Kruse Kronicle

The Middle Class is Disappearing ... Into the Upper Class

U.S. Census Bureau recently released time-series data on household income. All data in the following chart is pegged to 2010 dollars, which is adjusted for inflation - a dollar in 1970 buys the same as a dollar in 2020.

The Census Bureau divides the income distribution into nine segments and three broader categories:

• Poor: $0 - $35,000 (again, 2010 dollars)
• Middle Class: $35 - $100,000
• Rich: $100,000 - and up

Source: Economist Anthony Davies

The percentage of households in the low and middle-income segments has declined while the percentage in the high-income segments has increased. Furthermore, over these fifty years, the average number of people living in a household has been steadily shrinking the further down the income distribution we go and increasing the further up we go. Not only are there more wealthy households, but more people are living in those wealthy households.

The middle class is disappearing into the upper class. I am not making any policy statement here. I am saying that policies based on the perception of the middle class being driven into poverty - "the rich are getting richer and the poor are getting poorer - are demonstrably wrong.

Calmly Considered: Global Living Conditions-- Better or Worse?

Are global living conditions getting better or worse?

There are three simultaneous truths:

1. Living conditions are awful for a great many.
2. Living conditions are better than they ever have been, by far.
3. Living conditions can be improved and the trajectory is in a positive direction.

Join Allen Bevere and me as we calmly consider global living conditions.

The World Is Becoming A Better Place To Live For Most People

The great majority of people throughout most of human history have precariously been able to subsist. (See Level 1 below.) A great divergence began just over two centuries ago. Global life expectancy at birth has more than doubled, and abject poverty as a percentage of the population has declined. 

The average life expectancy at birth used to be about 30 years. That doesn't mean no one lived to old age. One in four children born alive died before their first birthday, so the average life expectancy at birth was skewed downward. But life expectancy at every age has improved, especially over the past century.

The researchers at Gapminder have constructed this informative chart showing anticipated improving economic status over the next twenty years. (These numbers attempt to account for changes in the value of "a dollar" over time and across national borders.) Each block equates to 100,000 people. As you can see, the population is larger in twenty years, but a higher percentage of people have moved rightward on the continuum to greater prosperity. Many people find these numbers too abstract. What does this mean in practical terms? Gapminder has constructed this helpful chart to describe what life is like at the four levels. 

You can learn more about these four levels here. 

Three truths. The world has become profoundly better in recent generations and is improving. There is much suffering and injustice as vast room for improving our world. We can make the world a better place.

How to Increase Intergenerational Mobility

Intergenerational mobility is low in the US. Economist Timothy Taylor discusses findings from a recent study investigating how we might make improvements: Intergenerational Mobility and Neighborhood Effects. The unique study incorporates 20.5 million Americans and enables them to analyze down to the city block level.

 

The study determined that neighborhood (.5 mile radius around family) is twice as significant in determining upward mobility compared to family status. Two policy options to consider:

 

First, empowering families to move to locations with greater opportunities. For a variety of reasons, low-income families have significant barriers to relocating for better opportunities. The article shows that when low-income people are provided with brokerage services (much like wealthy professionals get when being relocated), they relocate at dramatically higher rates.

 

Second, rebuilding impoverished neighborhoods with the institutions and resources necessary to achieve upward mobility for people who live there. This one is more problematic to measure and, therefore, more difficult to address confidently. But it does seem to suggest neighborhood development, including economic development, is more critical than isolated aid to families. It seems aid to families without a corresponding improvement in societal support systems is ineffective. 

Billionaires do NOT pay an overall tax rate lower than the bottom 50%.

Two months ago, the New York Times uncritically ran an article claiming billionaires pay lower tax rates than the bottom half of American earners. (I see this and related pieces circulated by my progressive friends.) The unsubstantiated and yet-to-be-reviewed data came from economists Emmanuel Saez and Gabriel Zucman, a tease to promote their soon-to-be-released book. Their claim is contrary to other economic entities that monitor and study taxation. Once the book was released, the methodology became public. The methodology conflicts with the methodology they used just a few years ago in peer-reviewed research.

I am not a tax expert, but I have tried to follow the discussion. Econofact gives one of the best summaries of the claim. (Are Taxes (And Also Spending) Progressive?) A couple of observations:

"In their book, Saez and Zucman reach conclusions that are at odds with a variety of previous studies. … What explains the difference? Relative to previous estimates, the current choices and assumptions made by Saez and Zucman generate higher estimates of income among high-income households, and of taxes on low-income households."

"Considering only positive tax payments gives an incomplete picture of the tax system. Some taxes are "refundable" and actually offer credits, such as the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). These credits can create negative tax liability for households. For example, if a household pays $1000 in a given year but receives $1,500 in an earned income tax credit, on balance, they have paid negative taxes. Conventional analyses count programs such as the EITC and the CTC as negative taxes, but Saez and Zucman exclude these credits from their analysis, making the tax system look more regressive than other studies show."

Taking this a step further, assume you have an income of $10,000 and tax credits that net you $5,000. You have $15,000 to spend. Assume the local sales tax is 10%. You pay $1,500 in local sales taxes. But these economists don't count the credits. So the tax rate is effectively 15% because the denominator by which you divide $1,500 is $10,000, not $15,000. It artificially inflates the tax burden even more. They do other "unique" things, like count health insurance premiums as taxes. 

On a further note, these two economists are key economic advisors to the Elizabeth Warren presidential campaign, and this book was written and released to support her political objectives, not as a scholarly analysis.

I am not defending billionaires or the present tax system. A factual claim was made concerning billionaires and taxes. Is it true? Outside of these two economists writing with a clearly partisan objective and using unorthodox methods, there is no support for the claim. A disdain for billionaires and a passion about inequality does not make the claim accurate.

Half of Global Wealth Owned by 62 People: How Oxfam Lies While Telling the Truth

Once again, Oxfam is circulating that 62 people have as much wealth as the bottom half of the world's population. Think about that for a moment. When you read that, what do you think that means? Particularly, what is wealth?

Many people will interpret "wealth" as financial assets. Many others realize wealth includes the value of our non-financial possessions. Therefore, Oxfam says that if you add up the value of all our possessions, 62 people own half. Right? Wrong! Though that is the message they want you to hear.

Terminology lesson. The sum of your financial and non-financial possessions is your total assets. Wealth is your total assets minus your debt. Wealth is your net worth. Oxfam misconstrues wealth as total assets. (As this has been thoroughly documented in the press for years, we can only assume the misrepresentation is intentional.)

Thanks to Reuters reporter Felix Salmon, who dug into Oxfam's sources, we know Oxfam uses Credit Suisse Global Wealth Databook to calculate their numbers. Here is how it works (using the 2015 Databook):

• Step 1: Find the global wealth total. Page 90 says it is $263 trillion.
• Step 2: Find the percentage of wealth owned by the bottom 50%. Here are the percentages of global wealth for the bottom five deciles of wealth ownership from lowest to highest (p. 148): -0.3 + 0.1 + 0.1 + 0.3 + 0.5 = 0.7%.
• Step 3: Calculate the amount of wealth for the bottom half. Multiply $263 trillion by .07%. That gives $1.84 trillion.
• Step 4: Get a list of the wealthiest people in the world and then add them up until you get to $1.84 trillion.

That may seem right at first glance but look at this graph from Credit Suisse's Global Wealth Report 2015. (p. 15) It shows what percentage of each decile lives in which region of the world. I've added two notations.

Note that the United States has 10% of the world's least wealthy people (circle 1). China has none of them (circle 2)! How is that possible? Because the bottom number for wealth on the left side of the chart is not zero. It is a negative number. The middle-class American with a mortgage, student loans, and consumer debt totaling more than the value of her home, bank account, and other possessions, is less "wealthy" than a Chinese peasant farmer who owns virtually nothing but also has no debt. The entrepreneur who borrowed a million dollars for his business is even "poorer" than these two. This is who Oxfam is grouping in its bottom 50% of wealth. It is a meaningless comparison. But the deception does not stop there.

Oxfam builds a narrative that the increasing concentration of wealth at the top has the corresponding negative effect of making people poorer at the bottom. Their misrepresentation of wealth as total assets gives us no insight into this claim. I will suggest that income is a more critical issue for the poorest people in the world than wealth or total assets. One must have an income that at least meets basic needs before she can begin to save, invest, and buy capital goods.

Extreme poverty, measured by income, is rapidly disappearing. The percentage of people living on less than $1.90 per day has shrunk from almost 40% in 1990 to less than 10% today (and we have added an extra 2 billion people.)

(Source: Washington Post)

Furthermore, the global income distribution has been progressively moving toward a bell curve distribution and away from a bi-modal distribution, with wealthy people clustered at the top and very low-income people clustered at the bottom.

(Source: Business Insider)

And this chart shows how the mean and median global per capita income numbers keep rising, also noting that the global GINI coefficient declined from 68.7 to 64.9 between 2003 and 2013. (Lower GINI number means more equality.)

(Source: Conversable Economist)

As I have continued to learn about these issues, I keep coming to this graph as a discussion starter on economic inequality.

(Source: Pew Research)

To me, this chart suggests that recent trends in technology and globalization have benefited billions of people who once lived in bare subsistence poverty. There is a small minority of people at the left of the chart who are not being touched by these changes, most of them living in counties with turmoil and failed nation-states. At the extreme right are the owners of capital who have benefited from productivity and expanded trade. Middle-class people in developed nations have experienced downward pressure on their wages due to technology and a burgeoning labor supply in a global economy. However, living standards are not just a function of wages but also the cost of living. A case can be made that the developed world middle class had improvements in living standards because globalization kept the cost of living lower than it otherwise would have been. That does not show up in this chart. It is more complex, but a chart like this is a better place to begin a discussion.

In short, Oxfam wants to promote a narrative that casts global capitalism primarily as an exploitative enterprise, a zero-sum game where the growth of wealth at the top necessarily means the reduction of wealth at the bottom. The narrative intuitively makes sense. Some version of this thinking is common, but it is virtual gospel on the left where the moral compass is directed predominately by equalization rather than a robust conceptualization of justice. But it is wrong. It is as ideologically myopic as the "free markets and democracy fixes everything" mantra on the right.

Finally, let me be clear about what I did not say. I did not say I thought that the growing concentration of wealth at the top was good, that there are not masses of people who need substantial improvement in their economic well-being, that global capitalism is an unqualified good, or that there are not profound economic injustices in the world. I did not speak to any of Oxfam's proposed policy solutions. Discernment of economic issues is complex and requires our best efforts at sound analysis to bring lasting and just change. Oxfam's misuse of the data to support ideologically predetermined policies does not help. They are telling the truth about the numbers they use, knowing the numbers they use will lead most of us. That is what I'm addressing.

 

Global Inequality in Decline

This chart comes from Timothy Taylor's post, The Shifting World Distribution of Income. One notable thing I saw was that median annual income (measured in purchasing power parity dollars) doubled from 2003 to 2013. This chart suggests it will double again within about 20 years. Of course, the most obvious change is the collapse of the spike at the low end of the chart, indicating the rapid decline in the number of people living in or near extreme poverty. See Taylor's post for more details.

Double-Edged Denmark: What we Should Learn

Denmark became a central topic during the Democrats' debate last week. Bernie Sanders calls himself a democratic socialist. Hillary Clinton loves Denmark but dismisses the idea that America can be Denmark. This inspired several articles by various commentators about the truth behind Denmark's economic model (or the Nordic model more generally.) Progressives like the high taxes, low inequality, and high government spending. Conservatives counter by noting that the Nordic countries rank among the countries highest in free trade and low corporate taxes. I've been linking articles on Facebook, but I thought this piece in Niskanen was the best. Double-Edged Denmark

Right-leaning arguments about the free-market marvel that is Denmark cut both ways. Denmark shows us that a much larger public sector and a much more robust social-insurance system need not come at the expense of a dynamic market economy. In other words, Denmark shows us that capitalism and a large welfare state are perfectly compatible and possibly complementary.

The lesson Bernie Sanders needs to learn is that you cannot finance a Danish-style welfare state without free markets and large tax increases on the middle class. If you want Danish levels of social spending, you need Danish middle-class tax rates and a relatively unfettered capitalist economy. The fact that he's unwilling to come out in favor of either half of  the Danish formula for a viable social-democratic welfare state is the best evidence that Bernie Sanders is not actually very interested in what it takes to make social democracy work. The great irony of post-1989 political economy is that capitalism has proven itself the most reliable means to socialist ends. Bernie seems not to have gotten the memo. But Bernie Sanders isn't the only one failing to come to terms with the implications of Danish social-democratic capitalism.

The lesson free-marketeers need to learn is that Denmark may be beating the U.S. in terms of economic freedom because it's easier to get people to buy in to capitalism when they're well-insured against its downside risks. That's the flipside irony of free-market "socialism. ...

... the reason the U.S. is lagging so far behind big-government Denmark on free trade, corporate taxation, ease of doing business, and more may very well be that the American safety net isn't good enough, and economic insecurity at the bottom and middle makes free-market policies a tough sell to anxious American voters.

I don't know that this is true. But, then again, libertarians and free-market conservatives don't know that it's not. Mostly, ideological American capitalists really badly want to believe it's not true that we're falling behind Denmark as capitalists because we're not redistributive enough. (I mean, the previous paragraph made me feel like I was channeling E.J. Dionne, which was … unsettling. But let us put away childish things.) Because if it is true, and social insurance and capitalism are complementary in this way, then champions of economic liberty will be forced to face up to the possibility that attacking the welfare state undermines support for laissez faire economic policy. Some of us might even be forced to choose between our love of capitalism and dislike of the welfare state. Awkward. ..."

Economic development always includes, in some broad sense, an embrace of trade and freedom from arbitrary interference in market activity. Yet when you look at the various nations that rose to affluence in the last century, diverse paths were taken to get there. The particular way toward trade and freedom seems less important than the stability issue. When the various players in the economy and society behave in predictable patterns, they can better predict and coordinate their behavior, even if the patterns are not optimal regarding trade and freedom. The imposition of trade and freedom that generates too much instability may be worse than simply staying with less effective economic models in the short run and letting things evolve.

This need for security and stability is a piece that most libertarians frequently undervalue at both the macro and micro levels. Economic historians will tell you that one of the pivotal developments in history (among several) was the emergence of limited liability. People could pool their resources and form joint ventures without risking their entire assets. Bad choices or unforeseen developments would not leave you destitute.

If the aim is a dynamic, risk-taking economy leading to high productivity and economic growth, then we need security and stability for citizens. With a basic safety net in place (here, I'm thinking mostly of a guaranteed minimum income as opposed to our wasteful welfare industry), people would become less risk-averse, knowing that trying new stuff doesn't lead to destitution if you fail.

But if libertarian conservatives are blind to security issues, progressives are blind to productivity and economic growth. Take the living wage debate. It is said that Walmart's low wages are possible because taxpayers subsidize the workers through the welfare system. Nonsense. Welfare support drives up wages. If the wages aren't at least comparable to welfare options, then why work?

Furthermore, while each business should have the aim of helping their employees flourish (improving their skills and providing opportunities to gain more responsibility in a safe environment), businesses are neither benefactors nor aid agencies. They are the institutions responsible for transforming matter, energy, and data from less useful forms to more useful forms on a sustainable basis. Sustainability means creating more value than the value of resources being used. Wages artificially set above the economic value contributed by labor are unfavorable to productivity and sustainability.

I know of no country, including the Nordic countries, which presumes that every job in every circumstance should provide a "livable" income "unsubsidized" by the government. The minimum wage is a temporary introductory wage people earn as they develop skills and experience. Few earn it for more than a period of a few months. Excessively high introductory wages compel businesses to adapt in ways that reduce the amount of this labor they use and decrease the opportunities for the least-skilled to find an on-ramp into the economy.

So while precisely replicating the Danish or Nordic model in a large, diverse nation like the United States may not be feasible, there are lessons here. To the degree the Nordic models have worked, they have done so because they have successfully married security and growth. This is a managed polarity for them, like breathing embraces both inhaling and exhaling. In America, our partisan factions grasp one polarity pole and demonize the other. To the degree they succeed, we are in deep trouble. That is the lesson I learn from double-edged Denmark.

 

Save

How GDP shares have shifted across the world since 1000 AD

Business Insider: How GDP shares have shifted across the world since 1000 AD

Interesting graph.

Trends in Extreme Poverty (Spoiler: The Poor Are Not Getting Poorer)

Globally, the number of people living in extreme poverty ($1.25 a day) is shrinking. The global poor are not getting poorer. The world population grew from 4.5 billion people in 1981 to 6.9 billion in 2010 - a 60% increase. The percentage of people living in extreme poverty in developing nations dropped from over 50% to 21%. (From about 1.95 bil. to 1.2 bil., estimates are now well below one bil. in 2015.)

That doesn't mean life just above the extreme poverty line is desirable. That doesn't mean there isn't a great deal more to do. But let's be honest about the trajectory. And let's also be honest that central to the decline in extreme poverty has been the inclusion of the poor in networks of productivity and exchange - that is to say, they embraced some form of market capitalism. Unqualified dismissal of "capitalism" (rarely defined by critics), as some religious leaders are prone to do, should be challenged.

Source: World Bank - State of the Poor

The Rise in Global Per Capita Income and Decline in Global Inequality

The Economist: Some good news for development economists

Top 1% Income Share Is The Same As 1999

From a post by Greg Mankiw (The One Percent, Updated):

Over the last sixteen years, the share of pre-tax income earned by the top 1% has ranged between 17% and 23%. I calculate an average of 20% over that time frame, precisely where it is today. Read Mankiw's post for more details.

A peculiar note: I suspect if you were to show this data from 1975 forward without the title and the y-axis label, many people would think this was a graph about global warming.

Globalization and Inequality: Two Complex Decades in One Simple Graph

Pew Research Center: Chart of the Week: How two decades of globalization have changed the world

(Source: Milanovic, B., Lead Economist, World Bank Research Department, Global income inequality by the numbers. Annotations by James Plunkett.)

I have seen the unannotated version of this graph several times, but the annotations really make things clear. The graph shows that much more is going on here than simplistic narratives of "The rich are getting richer, and the poor are getting poorer" (the graph discredits the second half of that statement) and the 1% versus everyone else.

