices and benefits are made.
One clear difference between the two perspectives is the extent to which one thinks of trade with developing countries as competing directly with U.S. production. Lawrence says that developing country exports hardly displace any domestic production anymore because much of that activity has already shut down. So whatever adverse impact may have existed in the 1980s, the current situation is much more benign. (But of course, less impact on productive re-allocation means fewer overall gains from trade too!). In Bivens' world (and that of the standard 2x2 model), by contrast, head-to-head competition is critical in driving the distributional effects.
I am on Dani's side, only more so. Two additional points are important, I think:
For competition to be head-to-head, the two countries have to be making very similar goods with similar production processes. Hand-spinners in Pakistan don't compete with labor here in the United States but with the capital embodied in our large automated spinning mills.
What trade does to our distribution of income can be undone by normal domestic redistributionist policies. The right way to deal with the issue is to (a) maximize the third world's ability to take advantage of our demand to spur its own growth, and (b) use domestic redistribution here to compensate for any adverse distributional impact.
She praises Chris Dodd while trashing Chris Matthews, John McCain, Richard Nixon, and Hilary Clinton:
None Dare Call It Child Care: Chris Matthews of MSNBC asked whether this country would ever get back to the days when a young guy could come out of high school, get an industrial job “and provide for a family with a middle-class income and his spouse wouldn’t have to work.” Given the fact that more than two-thirds of American mothers have been working outside the home since the 1980s, Matthews could just as easily have demanded to know when we’ll get back to using manual typewriters and rotary phones....
In a two-hour debate that focused on job-related issues, the Republican presidential candidates managed to mention the Smoot-Hawley tariff and trade relations with Peru but not a word about child care for America’s working parents. John McCain... focus[ed] on the fact that “50,000 Americans now make their living off eBay,” that the tax code is “eminently unfair” and that Congress wastes too much money studying of the DNA of Montana bears....
[C]hild car... was one of the very first issues to be swift-boated by social conservatives... vetoed by Richard Nixon... members were flooded with mail accusing them of being anti-family communists....
[I]t is absolutely nuts that it isn’t a topic of discussion — or even election-year pandering.... The only candidate who talks about child care all the time is Chris Dodd....
This is Hillary Clinton’s Women’s Week. On Tuesday... a grab-bag of Clintonian mini-ideas... expand family leave. Yesterday, she was... speaking out for a bill on child care workers that has little chance of passage and would make almost no difference.... Clinton... wasn’t prepared to get any closer to the problems of working parents than a plan to help them stay home from work...
Substantively, a good column. Rhetorically, it rubs me the wrong way. Senator Smoot had a silly-sounding name: that doesn't mean that international trade regulation is a silly issue. Peru is a mountainous country far away filled with poor, darkish-skinned people who don't speak English. That doesn't mean Peru is of small importance. Hillary Rodham Clinton would be a good president (albeit not as good as Dodd) for childcare issues--she belongs classified with the good guys like Chris Dodd rather than to be rhetorically lumped with the malefactors like Matthews, McCain, and Nixon.
A 700-word column doesn't make an argument. Instead, it makes three kinds of assertions:
It asserts the main point of the column--that we Americans should think more and do more about childcare issues.
It asserts that the world works in the way assumed by the background against which the main point is painted--that talking about Peru is stupid because Peru is of small importance, and that talking about international trade is silly because Smoot sounds silly.
It asserts that some people are good guys (Dodd) and other people are bad guys (pundits, Republicans, Hillary Rodham Clinton).
Point 1 is good, point 2 is bad, point 3 is mixed. Am I wrong to demand that people do better?
It tends not to support claims like this one from Greg Mankiw that the rise in income inequality stopped at the end of the 1990s:
July 14, 2006: In today's NY Times, Paul Krugman calls attention to the update of the Piketty-Saez data on income inequality, although Paul describes the data differently than I would. Here is what I see: After rising substantially from 1986 to 2000, income inequality is essentially the same in 2004 (the most recent year of data) as it was in 2000...
Or this one from Alan Reynolds that income inequality did not rise at all:
The Top 1% . . . of What? - WSJ.com: The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on these seriously flawed and greatly misunderstood estimates of the top 1%'s alleged share of something-or-other.... Some economists seem ready and willing to supply whatever is demanded. And there is an endless political demand for those able to fabricate problems for which higher taxes are, of course, the preferred solution. In Washington higher taxes are always the solution; only the problems change...
"I now know it is a rising, not a setting, sun" --Benjamin Franklin, 1787
Graphs
Global Warming
The U.S. Federal Budget Deficit
Modern Economic Growth Is a Historically Recent Phenomenon
Escape from Malthusland
The TED Spread Normalizes
Recovery in the 1930s
Stock Market: The Graham Ratio
Employment-to-Population
GDP Growth
From Brad DeLong
J. Bradford DeLong, Professor of Economics at U.C Berkeley, a Research Associate of the NBER, a Visiting Scholar at the Federal Reserve Bank of San Francisco, and Chair of Berkeley's Political Economy major.
The Eighteen-Year-Old is going to college next year, which means that I need to think about making more money. (The idea that one might write checks to rather than receive checks from universities is now strange to me.) So I have signed up with the Leigh Speakers' Bureau which also handles, among many others: Chris Anderson; Suzanne Berger; Michael Boskin; Kenneth Courtis; Clive Crook; Bill Emmott; Robert H. Frank; William Goetzmann; Douglas J. Holtz-Eakin; Paul Krugman; Bill McKibben; Paul Romer; Jeffrey Sachs; Robert Shiller;James Surowiecki; Martin Wolf; Adrian Wooldridge.
Some of what may be going on is that America is--or has been--relatively welcoming to immigrants. Immigration is all by itself an enormous upward mobility event. And that is not factored into the standard transition matrix analyses.