GDP Growing Fastest in Poor Countries

The world's poorest regions have been growing the fastest for at least twenty years. The Economist forecasts world GDP to be 2.9%, Asia and Australasia (less Australia) at 5.7%, and Sub-Saharan Africa at 4.5%. These rates indicate a considerable slowing of growth from recent years. The US forecast is 3.2%. This is more evidence that global inequality is shrinking, even though inequality within many nations is increasing. As the bottom of the economic ladder rises, so does the distance between the bottom and the top. A recent article forecasted that there would be no poor nations by 2050. I think that is likely. See: Gauging growth in 2015

23 Charts That Show Why This Is The Best Moment In History To Be Born

Business Insider: 23 Charts That Show Why This Is The Best Moment In History To Be Born

Here are a few of my favorites. Click through to see the rest. The big question is not how to stop the world from spiraling into chaos. The big question is how we get an improving world to improve more quickly and broadly. We have challenges ... climate and ecosystem impacts, evolving energy challenges, shift to renewable/recyclable resources ... but we have always had challenges. This is the golden era of humanity as it relates to material, physical, and political well-being. We just have to keep pushing to make it golden for everyone.

 

Reasons to Be Cheerful

Matt Ridley: Reasons to Be Cheerful

We are prone to fixate on problems and threats. The news concentrates on Ebola, the Middle East and Ukraine violence, and the discord in Ferguson, Missouri. But it is important to keep present challenges (and they are more decidedly real) in context. Matt Ridley offers twelve reasons to be cheerful when we look at broader trends.

So let’s tot up instead what is going, and could go, right. Actually it is a pretty long list, just not a very newsworthy one. Compared with any time in the past half century, the world as a whole is today wealthier, healthier, happier, cleverer, cleaner, kinder, freer, safer, more peaceful and more equal.

1. The average person on the planet earns roughly three times as much as he or she did 50 years ago, corrected for inflation. If anything, this understates the improvement in living standards ...

2. The average person lives about a third longer than 50 years ago and buries two thirds fewer of his or her children (and child mortality is the greatest measure of misery I can think of).

3. The amount of food available per head has gone up steadily on every continent, despite a doubling of the population. Famine is now very rare.

4. The death rate from malaria is down by nearly 30 per cent since the start of the century. HIV-related deaths are falling. Polio, measles, yellow fever, diphtheria, cholera, typhoid, typhus — they killed our ancestors in droves, but they are now rare diseases.

5. We tell ourselves we are miserable, but it is not true. ...

6. education is in a mess and everybody’s cross about it, but consider: far more people go to school and stay there longer than they did 50 years ago.

7. The air is much cleaner than when I was young, with smog largely banished from our cities. Rivers are cleaner and teem with otters and kingfishers. ... Forest cover is increasing in many countries and the pressure on land to grow food has begun to ease.

8. We give more of our earnings to charity than our grandparents did.

9. Violent crimes of almost all kinds are on the decline — murder, rape, theft, domestic violence.

10. Despite all the illiberal things our governments still try to do to us, freedom is on the march.

11. The weather is not getting worse. Despite what you may have read, there is no global increase in floods, cyclones, tornadoes, blizzards and wild fires — and there has been a decline in the severity of droughts. ... there has been a steep decline in deaths due to extreme weather.

12. As for inequality, the world as a whole is getting rapidly more equal in income, because people in poor countries are getting richer at a more rapid pace than people in rich countries. ...

By all means, let us address the problems at hand, but let us also tap down the tendency to see only the negative and give in to gloom and despair.

The Hockey Stick of Human Prosperity

From MRUniversity, Everday Economics:

"We are pleased to announce a brand new course at MRUniversity, Everyday Economics. The new course will cover some of the big ideas in economics but applied to everyday questions. The first section, premiering now and rolling out over the next several weeks, features Don Boudreaux on trade. Tyler will appear in a future section on food. You can expect more from me as well. Indeed, you may spot both Tyler and I in some cameos (ala Stan Lee) in some of Don’s videos!

Here’s the first video on trade and the hockey stick of human prosperity."

Measuring Inequality: On Using Snapshots When Only Video Will Do

When it comes to understanding inequality, the debate is frequently burdened with many misunderstandings about data. When talking about wealth inequality, we see statements like "85 people own more wealth than the bottom half of humanity." Wealth is routinely misunderstood to mean money and things someone owns. It isn't. Wealth is someone's total assets minus their liabilities. It is common to have negative wealth. The peasant farmer in rural China who has managed to save $200 and is debt free is "wealthier" than the high-income young M. D. who has a negative net worth due to substantial student loans (i.e., she owes more than she presently owns.) I recently wrote about this in The World's Bottom 10%: 7.5% Live in North America and None Live in China … And Other True But Worthless Facts.

Then there is the constant citation of growing inequality in pre-tax and pre-transfer income in the U. S. (usually just stated as "income") and the need to rectify it through redistribution. But if you only look at pre-tax and pre-transfer income, no amount of redistribution will have one penny of impact. We could transfer $100,000 to every household in the bottom half of the income distribution, and it wouldn't matter because it would be income after taxes and transfers. When we look at after-tax and after-transfer income, we see that there has been little change in inequality between those at the 95^th percentile and those at the 20^th percentile for the last twenty years. See my post, Is Income Inequality Really the Problem? It Depends on What You Call Income.

Today, Arnold Kling reviews Chasing the American Dream by sociologists Mark Robert Rank, Thomas A. Hirschl, and Kirk A. Foster. (See Kling's post: The Longitude of Well-Being) He cites a stat that shows that homeownership rates have remained fairly constant at about 67%. Kling then asks what percentage of Americans aged 55 have owned a home. A) 50%, B) 70%, and C) 90%. Kling says he would have guessed 70% when in fact, it is 90%. The 67% number is a cross-sectional piece of data, taking a "snapshot" of homeownership at a given time. The 90% number is a longitudinal piece of data, taking a "video" of homeownership over time.

… the question that I asked concerns what demographers refer to as longitudinal information. If you follow given individuals over a long period, what sort of cumulative outcomes will you observe? In particular, over a lifetime, how many people will at some point own a home? To answer a longitudinal question, you need to use longitudinal data. To instead use time-series cross-section data risks making serious errors.

Most of the conventional wisdom about relative economic well-being, including the famous studies by Thomas Piketty and Emmanuel Saez, commits the time-series cross-section fallacy. Rank, Hirschl, and Foster did not set out to debunk this fallacy or to attack the many economists guilty of it. Instead, they took what seemed to them a natural approach for studying the evolution of wealth and poverty: longitudinal data. The result, in my reading, is that, like the boy in the fable, they have in an innocent, unintended fashion exposed statistical nakedness among many economists who are regarded as experts on the topic of inequality.

Once you think about it, the truth about homeownership rates makes sense. At some point in our lives, nearly all of us have been renters. In addition, most of us are likely to "downsize" as we grow older, and in the process many of us may choose to rent.

Kling moves on to the authors' discussion of how many years a household spends in poverty or affluence between ages 25 and 60. Kling offers an interesting alternative.

I would be interested in what the data show if, rather than looking at the extremes, one does the opposite. That is, throw out each household's lowest and highest three years of income. For the remaining years of income, take the average relative to the poverty line. If this average is below 150 percent of the poverty line, call it low. If it is above 500 percent of the poverty line (which works out to about 200 percent of the median), call it high. Then calculate the proportion of households that have high, medium, and low incomes by this longitudinal measure.

This would produce a very different breakdown. For instance, suppose that, rather than quitting my job to start an Internet business, I had kept working and that my salary had continued to increase gradually until I reached age 50. In that case, under the authors' measure, our household would be in the bottom of the income distribution, because of the "poverty" of my graduate school years and my failure to achieve the income level that they require for "affluence." However, using my approach, my household would have been somewhere in the vicinity of the boundary between high-income and middle-income. That seems much more reasonable to me.

Overall, as with homeownership data, the longitudinal view of income paints a picture in which life-cycle variation and idiosyncratic factors play a role. This role is overlooked in discussions of inequality that commit the time-series cross-section fallacy.

As I read Kling's piece, I wondered how many people have had pimples. My guess is that the answer approaches 100%. Yet we don't see headlines about acne experienced by more than 90% of people at least one year in their lives. We understand that for most people, this is a temporary life-stage issue. The universe of people for whom acne is an ongoing problem is much smaller. The same is true with poverty. I'm intrigued by Kling's idea of discarding outliers and looking at 90% of the data between the outliers.

The reality is that no set of data or particular lens can tell us the whole picture about issues like poverty and inequality. We must examine the issues from multiple angles to get to the truth. But it is incumbent on us to be aware of what lens we are using at any given time and what that lens is actually showing; in this case, knowing the difference between a snapshot and a video.

Economic Development Links

1. Economist: March of the Middle Class

2. Chrsitianity Today: Poverty Is a Moral Problem - Interview with William Easterly

... The sad thing is that the field and practice of development have too often been on the wrong side of this debate. They've implicitly painted themselves into a corner where they're on the authoritarian side. Then they're backing the autocrats, backing the oppressors against the oppressed. ...

... Any advice for a 20-year-old reading this article who wants to "change the world"?

I love young people who want to change the world!

I think we need rebalancing. A large share of the effort has been going to direct technical solutions to poverty. But this has neglected the other option of advocacy and education for rights as an important moral goal. Rights also work to promote development. ...

3. BBC: Ending poverty needs more than growth, World Bank says

... "This is simply not enough, and we need a laser-like focus on making growth more inclusive and targeting more programmes to assist the poor directly if we're going to end extreme poverty." ...

4. Mashable: 64% of World's Extreme Poor Live in Just 5 Countries

... Using the most recent data from 2010, the report shows that nearly two-thirds of the extremely poor — that is, those who live on less than $1.25 a day — live in just five countries: India, China, Nigeria, Bangladesh and the Democratic Republic of Congo. ...

5. Wired: The Hyper-Efficient, Highly Scientific Scheme to Help the World’s Poor

... How did ICS know the campaign would work? It made sense in theory—free textbooks should mean more kids read them, so more kids learn from them—but they had no evidence to back that up. On the spot, Kremer suggested a rigorous way to evaluate the program: Identify twice the number of qualifying schools as it had the money to support. Then randomly pick half of those schools to receive the textbooks, while the rest got none. By comparing outcomes between the two cohorts, they could gauge whether the textbooks were making a difference.

What Kremer was suggesting is a scientific technique that has long been considered the gold standard in medical research: the randomized controlled trial. At the time, though, such trials were used almost exclusively in medicine—and were conducted by large, well-funded institutions with the necessary infrastructure and staff to manage such an operation. A randomized controlled trial was certainly not the domain of a recent PhD, partnering with a tiny NGO, out in the chaos of the developing world. ...

6. Christianity Today: How Female Farmers Could Solve the Hunger Crisis

... This gender inequality carries desperate consequences. Lack of basic tools and training means women grow and harvest significantly lower yields than men – not because they can't farm as well, but because they don't have necessary resources. In fact, female farmers do more to increase food security in rural communities than men. Women cultivate vegetable gardens and edible crops close to home, which allows them to watch their children and cook meals. In contrast, men tend to travel further from the house to grow cash crops like tobacco, coffee, and corn – crops that do little to supplement diet. ...

7. Businessweek: Have Higher Food Prices Actually Helped the World's Poor?

... Data, however, pointed in the other direction: The number of people in developing countries who reported that there had been times in the past 12 months when they didn’t have enough money to buy the food their family needed fell by hundreds of millions (PDF) from 2005 to 2009. In 2013 improved FAO estimates backed up the earlier polling reports: The numbers suggested that 842 million people in the 2011-13 period were unable to meet their dietary energy requirements, down nearly 6 percent (PDF) from 893 million people in the 2005-07 period. ...

... Heady suggests the fundamental assumption of previous poverty prediction models—that because poor people eat more food than they grow, they’re hurt by higher prices—did not account for the impact of food prices on wages. In a lot of places, as the prices of food rose, poor people earned more money. Even though they were paying more for food, their increased incomes more than made up for that and they got a little richer. In Bangladesh, for example, rural wages adjusted for the price of food increased by about a third from the middle of 2006 to the end of 2010. (Urban wages remained essentially unchanged.) ...

8. MR University: Water and common pool problem

The general logic here applies to a large number of problems in economic development, not just water. This is one of the key ideas of the theory of property rights.

9. Atlantic: How Sanitary Pads Can Help Women Improve Their Health and Education

... That's the little formula that's fueling Arunachalam Muruganantham's thriving sanitary-pad machine business, an undertaking that's not only making Muruganantham money, but one that will improve women’s hygiene in India and throughout the developing world.

Many women living in poverty use rags, newspaper, or even mud to manage their menstrual periods. None of these work very well and can introduce infections or injuries; they also circumscribe women’s movement. Often, women fear being in public without protection from blood staining. ...

10. Business Insider: Here's Why Mexico Is Increasingly Becoming A Crucial Global Manufacturing Hub...

However, another big beneficiary of rising Chinese labor costs and U.S. economic growth has been Mexico. This has come despite concerns about crime and safety.

Mexico benefits from the North America Free Trade Agreement (NAFTA). At 44, it also has more free-trade agreements than any other country. Mexico also benefits from having its natural gas prices tied to those in the U.S. where prices are substantially lower relative to the rest of the world.

Average electricity costs are about 4% lower in Mexico than in China, and the average price of industrial natural gas is 63% lower, according to a study by the Boston Consulting Group.

The same study found that by 2015, average manufacturing-labor costs in Mexico are projected to be 19% lower than in China. In 2000, Mexican labor was 58% more expensive than in China. ...

11. US AID: Full Speed Ahead on Malaria

Today, the greatest success story in global health is anchored by a continent once known mostly for famine and war. Many countries in sub-Saharan Africa are making unprecedented gains in child survival and reducing the devastating burden of malaria—a disease carried by mosquitoes and a major killer of children.

According to the World Health Organization an estimated 3.3 million lives were saved as a result of the scale-up of malaria control interventions over the last decade. Over the same period, malaria mortality rates in African children were reduced by an estimated 54 percent. ...

12. Huffington Post: Africa Is Richer Than You Think

Africa suffers from another kind of poverty: lack of accurate statistical data. And it is a tragic, messy situation. Nigeria nearly doubled the size of its economy overnight -- a whopping 89 percent -- surpassing South Africa to become Africa's largest economy and the world's 26th largest. What was thought to be a $270 billion economy one day became a $510 billion economy the next day, adding some $240 billion to its economy. To put the change into perspective, it is almost like adding Israel's economy, or more than Portugal's, to Nigeria's economy. It sounds like magic but it is not. Inaccurate economic data is commonplace across much of Africa. ...

13. Atlantic: How to Make Solar Panels Affordable—for Billions

Like the installment plans of the Great Depression, Simpa Networks' "Progressive Purchase" agreements are enabling customers in rural India to get solar power for their homes. ...

14. PBS: Capitalism in Cuba? It’s closer than the U.S. may think

... As an economist who had the opportunity to observe, first-hand, the difficult transitions of China and Russia from state to largely market-based economies, I was astounded by the counter-productive actions of my government. On its own, Cuba was well into a carefully planned transition to a market-based economy. The only impact of additional U.S. meddling would be to set back this process. ...

15. Mashable: 750 Million People Still Don't Have Access to Clean Drinking Water

... Since 1990, 2.3 billion people have gained access to drinking water from improved sources. But despite this progress, 748 million people — 90% of whom live in sub-Saharan Africa and Asia — still use unimproved drinking water sources, according to an updated report the World Health Organization and UNICEF released on Thursday. ...

16. New York Times: What’s So Scary About Smart Girls?

... Why are fanatics so terrified of girls’ education? Because there’s no force more powerful to transform a society. The greatest threat to extremism isn’t drones firing missiles, but girls reading books.

In that sense, Boko Haram was behaving perfectly rationally — albeit barbarically — when it kidnapped some of the brightest, most ambitious girls in the region and announced plans to sell them as slaves. If you want to mire a nation in backwardness, manacle your daughters. ...

 17. Businessweek: The Relentless Rise Of Global Happiness

... The rest of the world, however, is different: The average surveyed person planet-wide reports greater happiness than 10 years ago—which was happier than many reported 30 years ago. That said, it turns out that the factors that lead people to self-report as happy aren’t as obvious as you might think. And this suggests the limits of using happiness as a guide for making public policy. ...

... The World Values Survey presents an additional conundrum: While the share of the world population reporting itself happy has climbed since the 1980s, the average score on a question asking people if they are satisfied with life seems to have declined marginally. ...

 18. Atlantic: Having Kids Probably Won't Destroy the Planet

An overpopulated planet is not necessarily doomed. What matters most is how those billions of people choose to live. ...

Deirdre McCloskey vs Thomas Piketty - a clash of the inequality titans

The Spectator: Deirdre McCloskey vs Thomas Piketty - a clash of the inequality titans

Well, I think I might have met his match. She's called Deirdre McCloskey. ...

... McCloskey on the other hand, who is meant to be the conservative one, has the zeal of a revolutionary. She describes herself as an ex-Marxist, Christian libertarian. She is the most notable transgender economist in the world (I can’t recommend strongly enough Crossing, A Memoir, her moving account of her journey from Donald to Deirdre.) She is an entertainer and storyteller; one of the few serious economists who is as likely to quote the poetry of Robert Burns in support of an argument as she is to quote wheat prices in the 15th century.

But forget the characters. It is the intellectual contrast which gets to the heart of the debate between those who worry about in-equality and those who don’t. ...

...  McCloskey, by contrast, has long argued that economists are far too preoccupied by capital and saving. She doesn’t even like the word capitalism, on the grounds that capital is not what got us where we are today. ‘If Scotland is trying to become Holland, then capital accumulation is how to do it. That will double your income, maybe triple it.’ But for her, that sort of accumulation is a scratch-card-sized prize — and the lottery jackpot beckons. She enthuses about the Great Enrichment of the 19th century. ‘What happened, understand, is not 100 per cent growth, but anywhere from 2,900 per cent growth to 9,900 per cent growth. A factor of either 30 or 100.’

That jump in incomes came about not through thrift, she says, but through a shift to liberal bourgeois values that put an emphasis on the business of innovation. In place of capitalism, she talks of ‘market-tested innovation and supply’ as the active ingredient of our economic system. It is incidentally a system ‘drenched’ in values and ethics overlooked by economists. ...

...  The answer to that question determines what should be done about inequality. Piketty wants a progressive tax on wealth to prevent high returns entrenching the power of the richest. McCloskey, needless to say, is not keen on redistribution. Taking from today’s rich may give you a one-off uplift in the incomes of the poor of, say 30 per cent, she says; but that is nothing to the uplift from innovation and growth, which can double incomes every generation.

So much for the central disagreement between them. Here’s my problem. Many people with strong views on inequality consciously or unconsciously think of this as a binary choice: profits go to either a deserving or undeserving rich, depending on your view. It’s all about capital, or all about wealth creation. But I struggle to see it that clearly. I’d like to know how much of the return on capital that so concerns Piketty is actually income earned from entrepreneurial wealth creation. I’d also like to know how important that income is to innovation.

Piketty is well aware of this vulnerability in his argument. ...

...

She is admirably pure in her view, but is it as black and white as she portrays it?

Bill Gates or Liliane Bettencourt? They co-exist, of course, and have both had a pretty good time of it in recent decades. The question is which one better characterises the very rich. And also which risk you would rather take: taxing the Bills at the risk of deterring them from creating Microsofts? Or not taxing the Lilianes, at the risk of letting them become ever wealthier and more powerful while sitting at home doing nothing?

I know that the 99 per cent of the population have no difficulty coming to a view. I’m in the sad 1 per cent, who can see both sides.

Very interesting article! I lean more in McCloskey's direction. I think the impact of innovation is invisible to so many and it is radically underappreciated by others who acknowledge it. But I also share the ambivalence so well expressed by the author in this article. Here is a clip of McCloskey:

Is Income Inequality Really the Problem? It Depends on What You Call Income

Are the rich getting richer and the poor getting poorer? Stories about inequality typically talk about how the rich, especially the top 1%, are seeing their incomes grow rapidly while people at the bottom are seeing their incomes stagnate and drop. A gap is widening between the top and the bottom. Is that true?

The Federal Reserve Bank of Minneapolis has just published an interesting report that studies the relative income performance of households from 1967-2012. It compares households at the income distribution's 95th, 50th, and 20th percentiles. The report's distinction between two types of income is revealing: Market income and disposable income.

Market income (pre-tax and pre-transfer income) is what we typically see reported. But when we adjust for taxes (which substantially decreases the income of the wealthy) and add in transfer income like social security, unemployment, and welfare payments (which substantially increases the income of people in poverty), we get disposable income. Disposable income paints a much different picture than market income. Let's look at two important graphs:

The top line in the chart is the ratio of market income (pre-taxes and transfers) of households at the 95th percentile as a ratio to households at the 50th percentile. For example, it appears the households at the 95th percentile made 2.7 times as much as those of the households at the 50th percentile in 1967. By 2012, they were making about 3.6 times as much. The bottom line tells a different story.

Disposable income (after taxes and transfers) follows a similar pattern until about 2000, when the ratio leveled out at just below 3.0, and has remained between 2.9-3.0 ever since. That means that despite market income having risen faster for the 95th percentile compared to the 50th percentile, inequality in terms of what people have to spend at the end of the day hasn't really changed for almost fifteen years.

Then there is this chart:

This chart shows the ratio of the 50th percentile to the 20th percentile. Note the ratio of market income continues to widen with each business cycle. The recessions, shaded gray, result in spikes of unemployment. That expands the ratio, and then the ratio contracts a little as employment improves. The sharp jump at the end correlates with very high unemployment and underemployment.

But the striking thing is the disposable income line. It is flat from 1983 onward (until a slight increase since the 2008 financial meltdown.) There has been virtually no change in inequality between the 50th percentile and the 20th percentile for thirty years!

Some observations:

1. The debate around inequality typically points to the widening gap in market income between the top and bottom. More transfer of wealth is proposed to balance out the income people receive. Market income and disposable income are conflated. If a household with a market income of $15,000 gets transfers of an additional $15,000, for a total of $30,000 in disposable income, they still have a market income of $15,000! Pointing to market income statistics as an indicator that the distribution of income is insufficient is erroneous. By this reasoning, a $15,000 household could get $1,000,000 in transfers, but they would still be "living in poverty" because transferred income is not considered in the income calculation.

2. This analysis focuses only on households in the top 5%, not the top 1%, where so much debate has been. For reasons reported in the article, the data did not lend itself to a study of the very top 1% or 0.1%. The ratio of disposable income of the very top to lower percentiles may be increasing. But the ratio of disposable income is certainly much lower than market income.

3. This study suggests that public policy has been doing a very good job of preserving disposable income ratios for many years. We may want to debate if these ratios are just, but they are not widening.

4. The fact the market income ratio continues to widen, meaning it takes more transfers to keep disposable income constant, suggests that low wages and unemployment, not insufficient transfers, are becoming the problem. Left-leaning figures like Robert Reich argue that the decline of union bargaining and failure to raise the minimum wage are the culprits. Companies aren't paying employees relative to their economic contribution. That leaves taxpayers to subsidize the work that these companies get from low-wage workers. Other economists suggest the labor market is more efficient than that and that most employees are being compensated relative to their economic contribution. While very modest minimum wage increases are likely without much impact on the total labor market, substantial jumps in the minimum wage are likely to lead to automation and off-shoring, thus more unemployment and even more need for transfers than the alleged subsidization of low-wage workers today. Who knows exactly where the truth lies.

We do know that technology and the economy are rapidly changing. That means we need a workforce with the human and social capital to take advantage of such changes. Strong families and educational systems are central to developing that capital, and we know these institutions have weakened for some time. That doesn't help the market income challenge.

The bottom line is that disposable income inequality is not getting worse for the bottom 95%, and it seems likely that whatever inequality is growing between the top 1% and the rest is substantially less than the widely reported market income. Maybe present distributions of disposable income are unjust. That is worthy of debate. But that is different from saying inequality is growing. Market income inequality continues to rise, and what is unclear is if there is a policy fix for this or if this market income inequality is inherent in a post-industrial and digital economy.

World Bank: ‘The world has become more equal’

AEI - James Pethokoukis: World Bank: 'The world has become more equal'

Lots of attention being given to a new World Bank study suggesting China may overtake the United States this year as the world's largest economy, adjusted for living costs. But this other World Bank finding, noted by the Financial Times, is also interesting:

When looking at the actual consumption per head, the report found the new methodology as well as faster growth in poor countries have “greatly reduced” the gap between rich and poor, “suggesting that the world has become more equal”.

As the above chart shows, high-income countries in 2005 had 16.4% of global population and 60.4% of global GDP vs. 16.8% of population and 50.3% of GDP  in 2011. Although income inequality within nations may be on the rise, global economic inequality between nations is collapsing.

But here's what is really amazing: Back in 2005, low-income countries represented 7.1% of global GDP vs. 1.5% today. Now it's not as if these nations became poorer. Rather they moved up the income ladder. In 2005, 35.4% of global population lived in "low-income countries." Now that number is just 11.1% as more than 1 billion humans "moved" into middle-income nations which now represent 72.1% of global population vs. 48.2% in 2005. ...

I've seen the graph below, but it points to an interesting dynamic. It seems to suggest as economic growth happens in developing nations, the distance between the top and bottom of the income ladder widens considerably, leading to increased inequality in the nation. But economic growth also seems to move the very bottom of the distribution away from zero. It brings the income distribution more in line with developed nations, thus reducing the inequality between nations.

Economics Links

1. Huffington Post: Financially Speaking -- Are We an Illiterate Nation?

... Champlain College's Center for Financial Literacy released its '2013 National Report Card,' which quantifies what states are doing to promote financial literacy in the classroom. Only seven of 50 states surveyed came away from the study with an "A" rating. That's right, a paltry seven states! Of these seven states, only four have a standalone course -- Utah, Tennessee, Missouri and Louisiana.

Thirteen states received a "B" rating, and the remaining 30 states received a "C," "D," or "F" rating. In fact, eight states received an "F" rating. Ask yourself, as a parent, would you be content to have your children bring home similar grades? ...

2. Huffington Post: 40 Financial Things You Should Know by 40

3. Carpe Diem: World market cap reached record high in March, and is $2.4T above pre-recession, pre-crisis level

4. Businessweek: Why Factory Jobs Are Shrinking Everywhere

... But the U.S. jobs slide began well before China’s rise as a manufacturing power. And manufacturing employment is falling almost everywhere, including in China. The phenomenon is driven by technology, and there’s reason to think developing countries are going to follow a different path to wealth than the U.S. did—one that involves a lot more jobs in the services sector.

Pretty much every economy around the world has a low or declining share of manufacturing jobs. According to OECD data, the U.K. and Australia have seen their share of manufacturing drop by around two-thirds since 1971. Germany’s share halved, and manufacturing’s contribution to gross domestic product there fell from 30 percent in 1980 to 22 percent today. In South Korea, a late industrializer and exemplar of miracle growth, the manufacturing share of employment rose from 13 percent in 1970 to 28 percent in 1991; it’s fallen to 17 percent today. ...

5. Forbes: High Tech And Robots Can Create More Low Skilled Jobs, Not Just Destroy Them

As we all wait anxiously for the robots to come and steal all our jobs an interesting finding in a study on the effect of ever higher technology on the demand for low skilled labour. Contrary to what everyone seems to be assuming it is possible for that higher tech to actually increase the demand for that low skilled labour. For the higher tech enables that lower skilled labour to perform tasks that could only previously be done by highly skilled labour. And as the costs associated with whatever the task is fall then we quite naturally demand more of that task to be done. Thus, in certain cases at least, higher tech increases the number of jobs, not reduces them. ...

6. Business Insider: Why Food Prices Are Surging

... In a new report, Morgan Stanley commodities analysts led by Adam Longson attribute the surge in prices to a number of factors, "from weather (in the case of sugar, soybeans and coffee) to disease (in the case of hogs) to geopolitics (wheat and corn)."

The Morgan Stanley analysts don't believe this will continue. ...

7. Atlantic: How You, I, and Everyone Got the Top 1 Percent All Wrong

8. House of Debt: Measuring Wealth Inequality

9. Conversable Economist: An Inequality Chartbook: Long-Run Patterns in 25 Countries

This is an interesting chart from chartbook of income inequality.

10. Brookings: Income Growth and Income Inequality: The Facts May Surprise You

... The broadest and most accurate measures of household income are published by the CBO. CBO’s newest estimates confirm the long-term trend toward greater inequality, driven mainly by turbo-charged gains in market income at the very top of the distribution. The market incomes of the top 1% are extraordinarily cyclical, however. They soar in economic expansions and plunge in recessions. Income changes since 2007 fit this pattern. What many observers miss, however, is the success of the nation’s tax and transfer systems in protecting low- and middle-income Americans against the full effects of a depressed economy. As a result of these programs, the spendable incomes of poor and middle class families have been better insulated against recession-driven losses than the incomes of Americans in the top 1%. As the CBO statistics demonstrate, incomes in the middle and at the bottom of the distribution have fared better since 2000 than incomes at the very top.

11. Wall Street Journal: Ignoring an Inequality Culprit: Single-Parent Families

Intellectuals fretting about income disparity are oddly silent regarding the decline of the two-parent family. ...

12. Mother Jones: What If Everything You Knew About Poverty Was Wrong?

... A sociologist at Johns Hopkins University, Edin is one of the nation's preeminent poverty researchers. She has spent much of the past several decades studying some of the country's most dangerous, impoverished neighborhoods. But unlike academics who draw conclusions about poverty from the ivory tower, Edin has gotten up close and personal with the people she studies—and in the process has shattered many myths about the poor, rocking sociology and public-policy circles. ...

13. Forbes: Thank Goodness We Have Walmart If American Shoppers Are This Poor

... The economic background is that sure, WalMart makes good profits out of what it does. Yes, this includes minimising costs such as the wages they pay out, what they’ll let suppliers charge them. It even includes desiring to put other less efficient retailers out of business, those Mon and Pop stores, and to make those that remain more efficient through that competition with them. But there’s another effect of course: consumers save money through those lower prices.

We call this saving the consumer surplus. It’s not something that ever appears in the normal economic statistics, one good reason being that it’s rather hard to calculate. ...

... A 25% reduction in food expenditures just from the existence of WalMart is an amazingly large sum. It’s also considerably larger than the profits that WalMart makes out of its actions. And that’s from a decade ago recall (the paper is from 2005, the data up to 2003) and it is only recording the consumer surplus from WalMart’s move into food retailing, leaving the impact of the other parts of the company aside. ...

14. Atlantic: How the Rich and Poor Spend Money Today—and 30 Years Ago

15. AEI - James Pethokoukis: No, Walmart isn’t ripping off taxpayers

... I think I’m supposed to be outraged that Walmart isn’t paying some employees enough that they don’t need government anti-poverty benefits. But businesses generally aren’t going to pay workers more than they are worth. If a worker can only generate $8 in value to a company, then the firm isn’t going to pay them $10. Nor should they for some humanitarian reason. If American society thinks some of their fellow Americans deserve higher living standards than their skill set currently warrants, then society should pitch in and subsidize their wages through the Earned Income Tax Credit or even a new, broader direct wage subsidy. ...

16. PBS: How nonprofit workers get squeezed when minimum wages increase

Not everyone who supports raising the minimum wage is in a position to pay their employees more. Nowhere is that more true than in the nonprofit sector. ...

17. NPR: Subminimum Wages For The Disabled: Godsend Or Exploitation?

... Executive Director Gus van den Brink says the Sertoma Centre and other agencies do work to find jobs for disabled people in the community, but the focus should not be on shutting down all sheltered workshops. He says it would be nearly impossible for some people with severe intellectual disabilities to get a job at all. It's sheltered workshops, he says, that give them a chance to work and earn a paycheck.

"Some of the individuals may not even completely understand what the value of that paycheck is," van den Brink says. "But they know they are receiving a paycheck, so they are getting a lot of self-esteem. They are very proud of it."

Even so, Assistant Attorney General Samuels says the Justice Department will work with other states to make sure some workers with disabilities have the opportunity to do their work, as she puts it, at "real jobs for real wages."

18. PBS: What’s the welfare initiative uniting liberals and conservatives?

Some conservatives and liberals are uniting around the idea of a basic income because the current welfare system, they say, is an ineffective bureaucracy that doesn’t respect poor people’s ability to make their own decisions. ...

19. Atlantic: Women's Wages Are Rising: Why Are So Many Families Getting Poorer?

Start by looking at what's happening with men's wages. ...

20. Huffington Post: Gender Inequality in the Labor Market: Don't Call It a Wage Gap

When President Obama announced the Paycheck Fairness Act on Equal Pay Day this week, we applauded his efforts to address the so-called "gender wage gap" but, from a data point of view, mourn the fact that he, like many others before him, is building his case around a flawed number. The oft-quoted statistic that women only earn 77 cents for each dollar earned by a man, is not actually very accurate and distracts legislators and the public at large from coming up with solutions to the real problem -- the gender jobs gap. ...

21. Fortune: Corporate America's foreign cash machine: Signs it may be slowing

As governments coordinate to fix international tax laws on overseas earnings, companies may have to pay more taxes. ...

22. Forbes: How The Wealthiest Families Make And Lose Their Money -- Part 5

... Well-accepted research shows that about one-third of companies in the United States make it to the second generation.  Only around 10% reach the third generation.  If wealth were preserved during this movement away from the privately held business into the publicly traded markets, we would expect to see a greater portion of overall wealth being inherited.  But, the numbers tell us that only about 5% of wealth in the U.S. is inherited.  On the other hand, the wealthiest families of Europe hold two-thirds of their wealth in private companies and only one-third in publicly traded securities.  When we then look at inherited wealth, approximately 85% of European wealth is in its third or older generation.  One-third of European wealth is in its fifth or older generation.  This is an astounding result. ...

Stop Obsessing Over Exorbitant CEO Pay

Slate: Stop Obsessing Over Exorbitant CEO Pay

It’s grotesque, but income inequality isn’t as harmful as we think. ...

... But as New York Times economics writer Eduardo Porter noted recently, claiming that wealth inequality is unambiguously harmful is more about ideology than evidence. He cites the struggles of Harvard scholar Christopher Jencks, a leading chronicler of the middle class, to complete a planned book on income inequality. After years of research, Jencks was convinced that the only true statement about whether and how income inequality harms society is “It’s hard to tell.” Progressive economist Jared Bernstein has also found that we can’t prove the assumption that inequality leads to slower growth, given available evidence. It may be true, Bernstein wrote, but we do not have enough concrete proof.

The work of Jencks and Bernstein complicates the neat narrative of robber barons and a new Gilded Age harming the middle class. Because those views lack black-and-white simplicity, however, they tend to receive less attention. Which is a shame, because they’re probably closer to the truth.

The assumption of a causal link between excessive pay at the top and low growth and stagnant incomes fuels the drive to reframe the tax code toward greater redistribution. There is a strong moral case for that, especially insofar as massive gaps between the rich and the rest can be so insurmountable as to severely dent the idea of equality enshrined in the founding of the U.S. That said, even aggressive redistribution will not fundamentally solve what now ails us. ...

... The top 100 CEOs in the survey took home a total of $1.5 billion. That’s rather nice for them, but redistributing, say, $1 billion of that would do almost nothing to help the 100 million people at the bottom of the economic pyramid in the U.S. Even if you included upper management and got to, let’s say, $100 billion, the extra income distributed across American society would barely improve living standards. Boards could mandate that, say, Larry Ellison of Oracle should be less wealthy so that Oracle employees could be more wealthy, but Oracle employees are already on the winning side of the global economic equation. They are not the ones who need help.

Let’s say then that you created an inequality tax, as Robert Shiller of Yale has proposed. That could certainly generate some extra billions, which could then be redistributed. But even there, the super-rich would only become slightly less super-rich, while those whose incomes are stagnating or those tens of millions underemployed and caught in a web of structural unemployment would see marginal improvement at best. In short, measures to reduce inequality might be modestly helpful, but they wouldn’t solve much. ...

This piece highlights once again that for those truly interested in working for a just and prosperous world you have to move beyond populist "bumper-sticker" economics.

The Myth of the Monolithic 1%

The top 1% versus the 99% is again emerging as a popular topic. I wonder how many people genuinely reflect on who makes up the 1%. I believe many people see the 1% as a highly cohesive static population segment. It isn't.

Social scientists use two different types of analysis when analyzing data about populations. There is a cross-sectional analysis. These studies are a snapshot-in-time look at a given population. There is also longitudinal analysis. These studies measure the characteristics of a population over time. Cross-sectional studies are like looking at a photograph, and longitudinal studies are like looking at a series of photographs compiled together to give a motion picture.

Let's say we had unfettered access to I.R.S. data. We could analyze each person's income for each year over many years. A cross-sectional analysis would allow us to see who was in the top 1% in 2010. But how many of these people are genuinely wealthy in the sense of an ongoing lifestyle of riches and influence? There is no way to know from this analysis. Longitudinal analysis is needed.

So let's imagine two extremes over ten years. At one extreme is the idea that income is totally random. In that case, we would see no pattern in who makes up the top 1%. At the other extreme is the idea that the people in the top 1% are the same people in the top 1% ten years earlier, with a few adjustments for dropping people who died and adding people, mostly heirs, who took their place. The populist references to the 1% suggest something much like the latter is reality.

Mark Rank, professor of social welfare at Washington University, is one of the authors of a new book, Chasing the American Dream: Understanding What Shapes Our Fortunes. Last week, he wrote a piece in New York Times called From Rags to Riches to Rags. Based on the research in the book, here is some of what he wrote:

... Thomas A. Hirschl of Cornell and I looked at 44 years of longitudinal data regarding individuals from ages 25 to 60 to see what percentage of the American population would experience these different levels of affluence during their lives. The results were striking.

It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What's more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution.

Yet while many Americans will experience some level of affluence during their lives, a much smaller percentage of them will do so for an extended period of time. Although 12 percent of the population will experience a year in which they find themselves in the top 1 percent of the income distribution, a mere 0.6 percent will do so in 10 consecutive years.

It is clear that the image of a static 1 and 99 percent is largely incorrect. The majority of Americans will experience at least one year of affluence at some point during their working careers. (This is just as true at the bottom of the income distribution scale, where 54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60). ...

... Likewise, data analyzed by the I.R.S. showed similar findings with respect to the top 400 taxpayers between 1992 and 2009. While 73 percent of people who made the list did so once during this period, only 2 percent of them were on the list for 10 or more years. These analyses further demonstrate the sizable amount of turnover and movement within the top levels of the income distribution. ...

... Ultimately, this information casts serious doubt on the notion of a rigid class structure in the United States based upon income. ...

Other studies I've read show that even among those who make a high income for a string of years, it is difficult to stay at the top for more than a generation or so. Children rarely repeat the type of income production their high-achieving parents did. Studies show it is exceedingly difficult for a corporation to dominate top spots on the corporate hill for over a decade or two. Once decline sets in, only a small minority can recover past glory. We can probably count on one hand the number of corporations that have recovered three times in the past century or so. The point is that top spots in income for individuals and corporations are more precarious than is often appreciated. And it is also true that there is considerable variation in income over the lifetime of individuals found in the bottom 99% in any given year.

Raging against a monolithic unchanging 1%, sucking up all the wealth, and condemning the masses to a perpetual Dickensian dystopia, is way over the top, but it makes for pithy bumper stickers and effective sloganeering for certain ideological camps. Genuine interest in understanding and addressing economic challenges ... unemployment, stagnating wages, automation ... requires a significantly more nuanced approach.

The World’s Bottom 10%: 7.5% Live in North America and None Live in China … And Other True But Worthless Facts

Back in January, Oxfam published a statistic saying that eighty-five people have more wealth than the bottom half of the world population. It has become a widely circulated stat in the debate about inequality. (Forbes recently countered that the number is actually sixty-seven people.) But what do these numbers mean? I know full well that when most people hear “wealth,” they envision how much money and stuff people own. That is incorrect. These are assets. Wealth is your assets minus your liabilities (i.e., debt). What difference does that make?

Felix Salmon, a writer at Reuters, did some digging into the Oxfam report to find the data upon which they based their claims. (See: Stop adding up the wealth of the poor) It comes from Credit Suisse’s 2013 Global Wealth Databook and here is a graph Salmon clipped showing another take on the data:

Notice the top left corner of the chart. It shows that 7.5% of North Americans are in the bottom 10%. If you look further down, you will see that virtually no one from China is. How is that possible?

Take two hypothetical people:

 1. American Physician – A new physician with a salary of $150,000 a year. She has $125,000 dollars in student loans and a car with a $25,000 loan. That totals $150,000 of debt. She is renting an apartment. Her total assets including cash, car, and other items equal $50,000. That means her wealth is -$100,000.

2. Chinese Peasant Farmer – A Chinese farmer who earns the equivalent of $3 a day, or $1,400 a year. He has managed to save $50 in cash, and he has property worth about $250. He has no debt. His wealth is $300.

The physician would likely be found in the lowest decile while the farmer would be in the third or fourth decile. By Oxfam’s reasoning, the farmer is much wealthier than the physician! That is technically true, but does this have any correspondence with what most people think of when they think of "wealth?"

Just as advanced economies have upper-income levels that far outstrip the upper levels of emerging nations, so do they also have people with huge sums of net debt that far outstrip what people would have in emerging nations. Consequently, people from more advanced economies are going to dominate at either end of the wealth distribution. (You see evidence of this in the chart by the higher percentages at the extremes for North America, Europe, and Asia-Pacific excluding China and India.) People who are unable to earn or borrow much are going to be more toward the middle of the distribution. But as with the physician, high debt doesn’t necessarily mean deprivation.

Wealth is a useful measure for some purposes, but if we want to get an accurate picture of economic well-being, we must also include measures like income. Particularly important is consumption per capita because “income” doesn’t include transfers and non-cash assistance. Statistics often show people routinely consuming as much as double their cash income because of this discrepancy. Consumption tells us much more about how people actually live. In short, Oxfam’s stat is great for sensational headlines but does little to educate us about the challenges people face.

(Related: Your New Born Is Wealthier than 60 Million Americans)

Your New Born Is Wealthier than 60 Million Americans

Robert Reich's increasingly well-traveled observation is, "The 400 richest Americans now have more wealth than the bottom 150 million of us." But think about what that means. What is "wealth?" I routinely sense that most people incorrectly think this means how much money you have, or much stuff you own, including money (i.e., assets.) No.

Wealth is the sum of your assets minus the sum of your liabilities. Consequently, the person with a $300,000 home, $25,000 car, and other assets of $50,000 (total assets of $375,000), and with a $275,000 mortgage, $25,000 car loan, and $80,000 in student loans and other debt (total liabilities of $380,000) have a net worth (i.e., wealth) of -$5,000. The homeless person living under a bridge with no assets and no liabilities is wealthier than this person. Approximately 1 in 5 households have negative net worth, meaning your newborn is wealthier than 60 million Americans.

The fact is that most of us start as young adults with very little wealth (i.e., assets minus liabilities). In fact, I suspect many high school grads are wealthier than many recent college grads because college loans create a negative net worth for many. Wealth builds over the years through saving and investment. Someone with a modest income who is 55 years old and has been regularly saving and investing will likely have hundreds of thousands of dollars in wealth, while many 25-year-olds with professional degrees and good incomes will be at break-even or even have negative wealth. Wealth inequality is part of the natural process and will always be considerably greater than income inequality.

Reich's statement may be true, but it strikes me as sensationalist without more context. A great many of the 150 million people at the bottom have considerable assets but also have much debt. Some in the top 150 million have modest assets but little debt. I suspect Reich's statement gives the impression to many that half of America lives on just a few dollars a day. I'm just saying we need to be clearer in our thinking.

How You, I, and Everyone Got the Top 1 Percent All Wrong

Atlantic: How You, I, and Everyone Got the Top 1 Percent All Wrong

In fact, the gain in wealth share is all about the top 0.1 percent of the country. While nine-tenths of the top percentile hasn't seen much change at all since 1960, the 0.01 percent has essentially quadrupled its share of the country's wealth in half a century....

... It turns out that wealth inequality isn't about the 1 percent v. the 99 percent at all. It's about the 0.1 percent v. the 99.9 percent (or, really, the 0.01 percent vs. the 99.99 percent, if you like). Long-story-short is that this group, comprised mostly of bankers and CEOs, is riding the stock market to pick up extraordinary investment income. And it's this investment income, rather than ordinary earned income, that's creating this extraordinary wealth gap. 

The 0.1 percent isn't the same group of people every year. There's considerable churn at the tippy-top. For example, consider the "Fortunate 400," the IRS's annual list of the 400 richest tax returns in the country. Between 1992 and 2008, 3,672 different taxpayers appeared on the Fortunate 400 list. Just one percent of the Fortunate 400—four households—appeared on the list all 17 years.

Now there's your real 1 percent.

Economics Links

1. AEI - James Pethokoukis: What MinuteClinics and Google Fiber teach about crony capitalism

... Andy Kessler explains how established Internet service providers are trying to block Google from deploying Google Fiber, its superfast, gigabit broadband service. His solution: “The FCC can change this overnight. Instead of allowing municipalities to dictate onerous terms and laws that lock in (slow) incumbents, the FCC can mandate right-of-way rules similar to those granted Google Fiber to all credible competitors. If only the federal regulator would promote progress and focus on what’s best for the U.S. economy rather than for those it regulates.” Regulation should promote innovation and competitive churn, not protect revenue streams of existing players.

There is a big difference between being pro-business and pro-market. One does the bidding of incumbents, with the result being a static economy. The other promotes competition. Safety nets are for people, not businesses. The result is innovation and dynamism. Right now, America has too much of the former, not enough of the latter.

2. Economist: The politics of poverty. Another two cents.

... Within this miscellany [of the Ryan budget] there are some clues as to the future direction of Republican anti-poverty policies. Mr Ryan recently gave a speech in which he praised Britain’s Universal Credit, a plan to roll lots of government anti-poverty programmes into one. In some ways Britain is a strange place to seek inspiration: the British scheme is hopelessly behind schedule, a victim of the kind of IT snafu that has hobbled the Affordable Care Act. But the thinking behind it is sensible.

The other initiative that looks to have Mr Ryan’s blessing is the expansion of the Earned-Income Tax Credit (EITC) to people who do not have children (at the moment the childless are eligible for this credit but there is a low cap on the maximum payment they may receive). Marco Rubio has already spoken in favour of this. The report from the House budget committee cites plenty of evidence on the power of EITCs to boost the number of people in work. The president’s budget, published on March 4th, includes an expansion of this programme too. ...

3. Bloomberg: Free-Market Bashers Aren't Helping the Poor

... There's a more basic flaw in the thesis that markets have done nothing to help the poor while government programs have done a lot: Where does the government get the money to fund these programs? Economic growth is what enables Social Security checks to get fatter over time. Unless you're prepared to argue that the government is responsible for 100 percent of economic growth and markets for none, markets have to get some of the credit for whatever good government does. ...

... Both markets and government are necessary to improve the lot of the poor, and we ought to reform government programs so that they do a better job of helping the poor participate in markets. That's just common sense, and no study or statistic has given us a good reason to reject it.

4. AEI - James Pethokoukis: Has America finally reached peak food-stamp enrollment?

5. Carpe Diem: US household net worth increased to a new record high of $80.6T in Q4, fueled by stock market and housing gains

6. Bloomberg: Decoupling Happened: U.S. Stocks Soared, China's Shrugged

The idea that emerging markets could keep growing smartly despite the collapse of the U.S. was something romanced quite a bit in recent years. Decoupling, as it’s called, was at least numerically possible. After all, China, Brazil, India, and Russia—the planet’s four biggest emerging economies, which chipped in two-fifths of global economic growth in the year leading up to Wall Street’s 2008 collapse—stood out as the least dependent on exports to America. Upwards of 95 percent of China’s double-digit growth was attributable to domestic demand.

Turns out a decoupling did transpire in the five years since peak meltdown—only it’s the U.S. market that seems to be doing fine while China founders. It’s a divergence of fortunes few would have predicted. ...

7. Slate: The “Made in China” Fallacy

... But are iPhones really “made in China”? More than a dozen companies from at least five countries supply parts for them. Infineon Technologies, in Germany, makes the wireless chip; Toshiba, in Japan, manufactures the touch screen; Broadcom, in the U.S., makes the Bluetooth chips that let the devices connect to wireless headsets or keyboards.

Analysts differ over how much of the final price of an iPhone or an iPad should be assigned to which country, but no one disputes that the largest slice should go not to China but to the U.S., where the design and marketing of such devices take place at Apple’s headquarters in Cupertino, Calif. The largest source of an iPhone’s value—and this goes for thousands of other high-tech products—lies not in its physical hardware but in its invention and the work of the individuals who conceived, designed, patented, packaged, and branded the device.

Taking these facts into account would leave China, the supposed country of origin, with a paltry piece of the pie. The Asian Development Bank estimates that as little as $10 of the value of every iPhone or iPad actually ends up in the Chinese economy.

Now magnify this across hundreds, even thousands of finished goods. Those Nike shoes that count as imports from China, all those flat-screen televisions, Android phones, clothing, furniture, Disney toys and figures. Almost all are the result of ideas generated in the U.S. (or Japan, or Germany, or Korea, and so on), with parts sourced globally and then assembled in China to be sold elsewhere. ...

8. Project Syndicate: The Poverty of Renewables

... Forcing everyone to buy more expensive, less reliable energy pushes up costs throughout the economy, leaving less for other public goods. The average of macroeconomic models indicates that the total cost of the EU’s climate policy will be €209 billion ($280 billion) per year from 2020 until the end of the century.

CommentsView/Create comment on this paragraphThe burden of these policies falls overwhelmingly on the world’s poor, because the rich can easily pay more for their energy. I am often taken aback by well-meaning and economically comfortable environmentalists who cavalierly suggest that gasoline prices should be doubled or electricity exclusively sourced from high-cost green sources. That may go over well in affluent Hunterdon County, New Jersey, where residents reportedly spend just 2% of their income on gasoline. But the poorest 30% of the US population spend almost 17% of their after-tax income on gasoline. ...

9. New York Times - Economix: Q. and A.: A Development Expert on Narrowing Inequality

Branko Milanovic has been studying income inequality around the world for a long time. ...

... Inequality calculated among all individuals in the world, as if they were part of one single nation, has been edging slightly downward over the past 10 to 15 years, mostly thanks to very high growth rates in China and India. These relatively poor giants (particularly India) have pulled quite a lot of people out of poverty and into something that can be called “the global middle class.”

That is the key factor behind the decline of global inequality: The distance between their incomes and the rather stagnant incomes of the middle class in rich countries has diminished. Yet global inequality is still extremely high by the standards of any single country. It is, for example, significantly higher than inequality in South Africa, which is the most unequal country in the world. ...

10. Prospect: “I started off as a libertarian economist, but I’ve come full circle”—Gregory Clark on social mobility

... If you look at England, for example, what we measure is whether you were at Oxford or Cambridge; how long you live, which is another good indicator of social status; occupational status; are you a member of parliament? Now one of the interesting findings here is that it doesn’t really matter which measure you use. For the families we’re looking at, all these things are actually highly correlated. The wealthy at any time are also the educated, members of parliament, those who live long. What the book shows is that there’s an underlying physics of social mobility which all of our political efforts seem to have no effect upon. And the startling conclusion is that we may never be able to change social mobility rates. ...

11. Business Insider: Every 25-Year-Old In America Should See This Chart

12. Business Insider: 13 Money Lies You Should Stop Telling Yourself By Age 40

... By the time you hit 40, rationalizing away your bad money management habits starts to have a serious impact on your financial future (not to mention age you).

Here are some of the top money lies that you should stop telling yourself by age 40: ...

13. Huffington Post: 5 Tools to Tackle Finances in Your Twenties

Your twenties are hard enough already: matriculating from college, finding your first "real" job, moving out on your own, learning how to pay bills for the first time and learning how to navigate adult relationships without the structure of college or free flow of alcohol. It is a scary and awkward time, no one disputes that -- but mastering your finances in your twenties will reduce your stress and increase your net worth in the long run. Below are 5 tools you need to tackle finances in your twenties. ...

Economics Links

1. Quartz: Globalization really means countries just trade with their neighbors

2. Business Insider: Europe's Share Of Global Profits Is At A 28-Year Low

3. USA Today: Europe widespread corruption 'breathtaking'

... Meanwhile, the report, which was the first published by the EU to detail people's perceptions of corruption in the union, also said that 76% of Europeans think corruption is widespread, with another 56% saying they thought the level of corruption in their country had increased over the past three years.

"I think the perception is almost as important as the reality of how much corruption there is because if people feel that the national or EU institution is corrupt, it clearly is an indication of a lack of confidence, a lack of trust and a lack of respect for those governing institutions," said Ben Tonra, a professor of European foreign, security and defence policy at University College Dublin. ...

4. National Review: Welfare, Here and Abroad

How bad have things become? The British newspaper the Telegraph recently looked at the growth in welfare spending in industrialized nations and found that such spending (including health-care and pension programs) had grown faster in the United States since 2000 than in any country in Europe except Ireland, Spain, and Portugal.

Of course, European welfare states were larger to begin with, but the Telegraph’s report is reflective of an important trend. While the Obama administration presses forward with efforts to combat “income inequality” by expanding the American welfare state, the European nations and other industrialized welfare states are moving in the other direction.

A few examples: ...

5. Economist: The parable of Argentina

There are lessons for many governments from one country’s 100 years of decline ...

... Why dwell on a single national tragedy? When people consider the worst that could happen to their country, they think of totalitarianism. Given communism’s failure, that fate no longer seems likely. If Indonesia were to boil over, its citizens would hardly turn to North Korea as a model; the governments in Madrid or Athens are not citing Lenin as the answer to their euro travails. The real danger is inadvertently becoming the Argentina of the 21st century. Slipping casually into steady decline would not be hard. Extremism is not a necessary ingredient, at least not much of it: weak institutions, nativist politicians, lazy dependence on a few assets and a persistent refusal to confront reality will do the trick. ...

 6. Matt Ridley: Few people know that global inequality is falling and so is poverty

...  None of this is meant to imply that people are wrong to resent inequality in income or wealth, or be bothered about the winner-take-all features of executive pay in recent decades. Indeed, my point is rather the reverse: to try to understand why it is that people mind so much today, when in many ways inequality is so much less acute, and absolute poverty so much less prevalent, than it was in, say, 1900 or 1950. Now that starvation and squalor are mostly avoidable, so what if somebody else has a yacht?

The short answer is that surely we always have and always will care more about relative than absolute differences. This is no surprise to evolutionary biologists. The reproductive rewards went not to the peacock with a good enough tail, but to the one with the best tail. A few thousand years ago, the bloke with one more cow than the other bloke got the girl, and it would have cut little ice to try to reassure the loser by pointing out that he had more cows than his grandfather, that they were better cows, or that he had more than enough cows to feed himself anyway. What mattered was that he had fewer cows.

7. Huffington Post: A Post-GDP World? How to Measure Real Progress in America

... GDP actually tends to rise with societal problems such as crime, pollution, household debt, commuting time, and family breakdown. As a short-term measure of economic output, it increases with the depreciation of machinery and the extraction of finite resources, while failing to reflect the long-term contributions of education and entrepreneurship.

In light of these shortcomings, we seek to answer an overarching question in a report to be released in spring 2014: How should the US government institute supplemental national accounts that better reflect the well-being of the nation? The question, like the broader push for GDP reform, stems from a central premise that new comprehensive indicators would lead to better-informed policymaking, and, in turn, genuine advances in the nation's prosperity. We do not presume to replace GDP, which still serves an important although limited purpose, but to supplement it with modern measures of progress. ...

8. Business Insider: Half Of US GDP Comes From The Orange Spots On This Map

9. Legatus Magazine: Business and the option for the poor

... What does living out the option for the poor mean in practice? We must engage in works of charity — those activities that often address specific dimensions of poverty in ways that no state program ever could. And this means giving of our time, energy, and human and monetary capital in ways that bring Christ’s light into some of the darkest places on earth.

Yet this does not mean that Catholics are required to give something to everything, or even that Catholics must give away everything they own. As Fr. James Schall, SJ, writes, “If we take all the existing world wealth and simply distribute it, what would happen? It would quickly disappear; all would be poor.” Put another way, living out the option for the poor may well involve those people with a talent for creating wealth doing precisely that.

The option for the poor, however, does not rule out any form of government assistance to those in need. Yet lifting people out of poverty — and not just material poverty but also moral and spiritual poverty — does not necessarily mean that the most effective action is to implement yet another welfare program. There is no reason to assume that the preferential option for the poor is somehow a preferential option for big government. Often, being an entrepreneur and starting a business which brings jobs, wages, and opportunities to places where they did not hitherto exist is a greater exercise of love for the poor (and usually far more economically effective) than another government welfare initiative. ...

10. New York Times: Can Marriage Cure Poverty?

... “It isn’t that having a lasting and successful marriage is a cure for living in poverty,” says Kristi Williams of Ohio State University. “Living in poverty is a barrier to having a lasting and successful marriage.” ...

... In an economy that offers so little promise to those at the bottom, family planning in the name of upward mobility doesn’t make much sense. “Engaging in family formation by accident rather than by design, you get a story of low-opportunity costs,” says Kathryn Edin, the poverty researcher at Johns Hopkins. “We’ve created the situation where pregnancy is not the worst thing that can happen to you. It can be seen as a path to redemption in an otherwise violent, unpredictable, hopeless world.”

Similar forces might also spur some young couples not to get married, even if they want to. Many poor women opt not to marry the poor men in their lives, for instance, to avoid bringing more economic chaos into their homes. And the poor women who do marry tend to have unstable marriages — often to ill effect. One study, for instance, found that single mothers who married and later divorced were worse off economically than those who did not marry at all. “These women revere marriage, they want to get married,” Williams says. “They aren’t making an irrational choice not to marry.” ...

11. Atlantic Cities: How Anti-Poverty Programs Marginalize Fathers

... U.S. government programs designed to help such families, however, haven't evolved with the population. Based on decades-old stereotypes that single mothers are raising children alone and single dads are "deadbeats," the majority of United States anti-poverty programs almost exclusively serve women and children, says Jacquelyn Boggess, co-director of the Center for Family Policy and Practice,* a Wisconsin-based think tank that focuses on supporting low-income parents. The welfare system, as a result, can become a muddled mess of rearranging rather than relieving poverty. Single, non-custodial fathers bear the brunt. But dads don’t suffer alone. Because the poor pull together to support one another, everyone absorbs the pinch. ...

12. Investors: Low-Wage Hours At New Low As ObamaCare Fines Loom

... It's impossible to know how much of the drop relates to ObamaCare, but there's good reason to suspect a strong connection. The workweek has been getting shorter in many of the same industries where anecdotes have piled up about employers cutting hours to evade the law's penalties. ...

13. Business Insider: Very Few American Workers Actually Make The Minimum Wage

... "We do not know the share of individuals (or wages) who are just above the minimum wage and whose wages might also rise with an increase, but we do know that it is likely still a small proportion," they write.

"The current minimum wage is well below the economy-wide average. Even for low-paying sectors like retail trade and leisure and hospitality — where the average hourly wage in 2013 was $13.50 and $16.60, respectively — the current minimum is a fair bit lower. These data also suggest a relatively small share of total wage income that would be directly impacted by any increase in the federal (or various state) minimums."

So while the minimum wage debate may be a hot-button political issue, it is somewhat irrelevant from an economic perspective.

14. The Atlantic: Liberals Need to Think Beyond the Minimum Wage

A new report from the Congressional Budget Office says a hike would help the working class, but less than many might hope.  ...

15. New York Times: Evaporating Unemployment

Before the recession, in December 2007, about 63 percent of American adults had jobs. Six years later, in December 2013, less than 59 percent of adults had jobs.

And a new analysis says that the recession has very little to do with it.

The study, by two economists at the Federal Reserve Bank of New York, asserts that workforce participation is in long-term decline. If the recession had never happened, or the economy had since returned to complete health, the authors estimate 59.3 percent of adults would have jobs, instead of 58.6 percent. ...

 

16. Business Insider: Why 12.7 Million Americans Dropped Out Of The Workforce

17. Conversable Economist: Halfway to Full Economic Recovery

... In short, although the prediction is that the U.S. economy is roughly halfway from the end of the recession to a full economic recovery, this is a case where the glass is actually half-full, rather than half-empty, because the heartier period of economic growth is coming. Here are a few of the details. ...

 18. Carpe Diem: When it comes to spending on food as share of total consumer expenditures, Americans have the most affordable food on the planet, and it’s gotten better over time.

19. Forbes: Charitable Giving Grew 4.9% In 2013 As Online Donations Picked Up

... Charitable giving revenue grew 4.9% in 2013, the largest gain since the 2008 recession. U.S. based organizations with annual fundraising over $10 million saw 5% growth. Those that receive $1 million to $10 million in gifts gained 3.8% and the smallest nonprofits – less than $1 million raised annually – grew 3.6%. ...

... The tables, however, turn with online giving revenue which, at 13.5% growth overall, had its second consecutive year of double-digit gains. ...

 20. NPR: Economist Says Best Climate Fix A Tough Sell, But Worth It

... "When we did our first calculations, they actually spun out these 'shadow prices,' " he says. "And I remember looking at them and trying to think ... what in the world does that mean?"

The shadow prices, he realized, actually represented the cost of putting carbon dioxide into the atmosphere. And with that, climate change suddenly became a problem that could be attacked with the tools of economics.

"Actually from an economic point of view, it's a pretty simple problem," he says.

If people would simply pay the cost of using the atmosphere as a dump for carbon dioxide, that would create a powerful incentive to dump less and invest in cleaner ways to generate energy. But how do you do that?

"We need to put a price on carbon, so that when anyone, anywhere, anytime does something that puts carbon dioxide in the atmosphere, there's a price tag on that," he says.

His colleagues say that inspiration — now taken for granted — makes Nordhaus a prime candidate for a Nobel Prize. A lot of his work has been figuring out how big a price we should pay, and what form it should take. ...

21. New York Times: Your Ancestors, Your Fate

Inequality of income and wealth has risen in America since the 1970s, yet a large-scale research study recently found that social mobility hadn’t changed much during that time. How can that be?

The study, by researchers at Harvard and Berkeley, tells only part of the story. It may be true that mobility hasn’t slowed — but, more to the point, mobility has always been slow.

When you look across centuries, and at social status broadly measured — not just income and wealth, but also occupation, education and longevity — social mobility is much slower than many of us believe, or want to believe. This is true in Sweden, a social welfare state; England, where industrial capitalism was born; the United States, one of the most heterogeneous societies in history; and India, a fairly new democracy hobbled by the legacy of caste. Capitalism has not led to pervasive, rapid mobility. Nor have democratization, mass public education, the decline of nepotism, redistributive taxation, the emancipation of women, or even, as in China, socialist revolution.

To a striking extent, your overall life chances can be predicted not just from your parents’ status but also from your great-great-great-grandparents’. The recent study suggests that 10 percent of variation in income can be predicted based on your parents’ earnings. In contrast, my colleagues and I estimate that 50 to 60 percent of variation in overall status is determined by your lineage. The fortunes of high-status families inexorably fall, and those of low-status families rise, toward the average — what social scientists call “regression to the mean” — but the process can take 10 to 15 generations (300 to 450 years), much longer than most social scientists have estimated in the past. ...

50 Reasons We're Living Through the Greatest Period in World History

Huff Post Business (The Motley Fool): 50 Reasons We're Living Through the Greatest Period in World History

I recently talked to a doctor who retired after a 30-year career. I asked him how much medicine had changed during the three decades he practiced. "Oh, tremendously," he said. He listed off a dozen examples. Deaths from heart disease and stroke are way down. Cancer survival rates are way up. We're better at diagnosing, treating, preventing and curing disease than ever before.

Consider this: In 1900, one percent of American women giving birth died in labor. Today, the five-year mortality rate for localized breast cancer is 1.2 percent. Being pregnant 100 years ago was almost as dangerous as having breast cancer is today.

The problem, the doctor said, is that these advances happen slowly over time, so you probably don't hear about them. If cancer survival rates improve, say, one percent per year, any given year's progress looks low, but over three decades, extraordinary progress is made.

Compare health-care improvements with the stuff that gets talked about in the news -- NBC anchor Andrea Mitchell interrupted a Congresswoman last week to announce Justin Bieber's arrest -- and you can understand why Americans aren't optimistic about the country's direction. We ignore the really important news because it happens slowly, but we obsess over trivial news because it happens all day long.

Expanding on my belief that everything is amazing and nobody is happy, here are 50 facts that show we're actually living through the greatest period in world history.

1. U.S. life expectancy at birth was 39 years in 1800, 49 years in 1900, 68 years in 1950 and 79 years today. The average newborn today can expect to live an entire generation longer than his great-grandparents could.

2. A flu pandemic in 1918 infected 500 million people and killed as many as 100 million. In his book The Great Influenza, John Barry describes the illness as if "someone were hammering a wedge into your skull just behind the eyes, and body aches so intense they felt like bones breaking." Today, you can go to Safeway and get a flu shot. It costs 15 bucks. You might feel a little poke.

3. In 1950, 23 people per 100,000 Americans died each year in traffic accidents, according to the Census Bureau. That fell to 11 per 100,000 by 2009. If the traffic mortality rate had not declined, 37,800 more Americans would have died last year than actually did. In the time it will take you to read this article, one American is alive who would have died in a car accident 60 years ago. ...

How sexual equality increases income inequality

Economist: How sexual equality increases income inequality

The economist has an excellent presentation (less than two minutes) on how assortative mating has influenced income inequality. This closing chart sums it up.

Fifty years ago, there weren't many well-educated women with high earning potential. In fact, the percentage of adults with college degrees in 1960 (overwhelmingly men) was about 7%. That means 93% had a high school education or less. Fifty years later, the percentage of adults with college degrees is 25%, split nearly equally between the sexes. People of like education tend to marry each other, thus creating an explosion in the number of households with two high-income earners. That stretches the household earning distribution greatly and moves the mean income to the right on a chart. Thus, even if low-education households have stayed the same in inflation-adjusted income, their relationship to the mean will be considerably lower.

We have long known that income inequality shrank from the early decades of the last century until the late 1960s. It has risen more or less steadily ever since. See this graph of the GINI coefficient.

I've seen many people try to link rising inequality to political policies like the 1980s tax cuts. Such actions may have had a marginal impact, but the event I see that correlates much better is the rise of the women's movement in the late 1960s and improving women's earning potential in the following decades.

(On a side note, these discussions are usually about household "income." This is income before taxes, transfers, and non-cash benefits. Transfers and non-cash benefits have expanded dramatically over the last fifty years. When factored in, some of the disparity shrinks. Even the lowest quintile of households has seen improvement, just not as great as quintiles further up the scale.)

Hans Rosling: Don't Panic — The Facts About Population

This is just fantastic! Hans Rosling pulls together many of his various presentations over recent years and melds them into a one-hour-long presentation about the astonishing way our world is improving while pointing to the challenges ahead. I know this is long, but if you watch this closely and learn, you will be well-positioned to accurately reflect on the alarmist claims of environmentalists, neo-cons, and other ideologies. If I were teaching a demography or economic development class, this video would be the first hour of the first class of the semester.

Economics Links

1.  Brookings: Prospects for Ending Extreme Poverty by 2030

2. Carpe Diem: World trade and output both reached new all-time record highs in November and are nearly 10% above previous peaks

3. PBS Newshour: More than 200 million people were unemployed in the world in 2013

Worldwide, the number of unemployed people rose by 5 million in 2013 to 202 million, according to the International Labor Organization’s Global Employment Trends report. The global unemployment ratio of youth to adults has reached a new high. The jobless rate for 15- to 24-year-olds hit 13.1 percent in 2013 (or 74.5 million), nearly three times the adult rate.

The organization predicts unemployment will worsen, with 215 million jobless by 2018. Roughly 40 million net jobs will be added each year, the ILO estimates, but that won’t be enough to absorb the 42.6 million people expected to enter the labor force each year. ...

4. Conversable Economist: Limited U.S. Power in a Globalizing Economy

Just to be clear, the U.S. economy is not becoming a economic minnow like Belize or Burundi. But 65 years ago, as the high-income countries climbed out of the wreckage left by World War II and today's emerging economies had not yet engaged in the global economy, the U.S. economy had an extraordinary time of dominance. For a time in the 1960s, it was common to hear that the planned economy of the USSR would outstrip the U.S. economy. In the 1970s and into the 1980, Japan was going to rule the world economy. Around 2000 and the launch of the euro, there was talk about the economic rise of the European Union. But now, we are seeing the rise of a multipolar and distributed world economy, with faster growth happening in the emerging economies, but with stronger linkages of trade and global supply chains reaching across the world economy. The U.S. can certainly be an active and leading participant in shaping the world's economic future. But neither the U.S., nor some combination of high-income countries around the world, has the power to dictate what configurations will emerge.

5. Business Insider: Here's A Chart Of Interest Rates Going Back To 3000 BC

6. PBS: Is the famous ‘paradox of choice’ a myth? Barry Schwartz

"Paradox of choice" is tha notion that too many choices become overwhelming and make life decisions less satisying.

... Often people choose on the basis of essentially irrelevant features of plans, just because the relevant features are too complex to evaluate. Has anyone ever suggested that the sensible alternative to too many options is a single option? Absolutely and unequivocally not. Psychology has known about “single option aversion” for a half century. With too few options, there is the risk that none will be satisfactory, whereas with too many, there is the risk of paralysis, confusion and dissatisfaction.

The trick is to find the middle ground — the “sweet spot” — that enables people to benefit from variety and not be paralyzed by it. Choice is good, but there can be too much of a good thing. Adam Grant and I recently published a paper suggesting that this “too much of a good thing” phenomenon is pervasive in psychology. ...

7. TED: Paul Piff - Does money make you mean?

"It's amazing what a rigged game of Monopoly can reveal. In this entertaining but sobering talk, social psychologist Paul Piff shares his research into how people behave when they feel wealthy. (Hint: badly.) But while the problem of inequality is a complex and daunting challenge, there's good news too. (Filmed at TEDxMarin.)"

8. Forbes: Downton Abbey Makes A Powerful Case For Economic Freedom

... One of the great things about Downton Abbey is that it allows fans to escape their worries and fantasize about life on a luxurious estate in early 20^th century England. But the truth is, few of us could tolerate what we’d be forced to live with, and live without, in that world. ...

9. Carpe Diem: The middle class is shrinking ... because they are moving into the upper class! Census data on income distribution reveal evidence of rising income levels for a rising share of American households

10. AEI: This chart shows how tough it is for the poor to recover from a bad start in life

11. Business Insider: Millennials Are The Most Financially Conservative Generation Since The Great Depression

... According to a new report from investment banking company UBS, Millennials are the most financially conservative generation to come around since the Great Depression. The report, which focused on investors between the ages of 21 and 36, found that Millennials are risk averse when it comes to investing — dedicating 52% of their investment portfolios to cash, compared to 23% cash for other investors. They are also more likely to believe that working hard (69%) and living frugally (45%) puts you on the path to success rather than long-term investing (28%). ...

12. NPR: The Middle Class Took Off 100 Years Ago ... Thanks To Henry Ford?

January 1914 was a frigid month in Detroit — much like January 2014 has been, but nonetheless thousands lined up in the bitter cold outside to take Henry Ford up : $5 a day, for eight hours of work in a bustling factory.

That was more than double the average factory wage at that time, and for U.S. workers it was one of the defining moments of the 20th century. Five dollars in 1914 translates to roughly $120 in today's money. While many economists say today's employers could take some pointers from Ford, they also say 2014 is a totally different world for U.S. businesses and workers. ...

... "It was mainly to stabilize the workforce. And it sure did," Kreipke says. "And raised the bar all over the world."

He says to understand why Ford thought this was a smart move in January 1914, you have to go back to another huge shift that happened a few months earlier: By 1913, Model T production totaled 200,000 — a feat made possible by the creation of the first moving assembly line. Conveyor belts transported small parts to workers, each of whom performed a specific task.

This tremendously sped up production, but Ford still had a problem: While he had standardized production, he hadn't standardized his workforce. Now, he didn't need particularly skilled workers; he just needed ones who would do the same repetitive, specialized tasks hour after hour, day after day.

Kreipke says there was chronic absenteeism and lots of worker turnover. So Ford gambled that higher wages would attract better, more reliable workers. ...

... "Today, overwhelmingly employers view the lowest wage as the most competitive wage," Shaiken says.

These days, global supply chains feed a hypercompetitive auto industry where no one wants to give up even an inch of ground, and keeping up with technology takes precedent over stabilizing the workforce. This just isn't Henry Ford's economy anymore, Shaiken says.

"There are very real economic pressures out there that push down on wages," he says. "So it's not a simple story, but that doesn't mean that there isn't a core truth into what Ford found." ...

13. Business Insider: An Economist Explains Why Wage Growth Is Poised To Take Off

14. Conversable Economist: U.S. Household Finances Rebound

15. Greg Mankiw: Does income inequality increase mortality?

Angus [Deaton] writes the following (emphasis added):

Darren Lubotsky and I ⁷ have investigated the relationship between income inequality, race, and mortality at both the state and metropolitan statistical area level. In both the state and the city data, mortality is positively and significantly correlated with almost any measure of income inequality. Because whites have higher incomes and lower mortality rates than blacks, places where the population has a large fraction of blacks are also places where both mortality and income inequality are relatively high. However, the relationship is robust to controlling for average income (or poverty rates) and also holds, albeit less strongly, for black and white mortality separately. Nevertheless, it turns out that race is indeed the crucial omitted variable. In states, cities, and counties with a higher fraction of African-Americans, white incomes are higher and black incomes are lower, so that income inequality (through its interracial component) is higher in places with a high fraction black. It is also true that both white and black mortality rates are higher in places with a higher fraction black and that, once we control for the fraction black, income inequality has no effect on mortality rates, a result that has been replicated by Victor Fuchs, Mark McClellan, and Jonathan Skinner⁹ using the Medicare records data. This result is consistent with the lack of any relationship between income inequality and mortality across Canadian or Australian provinces, where race does not have the same salience. Our finding is robust; it holds for a wide range of inequality measures; it holds for men and women separately; it holds when we control for average education; and it holds once we abandon age-adjusted mortality and look at mortality at specific ages. None of this tells us why the correlation exists, and what it is about cities with substantial black populations that causes both whites and blacks to die sooner.

In a review of the literature on inequality and health, I note that Wilkinson's original evidence, which was (and in many quarters is still) widely accepted showed a negative cross-country relationship between life expectancy and income inequality, not only in levels but also, and more impressively, in changes. But subsequent work has shown that these findings were the result of the use of unreliable and outdated information on income inequality, and that they do not appear if recent, high quality data are used. There are now also a large number of individual level studies exploring the health consequences of ambient income inequality and none of these provide any convincing evidence that inequality is a health hazard. Indeed, the only robust correlations appear to be those among U.S. cities and states (discussed above) which, as we have seen, vanish once we control for racial composition. I suggest that inequality may indeed be important for health, but that income inequality is less important than other dimensions, such as political or gender inequality.¹⁰

16. Pew Research: There's More to the Story of the Shrinking (Gender) Pay Gap

17. The Daily Beast: No, Women Don’t Make Less Money Than Men

... In its fact-checking column on the State of the Union, the Washington Post included the president’s mention of the wage gap in its list of dubious claims. “There is clearly a wage gap, but differences in the life choices of men and women… make it difficult to make simple comparisons.” ...

...  Much of the wage gap can be explained away by simply taking account of college majors. Early childhood educators and social workers can expect to earn around $36,000 and $39,000, respectively. By contrast, petroleum engineering and metallurgy degrees promise median earnings of $120,000 and $80,000. Not many aspiring early childhood educators would change course once they learn they can earn more in metallurgy or mining. The sexes, taken as a group, are somewhat different. Women, far more than men, appear to be drawn to jobs in the caring professions; and men are more likely to turn up in people-free zones. In the pursuit of happiness, men and women appear to take different paths.

But here is the mystery. These and other differences in employment preferences and work-family choices have been widely studied in recent years and are now documented in a mountain of solid empirical research. By now the President and his staff must be aware that the wage gap statistic has been demolished. This is not the first time the Washington Post has alerted the White House to the error. Why continue to use it? ...

18. Atlantic: How When Harry Met Sally Explains Inequality

A new study says that educated people marrying each other has increased inequality by 25 percent.

19. Reuters: The real future of U.S. manufacturing

... The assertion that the United States, or any nation, requires continued investment in the technologies that will drive future production is indisputable. On that score, at least, the Obama White House is fighting the proverbial good fight.

The contention, however, that these technologies and the factories that harness them for production will be sources of well-paid, solidly middle-class jobs, is flawed. In our political debates, we maintain the comforting fiction that a manufacturing revival can and will go hand-in-hand with a jobs revival. Yet, as Obama’s initiative shows, the two can be — and increasingly are — uncoupled.

The issue is not the hollowing-out of manufacturing as defined by less production. Yes, many less expensive, simpler products are now made more cheaply elsewhere and are unlikely to be made in the United States anytime soon — even with the “on-shoring” of manufacturing. Though China ceases  to be the place of low-cost production, Vietnam, the Philippines and who knows where else (even Mexico) will be more attractive for apparel, furniture, electronics and anything plastic for a long time to come.

The high-end production that these new U.S. innovation hubs seek to promote is indeed in demand around the world. It is something where, as yet, China and other low-cost manufacturing centers have not excelled. This is why China actually imports considerable billions of higher-end equipment – particularly from Japan and Germany. So it is true that the United States could have a competitive advantage, especially given the plethora of research universities and the wealth of highly-educated talent that can be used for just this type of production.

But all this is not the same as a job creator for a workforce of at least 120 million and counting in nation of more than 320 million people. These high-tech factories might employ hundreds of people in conjunction with industrial robots, using sophisticated software systems for design and production. These factory workers bear little resemblance to the 1950s line workers doing rote tasks. They are more like Silicon Valley engineers or lab technicians. These are high-skill jobs — and not nearly as plentiful as the factory jobs of the past. ...

Related: Bloomberg - Factory Jobs Are Gone. Get Over It

... In 1953 manufacturing accounted for 28 percent of U.S. gross domestic product, according to the U.S. Bureau of Economic Analysis. By 1980 that had dropped to 20 percent, and it reached 12 percent in 2012. Over that time, U.S. GDP increased from $2.6 trillion to $15.5 trillion, which means that absolute manufacturing output more than tripled in 60 years. Those goods were produced by fewer people. According to the Bureau of Labor Statistics, the number of employees in manufacturing was 16 million in 1953 (about a third of total nonfarm employment), 19 million in 1980 (about a fifth of nonfarm employment), and 12 million in 2012 (about a tenth of nonfarm employment).

Service industries—hotels, hospitals, media, and accounting—have taken up the slack. Even much of the value generated by U.S. manufacturing involves service work—about a third of the total. More than half of all people still employed in the U.S. manufacturing sector work in such services as management, technical support, and sales. ...

 20. PBS: Paul Soloman on Man vs the Machine: Will Human Workers Become Obsolete?

 21. Huff Post: The End of Capitalism

Interesting thoughts. I don't know if he has it just right, but I do think he is correct that we may be on the verge of something as transformative to capitalism as industrialization was to agricultural societies:

... The location of creation has switched. Under industrial capitalism, machines operating centrally created riches. James Watt perfected his steam engine, but then the machines took on a life of their own - the machines themselves, and machine-like corporations built around them, churned out money. People danced around the edges, enlarging and improving the machines, putting them together in large mills or mines to turbo-charge productivity, adapting their pace of work to that of the machines. The machines and the capitalists were in charge.

Now it is not machines or their owners, but creative individuals who are center-stage. People not only invent new technology - they are the new technology. As sociologist Manuel Castells says, "For the first time in history, the human mind is a direct productive force ... Computers, communication systems, and genetic decoding and programming are all amplifiers and extensions of the human mind."
In the West, knowledge has become personalized. Open innovation requires it. The effect of open innovation is to transfer initiative and wealth from established corporations to new ones, and from shareholders to individuals. From thought to action, individuals are at the heart of creation, including wealth creation. Every element of the unique human personality takes part in creation - intellect, imagination, emotion, calculation, empathy, and the ability to evoke enthusiasm from other seriously talented people. Each person does it their way. Steve Jobs may not have been the nicest person in Silicon Valley, but he got amazingly talented people to distort reality and create previously unimaginable products. The individual is everything.

In all kinds of ways, therefore, we are moving away from capitalism, from an economy centered on capital and large, established, hierarchical corporations. But we are not moving from private hierarchy to public hierarchy, from capitalism to socialism or communism. Free enterprise is alive and well - arguably too alive and well. The new system is even more market-oriented than capitalism, and much more decentralized. It is as decentralized as any system can possibly be, because it is decentralized to individuals, and above all to a tiny minority of new superstar individuals. Welcome to the personalized economy. ...

22. Carpe Diem: Cash for kidneys will solve the organ shortage, save money spent on dialysis, and then we’ll wonder why it took so long

(Not necessarily agreeing here. Just reporting.)

Economists Gary Becker and Julio Elias make the case in today’s WSJ that a market for organs and donor compensation of about $15,000 would eliminate the growing kidney shortage.  As the chart above shows, the kidney waiting list has nearly doubled from 50,000 in 2001 to almost 99,000 today, while the number of annual kidney transplant operations has increased only slightly from 14,279 in 2001 to fewer than 17,000 in 2013. Over the last eight years, kidney transplants have remained stuck at slightly below 17,000 per year, while the kidney waiting list has swelled by almost 30,000.  Therefore, there an additional 30,000 patients today (99,000) than in 2006 (69,600) competing for the same number of transplants. And that’s why, as Becker and Elias point out, the average waiting time for a kidney has increased to 4.5 years from 2.9 years a decade ago. The authors argue that “Paying donors for their organs would finally eliminate the supply-demand gap.”

Isn’t donor compensation immoral? No, according to Becker and Elias (emphasis added: ...

The Story of Globalization in 1 Graph

Atlantic: The Story of Globalization in 1 Graph

... Globalization has winners and losers. The winners—particularly the upwardly mobile middle classes of China, India, Indonesia,Brazil, and Egypt—occupy the long hump of this elephant-like line. They have seen their inflation-adjusted incomes grow by 70 percent or more. The world's "1%" (which works out to the top 12 percent of the U.S., or households making more than $130,000) is also racing away with income, particularly at the tippy-top.

But the story for world's poorest percentiles has been the same as for the developed world's lower-middle class: No growth or worse. ...

 

Proof Jesus Was Not a Capitalist: The Richest 1 Percent Own Half the World's Wealth - My Response

Rev. Dr. Susan Brooks Thistlethwaite has a post at the Huffington Post today titled Proof Jesus Was Not a Capitalist: The Richest 1 Percent Own Half the World's Wealth. Here is my response.

She writes:

...Biblically speaking, probably not. As Jesus warned, you have to choose. Either money rules you, or your highest values rule you. There's no middle ground. "No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. You cannot serve both God and money." (Luke 16:13)

Jesus was not a capitalist.

God's rules on economics, as articulated both by the prophets and Jesus of Nazareth, are strikingly clear. Not small concentrations of great wealth and the vast majority of people in poverty, but 'each under their own vine and fig tree, living without fear.' (Micah 4:4) Jesus announces his ministry as "good news to the poor" (Luke 4:18), that is, the "Jubilee," the really radical redistributive economic strategy of ancient Israel.

So, is it likely the leaders gathered at the World Economic Forum in Davos serve that vision, a vision of a reasonable abundance shared by all, or are they in service to the vast accumulated wealth of the 1 percent? Is it going to be possible for people at that meeting to enact policies that start to close this disastrous economic gulf between the rich and the poor? ...

First, advanced agrarian societies of the Near East and Rome are the contexts of the Bible (Hebrew and Christian Testaments.) To the limited degree they thought in macroeconomic terms, the economy was a zero-sum game. Land and labor were the two inputs for production. Both were relatively fixed. There was little you could do to alter land productivity, and one person's labor was not substantially different from another's. Consequently, with variable productivity off the table, economics was constrained to considerations of consumption and distribution. Both personal and societal abundance was cyclical, and sharing the fixed pie was essential for community survival.

The great divergence of the past two centuries is the realization that productivity can be radically altered. Productivity can be altered radically by applying technology, energy, exchange, stable institutions, and improving human capital. But these changes have included concentrating wealth into productive assets and assuming larger risks to achieve greater productivity effectively. We live in a different world from advanced agrarian societies, and applying morals from their context directly to ours is useless.

Second, the Jubilee was categorically not a "radical redistributive economic strategy." Land was to revert to its perpetual owners every 50 years. Jubilee stated that if someone needed to "sell" their land, the price would be determined based on the number of crops gathered between the "sale" date and the next Jubilee. Then the land would revert to the perpetual owner. In other words, it was a lease. A person could "sell" their labor under the same conditions. These provisions only applied to agricultural land and had nothing to do with non-agricultural land or other private property. Significantly, it ensured that everyone had access to at least a minimal level of capital (land and labor) to provide for themselves and to produce goods for exchange, living individually and corporately as God's stewards. That has interesting theological implications for economics, but it was not radical redistribution.

Third, from where does abundance come? Apart from air and sunlight, name one thing humans use that does not require human action to transform matter, energy, and data from a less useful form to a more useful form. Absent human action, there is near absolute scarcity of the things that humanity uses. If we each had to provide for ourselves and our families alone, our days would be precarious, doing little else but hunting and gathering our way through life. But we achieve high productivity levels through specialization, technology, the concentration of wealth in productive enterprises, and trade (i.e., capitalism), resulting in unprecedented abundance. Had Jesus known that productivity could be radically altered, I suspect he may have offered different guidance (and I don't mean a blanket blessing of the American economic system.)

Fourth, just what is the negative impact of inequality that should give us pause? The article doesn't say, but it is strongly implied: If wealth is becoming concentrated at the top, then it must be that it is being taken from others, making them poor (1% are wealthy while 99% are in poverty) ... the rich are getting richer, and the poor are getting poorer. She is not alone in this thinking. A recent survey of Americans showed that 66% of respondents think that the proportion of the global population living in poverty has doubled in the past twenty years and another 29% think there has been no change (total of 95%), when in fact the proportion has been halved:

Source: Brookings

Furthermore, the number of well-paying jobs is expanding around the world. Life expectancy at birth, the most holistic measure of human well-being, is now at seventy years and closing in on the eighty-year mark enjoyed by the wealthiest nations. Studies show that inequality within nations is increasing, but inequality between nations is falling.

Now none of this is to say that rising inequality is good or bad. We have to be specific about what metric we use. If the metric is that inequality means more poverty and is therefore bad, then the assertion that inequality is "bad" isn't true. People are not getting poorer. That doesn't mean inequality isn't problematic for other reasons, but we must be specific about what we are tackling.

Finally,

"Unregulated market capitalism has only one master, and that is money. And that is why 85 people control half the wealth of the whole world."

Dr. Thistlethwaite, if you identify one nation on the face of the earth with "unregulated market capitalism," I will write you a check for $1,000 here and now. They don't exist! This issue is not unregulated market capitalism but corporatism. If there is a governance problem, it is that the biggest corporate entities and government have joined together to stack things in favor of their mutual interests over and against market forces that might threaten them. That is corporatist business capitalism and antithetical to market capitalism. Furthermore, economists have not reached a consensus on why there has been an increasing concentration at the top, but the idea that it is summed up in "unregulated market capitalism" is just absurd.

With all that said, I'm not saying that growth in inequality isn't a problem and isn't worthy of theological and moral reflection. I am asking for a more responsible discussion.

I will also agree that change begins from the bottom up. Muhammad Yunus uses the image of a bonsai tree. The seed that grows into the tiny bonsai tree is the same seed that grows into the tall tree in the forest. The difference is that the bonsai grows from the limited foundation of the flowerpot, while the tall tree has the rich foundation of the forest bed. The poor are bonsai people. By improving the soil in which they grow, instituting property rights and the rule of law, and including them in networks of productivity and exchange, they too can flourish as people in wealthier nations have. Trickle-up capitalism is a promising strategy. It is already at work around the world. Let's join them and support them. Populist ideological warfare about poorly defined issues and remedies is nothing but a moralistic distraction. The world deserves better from Christian thinkers.

Has U.S. Economic Mobility Declined?

Economic mobility has not changed in forty years according to this NEBR paper: Is the United States Still a Land of Opportunity? Recent Trends in Intergenerational Mobility

Abstract

We present new evidence on trends in intergenerational mobility in the U.S. using administrative earnings records. We find that percentile rank-based measures of intergenerational mobility have remainedextremely stable for the 1971-1993 birth cohorts. For children born between 1971 and 1986, we measure intergenerational mobility based on the correlation between parent and child income percentile ranks. For more recent cohorts, we measure mobility as the correlation between a child’s probability of attending college and her parents’ income rank. We also calculate transition probabilities, such as a child’s chances of reaching the top quintile of the income distribution starting from the bottom quintile. Based on all of these measures, we find that children entering the labor market today have the same chances of moving up in the income distribution (relative to their parents) as children born in the 1970s. However, because inequality has risen, the consequences of the “birth lottery” – the parents to whom a child is born – are larger today than in the past.

The (Mostly) Improving State of the World

Washington Post: 40 charts that explain the world

Our friend and colleague Max Fisher over at Worldviews has posted another 40 maps that explain the world, building on his original classic of the genre. But this is Wonkblog. We're about charts. And one of the great things about charts is that they show not just how things are -- but how they're changing.

So we searched for charts that would tell not just the story of how the world is -- but where it's going. Some of these charts are optimistic, like the ones showing huge gains in life expectancy in poorer nations. Some are more worryisome -- wait till you see the one on endangered species. But together they tell a story of a world that's changing faster than at arguably any other time in human history. ...

As the author notes, we have challenges but hardly descend into a global dystopia. I think these charts give a pretty holistic view. Here are three examples.
It was commonly believed that primitive societies were more peaceful and that modern civilization gave rise to unprecedented violence. This chart compares death rates by war in primitive societies as calculated by anthropologists to those for Europe/USA in the 20th century.
And then there is this:

The graphs point to environmental protection and adaptation as the biggest problems in the days ahead. Those challenges are not insurmountable. Energy sources like natural gas and nuclear power can be used in the interim on the way to practical renewable technologies. Genetically modified crops can help to reduce water consumption, increase yield, and improve hardiness. Innovations in fields like biotechnology, nanotechnology, and 3-D printing promise to revolutionize the world economy into a less wasteful and more affordable human existence for everyone. There is work to do, but there is also much reason for hope of a better world.

 

Economics Links

1. The Atlantic: If You Really Care About Ending Poverty, Stop Talking About Inequality

Don’t mind the rich-poor gap. Statistical analysis shows three factors—overall income growth, marriages, and local government spending—matter most for poorer children chasing the American Dream. ...

... But for all the new attention devoted to the 1 percent, a new dataset from the Equality of Opportunity Project at Harvard and Berkeley suggests that, if we care about upward mobility overall, we’re vastly exaggerating the dangers of the rich-poor gap. Inequality itself is not a particularly potent predictor of economic mobility, as sociologist Scott Winship noted in a recent article with his colleague Donald Schneider based on their analysis of this data.

So what factors, at the community level, do predict if poor children will move up the economic ladder as adults? What explains, for instance, why the Salt Lake City metro area is one of the 100 largest metropolitan areas most likely to lift the fortunes of the poor and the Atlanta metro area is one of the least likely?

Harvard economist Raj Chetty, a principal investigator at the Equality of Opportunity Project, has pointed to economic and racial segregation, community density, the size of a community’s middle class, the quality of schools, community religiosity, and family structure, which he calls the “single strongest correlate of upward mobility.” ...

2. AEI Ideas: 70% of Americans born at the bottom never reach the middle

... But while intergenerational mobility has not worsened, it has failed to improve. Perhaps it would have worsened if not for the war on poverty, or perhaps we have not reduced poverty enough. More likely, income is less important for child mobility — and income inequality less consequential — than Great Society liberalism asserted.

We need a war on immobility — a bipartisan crusade to identify and address the barriers that leave 70 percent of poor children below the middle class as adults. ...

3. PBS: Poverty rates surge in American suburbs

... According to Kneebone, since 2000, the number of poor people living in suburbs has grown by 65 percent. 

For example, poverty is up by almost 16 percent in the suburbs of Pittsburgh.  Up more than 27 percent in the suburbs of providence.  Nearly 79 percent outside Seattle.  And in the suburbs of Austin, Texas, the number of poor has swelled almost 143 percent.  More poor people now live in America’s suburbs than in cities or in rural areas.

The main explanation for this shift is simply demographics.  Many more Americans have moved to suburbs in recent years, and that growth included low-income residents and new immigrants.  Other factors - suburbs are still recovering from the foreclosure and financial crises.  Kneebone says federal programs for the poor were mostly designed back in the 60’s with rural or urban communities in mind, and when hard times came to the suburbs, many weren’t prepared. ...

4. Family Studies: Why Working-Class Men Are Falling Behind

... All of these things mentioned above—early reliance on stimulating entertainment, lower educational attainment, disconnection from families and role models, and the attractions of different, “edgy” subcultures—contribute to a widening gulf between those more connected to family, work, and society, and those without these commitments. While men are losing connections, women continue to participate in the labor force, attend religious services more often, and belong to other community and civic organizations. This is partly because many have dependent children and need to support them, whereas men can to a large extent avoid this responsibility.

Men who are not committed to families enjoy all the options that a consumer culture gives them, have more independence and freedom, and thus are found in a wider array of subcultural activities that take men away from consistent work and commitment to families. At the same time that non–college-educated men have fewer economic opportunities, they have more opportunities to indulge in various activities. That’s a recipe for ever-widening gaps between these men and the rest of society.

 5. Business Insider: The Most Damning Chart That Shows How Far The Economy Still Has To Recover

6. New York Times: More U.S. Economists See Half-Full Glass

Record exports and the smallest trade deficit in four years. Healthier consumer spending, including the strongest annual increase in automobile sales since 2007, spurred by a booming stock market and an improving housing sector. And a slow but steady pickup in job creation that has pushed unemployment to its lowest level since 2008.

The confluence of all these forces in recent weeks has prompted economists to sharply revise their expectations for growth in late 2013 and early 2014, and prompted hopes that a more sustained economic expansion has finally arrived.

Plenty of caution is in order. It is a refrain that has been heard several times since the end of the Great Recession, and frustrated job seekers and income-stretched workers have plenty of reasons to be dubious about the upbeat forecasts.

Still, a series of arrows from disparate parts of the economy in both the United States and elsewhere around the world are finally pointing in the right direction, experts and policy makers say. ...

7. AP: Gloomy Americans foresee a downhill slide to 2050

WASHINGTON (AP) -- Ask people to imagine American life in 2050, and you'll get some dreary visions.

Whether they foresee runaway technology or runaway government, rampant poverty or vanishing morality, a majority of Americans predict a future worse than today.

Whites are particularly gloomy: Only 1 in 6 expects better times over the next four decades. Also notably pessimistic are middle-age and older people, those who earn midlevel incomes and Protestants, a new national poll finds. ...

8. Bloomberg: American Consumers in 2013 Most Upbeat Since Before Recession

American consumers in 2013 were more upbeat than at any time in the previous six years as views on the economy, finances and the buying climate improved.

The Bloomberg Consumer Comfort Index (COMFCOMF) averaged minus 31.4 for 2013, the highest since 2007, when it was minus 10.5. The weekly index fell for the first time since mid-November, dropping to minus 28.7 for the period ended Dec. 29, from minus 27.4.

An improved job market, higher stock prices and rising home values lifted sentiment at the end of the year and helped drive holiday retail shopping. Stronger wage and employment growth would help propel bigger gains in confidence and encourage Americans to boost spending, which accounts for almost 70 percent of the economy. ...

9. Conversable Economist: The Slowdown in Rising U.S. Healthcare Costs

...The red line makes two obvious points. First, the slowdown in rising health care costs started back around 2002 or 2003. Indeed, health care economists have been writing about it for a couple of years now, and OECD evidence point out that a similar slowdown seems to be occurring across high-income countries. Thus, eager claims by Obama administration officials about how the Affordable Care Act--although still far from fully implemented--is bringing down the rise in health care costs are a prime example of finding a parade, running to the front, and then claiming to lead the parade. As the writers of the Health Affairs article note: "The Affordable Care Act (ACA), which was enacted in March 2010, had a minimal impact on overall national health spending growth through 2012." ...

10. Conversable Economist: The median woman's wage to the median man's wage has been closing over time

11. Why Not Give Money Instead of a Gift?

"... Ariely, a good friend of Making Sense, whom we featured prominently in our segment about teaching kids how to save, most recently appeared in our segment on the economic waste of Christmas gift-giving, explaining why non-monetary gifts are more socially acceptable. Money's an awkward gift, and, as Ariely explains in the web-exclusive video above, a poor motivator. ..."

12. The Atlantic: Should Your Minimum Wage Depend on Your Age?

Speaking on Fox News recently, conservative columnist Charles Krauthammer proposed what, to many, might have sounded like a rather novel compromise on the minimum wage. His idea? We should have two of them, a higher minimum for "breadwinners," and a lower minimum for everybody else.

Here was Krauthammer's thinking, paraphrased. It might be hard to feed a whole household on $7.25 an hour. But raising the minimum is most likely to hurt teenagers and minorities who rely on low-paid, entry-level jobs to get a foothold in the working world. So how do you lend a hand to hard-pressed families without penalizing the young? Force employers to pay the "breadwinners" more, and everybody else less. 

He called his two-tiered solution "a reasonable answer that Republicans and conservatives could offer." ...

... Klein is right that that whole "breadwinner" concept would probably be more trouble than it would be worth. But what if we tweaked the idea just a little bit, and based the minimum wage on something more straightforward, like a worker's age? 

We wouldn't be the first country to try it.  Take Australia. ...

13. Forbes: Raising Minimum Wage? How About Raising Employee Ownership?

With an eye towards the 2014 midterms, the administration is keen to talk about something other than health care and is banging the drum for raising the federal minimum wage.  Republicans — voicing concerns about job loss and impact on small businesses — will oppose an increase and the issue will go nowhere at the federal level.

For fair-minded policy makers interested in helping working families today – and not just pushing a campaign issue – there is a different answer. It is one that has bipartisan support and could actually get passed: encourage companies to provide greater ownership opportunities or revenue sharing to all their workers. ...

14. PBS: Who Counts as Poor in America?

Fifty years ago, President Lyndon Johnson announced a legislative agenda to wage "unconditional war on poverty in America." But how do we know what poverty is in America?

15. Here's How The U. S. Bureau Keeps Track Of Poverty In America

Economics Links

1. Carpe Diem: 5 Reasons Why 2013 Was The Best Year In Human History

1. Fewer people are dying young, and more are living longer. ...
2. Global economic growth in the past five decades has dramatically reduced poverty and made people around the world happier. ...
3. War is becoming rarer and less deadly. ...
4. Rates of murder and other violent crimes are in free-fall. ...
5. There’s less racism, sexism, and other forms of discrimination in the world. ...

2. Everyone is putting out their most important economic charts list for 2013:  Atlantic: The Most Important Economic Stories of 2013—in 44 Graphs.  Economist: 2013 in charts.  Huffington Post: The 13 Most Important Charts Of 2013.

3. Economist: The world has become better fed over the past 50 years

MANY people will groan after stuffing themselves on a Christmas feast. A traditional three-course turkey dinner can be as much as 3,500 calories. Such indulgences are a luxury in many parts of the world—but thankfully less so. Over the past half-century, the amount of food that people consume has increased (measured in calories), according to the UN’s Food and Agriculture Organisation. Our interactive map and chart tracks countries across five decades, letting users select places, years on the timeline or any chart-line. (It performs poorly on smartphones; our apologies.) ...

In a related story at NPR: More People Have More To Eat, But It's Not All Good News

... The good news is: The percentage of the world's population getting what the researchers say is a sufficient diet has grown from 30 percent to 61 percent.

In 1965, a majority of the world survived on less than 2,000 calories a day per person. This was especially true in parts of the Middle East, Africa, Latin America, China and Southeast Asia. Now, 61 percent of the world has access to 2,500 or more calories a day.

But one thing the scientists discovered is that the countries that have a history of food insufficiency didn't just up and start growing lots more food. Instead, for the most part they're increasing supply by importing food from abroad. ...

I'm unclear why the author thinks importing food is a problem but other challenges he mentions in the article are an issue.

4. Carpe Diem: When it comes to home appliances, the ‘good old days’ are now: they’re cheaper, better, more energy efficient than ever

... In 1981, the 24-inch built-in dishwasher pictured above from a 1981 Wards Christmas catalog sold for $359.88. The average hourly manufacturing wage then was $7.42, meaning that it would have taken 48.5 hours of work at the average hourly wage for a typical factory worker to earn enough income 32 years ago to purchase the dishwasher above. ...

... The new Kenmore 24-inch built-in dishwasher pictured above is currently listed on the Sears website for sale at $539.99. At the current average hourly wage of $20.26 for production workers, the average factory worker today would only have to work 26.7 hours to earn enough pre-tax income to buy today’s energy-efficient dishwasher, which is only a little more than one-half of the 48.5 hour time-cost for the 1981 model.

Bottom Line: Today’s modern household appliances are not only cheaper than ever before, they are the most energy-efficient appliances in history, resulting in additional savings for consumers through lower operating costs. The average dishwasher today is not only more than twice as energy-efficient as a comparable 1981 model, but its real cost today is only about 50% of the price of the 1981 dishwasher, measured in hours worked at the average hourly wage. Put those two factors together, and the average American’s dishwasher today is about six times superior to the dishwasher of thirty years ago. ...

5. Carpe Diem: How much did real US median income increase from 1979 to 2007? A lot depends on the measure of income used

"The median income data [often cited] are on tax units rather than households, they do not include many government transfer payments, they are pre-tax rather than post-tax, they do not adjust for changes in household size, and they do not include nontaxable compensation such as employer-provided health insurance.

Does this matter?  Yes!"

6. American Interest: Economic Mobility is a Male Problem

The biggest victim of family breakdown might be lower-class men. In City Journal Kay Hymowitz has a fascinating yet alarming piece on how family breakdown hurts men’s prospects more than women’s. One of the most interesting facts she highlights is that if you separate out men from women, women in America are roughly as upwardly mobile as women anywhere else in the world. It’s only when you add men back in and compare the US whole population to populations abroad that things look bleak:

Numerous studies have confirmed that the U.S. has less upward mobility than just about any developed nation, including England, the homeland of the peerage. Yet, if you look at boys separately from girls, as the Finnish economist Markus Jäntti and his colleagues at the Bonn-based Institute for the Study of Labor did, the story changes markedly. In every country studied, girls are more likely than boys to climb up the income ladder, but in the United States, the disadvantage for sons is substantially greater than in other countries. Almost 75 percent of American daughters escape the lowest quintile—not unlike girls in the comparison countries of the United Kingdom, Denmark, Finland, Norway, and Sweden. Fewer than 60 percent of American sons experience similar success. ...

7. AEI Ideas: 3 charts that show what’s really going on with economic mobility in the US

8. Washington Post: Full employment, not inequality, should be the top economic priority - Ezra Klein

... While there are ways to reduce inequality without doing much about employment (say, by taxing the rich and using the proceeds on defense spending), it's hard to imagine full employment not doing much to reduce inequality. ...

... All that said, income inequality and social mobility really are startling trends that people should be very worried about and that the political system should be working aggressively to solve, or at least ameliorate. I don't have many policy disagreements with the folks focusing on inequality. But politics is about prioritization, and what politicians end up doing is in part driven by what problems their political coalitions are most worried about. ...

9. Conversable Economist: Falling Unemployment and Falling Labor Force Participation

10. Business Insider: This Map Shows Which Parts Of The Country Have A Huge Gender Gap In The Workforce

11. PBS: The rise of the 'new rich': 1 in 5 Americans will reach affluence in their lives

It's not just the wealthiest 1 percent.

Fully 20 percent of U.S. adults become rich for parts of their lives, wielding outsize influence on America's economy and politics. This little-known group may pose the biggest barrier to reducing the nation's income inequality.

The growing numbers of the U.S. poor have been well documented, but survey data provided to The Associated Press detail the flip side of the record income gap -- the rise of the "new rich." ...

12. Atlantic Cities: America's Wealth Is Staggeringly Concentrated in the Northeast Corridor

 

13. New York Times: Demand Soaring, Poor Are Feeling Squeezed

... Today, millions of poor Americans are caught in a similar trap, with the collapse of the housing boom helping stoke a severe shortage of affordable apartments. Demand for rental units has surged, with credit standards tight and many families unable to scrape together enough for a down payment for buying a home. At the same time, supply has declined, with homebuilders and landlords often targeting the upper end of the market. ...

14. Bloomberg: North America to Drown in Oil as Mexico Ends Monopoly

The flood of North American crude oil is set to become a deluge as Mexico dismantles a 75-year-old barrier to foreign investment in its oil fields.

Plagued by almost a decade of slumping output that has degraded Mexico’s take from a $100-a-barrel oil market, President Enrique Pena Nieto is seeking an end to the state monopoly over one of the biggest crude resources in the Western Hemisphere. The doubling in Mexican oil output that Citigroup Inc. said may result from inviting international explorers to drill would be equivalent to adding another Nigeria to world supply, or about 2.5 million barrels a day....

15. Oil Price: Cheap Fossil Fuels: Good or Bad for the World’s Poor?

... Let’s try reconciling all of the themes raised in Lomborg’s article and in my comments by reframing them in this way:

•    Yes, fossil fuels are going to be with us for a while. For that reason, a smart energy policy needs to focus on shifting the mix of fossil fuels, so far as is possible, to relatively clean natural gas and away from relatively dirty coal, while also keeping the pressure on for energy conservation across the board.
•    Price signals are one way to keep the pressure on. A carbon tax is a somewhat crude way to penalize relatively dirty fuels, in that climate change is not the only issue. We should be concerned, too, about sulfur and mercury from burning coal, urban air pollution from gasoline and diesel fuels, and local environmental risks of fracking for natural gas. Still, a carbon tax serves at least roughly to penalize the dirtiest fuels the most.
•    And yes, no environmental policy is going to be successful politically if it is seen as a matter of saving the earth versus helping the poor. Fuel subsidies have to go, since, realistically, they are a burden, not a boon, to the poor, but at the same time, some of the budgetary economies from the elimination of subsidies and some of the revenues from carbon taxes should  go toward smarter policies to help the world’s least advantaged.

Those ideas might help point us toward policies that are good for both the poor and the planet.

16.  askblog: The Market is a Process, not a Decision Mechanism

... I think that many commentators contrast the market and government as mechanisms for making decisions. In this contrast, the market sometimes has an efficiency advantage, but government is presumed to have a moral-authority advantage.

Instead, think of the market as a process for testing hypotheses. The process is brutally empirical, winnowing out losing strategies and poor execution. In contrast, elections are a much weaker testing mechanism. Elections are unable to winnow out sugar subsidies, improvident loan guarantees, schools that produce bad outcomes, etc. ...

17. Quartz:  Why the left-leaning Nelson Mandela was such a champion of free markets

One often overlooked aspect of Nelson Mandela’s legacy is South Africa’s economy. Parallel to everything amazing the man is connected to—freeing the country from the shackles of apartheid, subordinating retribution in favor of peace and reconciliation, and unifying a volatile nation at risk of civil war—he laid the groundwork for South Africa as the continent’s economic powerhouse. ...

18. Atlantic: Why Economics Is Really Called 'the Dismal Science'

... But this origin myth is, well, mythical. Carlyle did coin the phrase "the dismal science." And Malthus was, without question, dismal.

But Carlyle labeled the science "dismal" when writing about slavery in the West Indies. White plantation owners, he said, ought to force black plantation workers to be their servants. Economics, somewhat inconveniently for Carlyle, didn't offer a hearty defense of slavery. Instead, the rules of supply and demand argued for "letting men alone" rather than thrashing them with whips for not being servile. Carlyle bashed political economy as "a dreary, desolate, and indeed quite abject and distressing [science]; what we might call ... the dismal science.” ...

Worldwide Income Inequality Moves From Two Humps to One

Economist Timothy Taylor always has interesting posts. Yesterday he posted Worldwide Income Inequality: From Two Humps to One. The world distribution of income 25 years ago had a large hump at the low end and a smaller hump at the high end. (If you go back another 20 years, these humps are even more pronounced.) The distribution is now moving more toward a bell curve. Remember that the following graph is logarithmic, so the right tail extends to the right when scaled otherwise. Still, the shift from the blue to the green line is moving in a very positive direction. The big question is how do we make this happen better and quicker?

Economics Links

1. Poor and Middle Class Incomes Have Increased Significantly

"... Using this more sophisticated cost-of-living adjustment, which is preferred by the Congressional Budget Office and Federal Reserve Board, the increase in median household income was not 5 percent but 16 percent from 1979 to 2012. In 2007, like 1979 a peak in the business cycle, median income as defined by the Census Bureau was 25 percent higher than in 1979. 

Similarly, the official Census Bureau figures indicate that the household at the 20th percentile of income—poorer than 80 percent of households and richer than only 20 percent of them—was no better off in 2012 than in 1979. Switching to the better cost-of-living adjustment, however, shows a 10 percent improvement—and a 19 percent improvement comparing the 1979 peak to the 2007 peak.

The Census Bureau narrowly defines income to exclude the non-cash benefits that constitute an important part of the safety net, as well as employer-provided fringe benefits. That means it assumes that food stamps, Medicaid, Medicare, and employer-provided health insurance have no value to families trying to pay their bills and live more comfortably. For that matter, it considers income before taxes are deducted, missing any increase in disposable income that declining taxes may have yielded. 

From 1979 to 2007, median pre-tax income defined to include non-cash benefits rose by about 30 percent. I find about the same increase for median post-tax income, but my estimates do not account for tax credits. The Congressional Budget Office reports a 33 percent increase in pre-tax income and a 42 percent increase in post-tax income. At the 20th percentile, pre-tax income rose by 26 to 38 percent, depending on how Medicare and Medicaid are valued. The truth is almost surely somewhere in the middle. The post-tax increase was similar.

Finally, the Census Bureau figures do not account for the fact that households have become smaller over time. When households have fewer mouths to feed, a given amount of income goes a longer way, so even if incomes had not grown, Americans would have been better off. 

After adjusting for household size, median pre-tax income was about 40 percent higher in 2007 than in 1979, and according to CBO, post-tax income was 49 percent higher. At the 20th percentile, size-adjusted household income rose by 28 to 46 percent (with the health insurance valuation much more consequential than the inclusion of taxes).

These are sizable gains over time—just not as large as those experienced in the “Golden Age” of the 1950s and 1960s or as substantial as those seen at the top of the income distribution. ...

I want to study this report a little more.

2. 21 Charts On US Inequality That Everyone Should See

3. American Inequality in Six Charts

4. Here's Who Earns The Minimum Wage, In 3 Graphs

5. The Mythology of the Minimum Wage

... A more effective way to help those in need is for policymakers to work on improving programs that have a track record of success, such as the earned income tax credit (EITC). The EITC has proven to be very effective at moving Americans from out of work to having a job. The EITC is also more effective at targeting those in poor households because it is based on income and not just wages. In the end, the EITC benefits 56.1 percent of workers in poverty.

A strong social safety net is one of the most important things a nation can provide its people, but an increase in the minimum wage should not be part of the strategy. Redistributing income from those who need it the most--the job seekers--to those who need it the least-- job holders in high income households expands the income divide and is a counterproductive anti-poverty policy.

6. Should Walmart Pay Its Workers More?

... It’s important to highlight the plight of the working poor. At a time when food stamps are being cut and some on the right attempt to argue against the basic idea of a safety net it is useful to show what actual need looks like in this country, and that many who work hard still encounter real economic hardship. So by all means, let’s talk about increasing the EITC, making a better and more robust safety net, and ways to improve the welfare of low-income people in this country. But let’s not pretend that a huge percentage of the context in which this story is being discussed isn’t that it is Walmart’s duty to raise the wages above the current market level. I’m happy to talk about economic hardship and things to do about it, but let’s not ignore the conversation most people are actually having and the bad ideas actually being proposed.

7. Krugman: The Amorality Of The Market Economy Can Not Be Legislated Away

... The final argument is his attempt to get at what the liberal case for higher minimum wages is at it’s core: it’s about opposing the idea that wages are determined by prices.

In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price–determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away.

I think Krugman’s points on the minimum wage are still very applicable despite being published way back in 1998.

8. The Minimum Wage and the Laws of Economics

I can’t open the paper these days without stumbling onto something about the minimum wage, which I take to be a good thing as it’s a simple, popular way to help address the problem of very low-wage work in America.  It’s not a complete solution; it’s not the only solution — it is, in fact, a relatively small-bore policy that sets an important labor standard: the government will compensate for the severe lack of bargaining clout among our lowest-wage workers by setting a floor below which we won’t allow their wages to fall.

It’s also that case that we need to look carefully these days at any policies that will help offset income inequality and wage stagnation, especially ones with low budgetary costs, or in this case, virtually none.  That’s one reason that I expect President Obama to amplify these points in an economics speech on Wednesday in Washington. ...

... Thus we can conclude that at least part of the problem with the low-wage labor market is the quality of the jobs, at least from the perspective of compensation, not the quality of the workers.  Sure, soft skills — showing up on time, dealing maturely with peers — are as important as ever, but people with shortcomings in those areas show up in all sectors.  Typical low-wage workers don’t lack the skills to do their jobs.  They lack the bargaining power to be paid decently for the work.  Relative to most others in the job market, they’re least able to press for a share of the profits they’re helping to generate.

When you think of it this way, a lot of the cramped economic debate opens up.  Since workers are not really paid their precise marginal product, you wouldn’t expect them to be laid off because of a moderate, mandated wage increase.  In periods of high profitability, you’d expect some of the wage increase to be paid for out of profits.  In a real-world context, you’d want a policy taking direct aim at deteriorated job quality and thus helping to offset the acute lack of bargaining clout among low-wage workers.

Does that mean completely ignoring the “laws” of supply and demand and setting the minimum at any level we want?  Of course not.  Workers may not be paid their “marginal product,” but there is some rough correlation between their pay and the value of their work (the great labor economist Richard Freeman gets at this by using the flat edge of the chalk to draw demand curves).  History teaches that moderate wage increases — say, those including not much more than 10 percent of the work force in their sweep — have nothing like the job-loss effects that opponents claim (which isn’t to say “zero,” but the beneficiaries far outnumber those hurt by the policy). ...

9. Retail Wages Are Market Wages, Not a Welfare Program

... Employers pay employees based on the worth of the employee, how much profit that person adds to the company’s bottom line. That amount has no connection at all to the cost of living or to any neutral observer’s idea of what a “fair” wage might be. A business has no reason to care or to know how much money you need (or think you need) to live the life you have chosen to live. Businesses care about what each employee does for them.

An employer may choose to pay a higher-than-market wage for a variety of reasons, but those reasons do not include charity. Some companies (including some retailers such as Costco) follow the efficiency wage hypothesis, positing that paying a higher than normal wage will induce the employee to work extra hard and be very loyal to that employer. This is perfectly rational economics if the hypothesis proves true. Companies are still only paying for what they receive; they have simply found a way to get more profit per employee by paying them higher wages. Other firms may pay more, or provide better benefits, to reduce employee turnover, which can be very costly to the company. Many tech firms are examples of both these behaviors.

The two most recent welfare reforms in this country, in 1975 and in 1996, have both tried to engineer a system of complementary social safety net features and incentives to work. In both cases, the welfare system was judged to have become too skewed toward the safety net and to actively be discouraging people from working. For example, in the 1990s a single mother of two would have needed a job paying well over $20,000 before it would have made economic sense to leave welfare and start working. Simply losing her Medicaid eligibility would have cost her around $10,000 per year even back then. People were being penalized for working. Most people will not work if it makes them poorer.

The point of the current system is to encourage people to work by not making them ineligible for benefits simply by virtue of being employed. Thus, having workers at retail stores or fast food restaurants who also qualify for public assistance is not a reason to condemn those employers, but instead one to praise the politicians and public policy experts who redesigned the welfare system. ...

10. When it comes to home appliances, the ‘good old days’ are now

11. About Half of Kids With Single Moms Live in Poverty

... Among all children living only with their mother, nearly half — or 45% — live below the poverty line, the Census Bureau said. For those living with just the father, about 21% lived in poverty. By comparison, only about 13% of children with both parents present in the household live below the poverty line. ...

12. The End Of The Era Of Multinationals

... But since I clearly can’t help myself, I will make a prediction. When tax reform does come, and whatever it means whenit gets here, U.S. multinationals will pay a price. Now, I’m no communist; in fact, I’m a practicing capitalist, but the multinationals sort of deserve what’s coming, because they’re sort of pigs. They have been working the U.S. tax system for years – just like they have been working tax systems around the world. They have managed to build up quite an arsenal of weapons to help themselves – things like transfer pricing, check-the-box, tax havens, deferral, just to name a few. All these weapons are legal. The system seems rigged their way. ...

13. The Largest U.S. Charities For 2013

Its incoming donations didn’t go up much. But by a wide margin, United Way remains No.1 on the annual Forbes list of the largest U.S. charities.

The Alexandria, Va.-based network of more than 1,000 separate units largely dependent on paycheck deductions received $3.9 billion in gifts for the year ending December 31, 2012, $24 million more than the previous year. In a difficult economic environment, that represented a 0.6% increase.

No. 2 again is the  Salvation Army , a church better known for its social services efforts whose U.S. headquarters also is in Alexandria.  Its donations rose 11% to $1.9 billion, more than making up for a 6% fall from the previous year.

A list newcomer comes in at No. 3, Task Force for Global Health, which is based in Decatur, Ga. To implement its health activities in 50 countries, including the U.S., the charity brought in $1.7 billion, most of it donated medicines.

Rounding out the billion-dollar-donation club:  Feeding America at $1.5 billion and Catholic Charities USA at $1.4 billion. Feeding America, a Chicago-based supplier of of food banks, saw its incoming gifts, mainly donated food, rise a whopping 33%, in contrast to a 10% donation drop at Catholic Charities, which directs its efforts toward fighting poverty. ...

Global Inequality is Decline

James Pethokoukis includes the following graph and commentary in his post Actually, global income inequality seems to be on the decline.

As a follow-up to my blog post on the Pope Francis and his recent statement on economic inequality, here is what’s been happening on inequality globally. While inequality has increased within countries since 1970s — it’s not just America, gang — it’s dropped between countries. See the above chart from this study (h/t to Overcoming Bias.) When you combine the two, it looks like inequality has been declining.

Very poor countries tend to have high percentages of the population living at subsistence levels, with a small fraction of people with high income at the top. That means a distribution with the masses bunched at the bottom with a small tail extending toward high income.

But the high-income people in these poor countries would not compare to the wealthy in the West. The gap between the poorest and richest persons is much smaller in poor countries. As economic growth occurs, the distribution begins to look more like a bell curve where no one is living at subsistence levels, but the high-income part of the distribution has extended much further out. That is to say that absolute poverty is eliminated, but the distance between the bottom and the top widens considerably. Nations are finally becoming more economically developed. Thus there is a widening within countries but a narrowing between countries and on the global level.

You can see this graphically in a presentation at Gapminder: Human Development Trends, 2005. Here are four slides:

Here is Hans Roslings 200 Countries, 200 Years.

Economics Links

1. Timothy Taylor (The Conservable Economist) has several interesting graphs on The Global Wealth Distribution

2. Britain Just Privatized Its Mail Service at a $1 Billion Discount

The largest initial public offering in Europe in more than two years could have been even larger. The privatization of the Royal Mail, in which around two-thirds of the company’s shares began trading Friday morning, raised £1.7 billion ($2.7 billion) for the government.

Frenzied trading pushed the Royal Mail’s shares up by nearly 40% within minutes of the opening bell. This followed enormous demand for the initial allocation of shares, with the retail portion of the offering oversubscribed by seven times and institutional investors bidding for 20 times as many shares as they were allowed. ...

3. The CPI for clothing has fallen by 3.3% over the last 20 years, while overall prices increased by 63.5%

4. Staying Put: Why Income Inequality Is Up And Geographic Mobility Is Down

MARTIN: In the early 1950s, you say in your piece, about 3.5 percent of all American households moved from one state to another in any given year. You said that this held up through the '70s and then started to fall around 1980. You're saying that the latest available data shows that interstate migration is stuck at about 1.7 percent. This is about the lowest level in...

NOAH: Yeah.

MARTIN: ...about, what, three decades?

NOAH: Yeah. Less than half. ...

... MARTIN: So what does? NOAH: Well, I think it's two things, and one is the familiar story of income inequality. And the other is - has to do with housing prices. Incomes have been stagnant for, really, going back to the late 1970s. They've been stagnant relative to the income growth that we saw before 1979, and they have been literally stagnant for about a dozen years. Median income is now a little below what it was in the late 1990s. And you combine that with rising housing prices, then it becomes difficult for people to move to jobs because they can't afford to live where the new jobs are. ...

... NOAH: Yes, that sounds to me like a very common experience. And yes, obviously people are moving, you know, but in the aggregate, people are moving a lot less than they used to. And, you know, when you look back through American history, I mean, you sort of think - American history really is the story of a succession of movements. There was the westward movement. There was the movement, in the early part of the 20th century, from farms to the cities. There was the great black migration of the early and middle 20th centuries. There was the move to the Sunbelt in the 1970s. That was really the last time people were, in large numbers, moving to jobs. People are still moving to the Sunbelt today, but now it's not moving to jobs. They're moving there for the warm weather or for the cheaper housing. ...

I'm not endorsing his solutions, but the analysis is interesting.

5. Why Did Jews Become Moneylenders? Because They Could

6. One reason C.E.O. pay keeps rising: Open Season

... the drive for transparency has actually helped fuel the spiralling salaries. For one thing, it gives executives a good idea of how much they can get away with asking for. A more crucial reason, though, has to do with the way boards of directors set salaries. ...

... This isn’t just an American problem. Elson notes that, when Canada toughened its disclosure requirements, executive salaries there rose sharply, and German studies have found something similar. ...

... Transparent pricing has perverse effects in other fields. In a host of recent cases, public disclosure of the prices that hospitals charge for various procedures has ended up driving prices up rather than down. And the psychological causes in both situations seem similar. We tend to be uneasy about bargaining in situations where the stakes are very high: do you want the guy doing your neurosurgery, or running your company, to be offering discounts? Better, in the event that something goes wrong, to be able to tell yourself that you spent all you could. And overspending is always easier when you’re spending someone else’s money. Corporate board members are disbursing shareholder funds; most patients have insurance to foot the bill. ...

7. Americans Significantly Overestimate The Percent Of People On Food Stamps

... Around 14.3% of the nation is on SNAP — roughly 1 in 7 Americans — but still people thought participation was much higher, with the average being 22.5%. ...

8. Europe Can’t Find Balance Between Green Goals and Growth

... Europe hoped to act as a global leader by setting its ambitious 2020 climate goals, but its position as a first mover in green policy has only managed to put European industry at a competitive disadvantage relative to the rest of the world. Green energy is more expensive than brown energy and must be propped up by government subsidies to gain significant market share. The costs of these subsidies get passed on to consumers, meaning households and businesses must pay out the nose for electricity. If you’re a decent-sized widget manufacturer in Germany, options in the developing world and shale-rich America start to look more appealing. ...

9. Yes, Economics Is a Science by Raj Chetty

... But the headline-grabbing differences between the findings of these Nobel laureates are less significant than the profound agreement in their scientific approach to economic questions, which is characterized by formulating and testing precise hypotheses. I’m troubled by the sense among skeptics that disagreements about the answers to certain questions suggest that economics is a confused discipline, a fake science whose findings cannot be a useful basis for making policy decisions.

That view is unfair and uninformed. It makes demands on economics that are not made of other empirical disciplines, like medicine, and it ignores an emerging body of work, building on the scientific approach of last week’s winners, that is transforming economics into a field firmly grounded in fact.

It is true that the answers to many “big picture” macroeconomic questions — like the causes of recessions or the determinants of growth — remain elusive. But in this respect, the challenges faced by economists are no different from those encountered in medicine and public health. Health researchers have worked for more than a century to understand the “big picture” questions of how diet and lifestyle affect health and aging, yet they still do not have a full scientific understanding of these connections. Some studies tell us to consume more coffee, wine and chocolate; others recommend the opposite. But few people would argue that medicine should not be approached as a science or that doctors should not make decisions based on the best available evidence. ...

Economics Links

1. Did living standards improve during the Industrial Revolution?

... So, while the Industrial Revolution ultimately led to big increases in wealth, progress was unsteady. For much of the period, the average person was not reaping the benefits of economic change.

So much for wages. Other measures of standard of living should be considered. ...

This a great piece highlighting the methods economic historians use to evaluate standards of living.

2. Annual Food Inflation

3.  Robert Reich on free markets

... In reality, the "free market" is a bunch of rules about (1) what can be owned and traded (the genome? slaves? nuclear materials? babies? votes?); (2) on what terms (equal access to the internet? the right to organize unions? corporate monopolies? the length of patent protections? ); (3) under what conditions (poisonous drugs? unsafe foods? deceptive Ponzi schemes? uninsured derivatives? dangerous workplaces?) (4) what's private and what's public (police? roads? clean air and clean water? healthcare? good schools? parks and playgrounds?); (5) how to pay for what (taxes, user fees, individual pricing?). And so on.

These rules don't exist in nature; they are human creations. Governments don't "intrude" on free markets; governments organize and maintain them. Markets aren't "free" of rules; the rules define them....

All true, but the rules were not arbitrarily written yesterday. Centuries of trial and error are reflected in the rules. That doesn't make them all just or above modification, but neither are they a game thrown together at a whim. To claim there are no free markets because government frames elements of exchange is like saying there is no such thing as free speech because government frames elements of public dialog.

4. American Farmers Say They Feed The World, But Do They?

... So I called , an economist at Cornell University who studies international agriculture and poverty.

They're both right," he says, chuckling. "Sometimes the opposite of a truth isn't a falsehood, but another truth, right?"

It's true, he says, that bigger harvests in the U.S. tend to make food more affordable around the world, and "lower food prices are a good thing for poor people." ...

... But Mellon is right, too, Barrett says. The big crops that American farmers send abroad don't provide the vitamins and minerals that billions of people need most. So if the U.S. exports lots of corn, driving down the cost of cornmeal, "it induces poor families to buy lots of cornmeal, and to buy less in the way of leafy green vegetables, or milk," that have the key nutrients. In this case, you're feeding the world, but not solving the nutrition problems. ...

 5. Why the U.S. Needs to Fall Out of Love With Homeownership

... Less developed countries have consistently higher levels of homeownership, while more advanced nations combine higher levels of economic development with substantially lower levels of homeownership.  (The correlation between the two is -.40 overall and it rises to -.58 when she removed outliers Singapore, Norway, Luxembourg and Switzerland). American political rhetoric tends to equate rising homeownership rates with strong economic development. Instead, the opposite is true. The rate of homeownership declines as nations get wealthier.

One reason for this may be because people in less developed nations have fewer options of where to put their money. In agrarian economies, land ownership is the basic source and measure of wealth. In more advanced capitalist economies, people have many more investment options. Many of the places with the highest rates of homeownership are in former Communist nations of Eastern Europe. ...

... And numerous studies have found that excessive homeownership significantly distorts the economy, diverting investment away from much more needed areas like technology and knowledge.

Homeownership continues to make sense for many Americans. But for those whose income is limited or who are still building their careers, a house can be an anchor than limits their ability to move to where jobs are.  ...

6. Household Incomes Remain Flat Despite Improving Economy

7. Brazil's New Middle Class: A Better Life, Not An Easy One

Tens of millions of Brazilians have risen out of poverty over the past decade in one of the world's great economic success stories. The reasons are many: strong overall economic growth, fueled by exports. A rise in the minimum wage. A more educated workforce. And big government spending programs, including direct payments to extremely poor families.

But becoming middle class in Brazil means a better life, not an easy one. The new, lowest rung of the middle class is what in the U.S. would be called the working poor, with monthly incomes of between $500 and $2,000.

Yet this group is driving consumer spending in Brazil as they cobble together enough money to buy a television, a cell phone or pay for their children to go to a private school. ...

Technology, Globalization, and Inequality.

These articles caught my eye this week. First, in the Atlantic: Bash Brothers: How Globalization and Technology Teamed Up to Crush Middle-Class Workers

Globalizationandtechnology is often referred to like a monolithic thing. A new study shows they're very separate. Globalization increases joblessness. Computers increase inequality.

The article is reporting on a recent economic study: Untangling Trade and Technology: Evidence from Local Labor Markets

... Here's the bumper sticker version of their conclusion: Globalization increases unemployment; technology increases inequality.

Globalization: The authors found that metros with more exposure to Chinese trade -- mostly concentrated in the swoosh of states extending from Indiana down to the Gulf of Mexico and up through North Carolina -- saw significant job losses, both in manufacturing and overall. For every $1,000 increase in imports per worker, the share of people with jobs declined by 0.7 percentage points -- and more for non-college grads. As manufacturing jobs declined, demand for local services would decline, and thus job losses could extend into areas like retail and hotels.

Technology: The computerization of certain tasks hasn't reduced employment, the authors find. But it has reduced the availability of decent-paying, routine-heavy jobs. Middle-class jobs, like clerks and sales people and administration support, have disappeared as computers gradually learned to perform their routines more efficiently. But as those jobs disappeared, cities saw an increase in both high-skill work and lower-paid service sector work, leading to little overall change in employment. ...

CNBC has an article (published at Huff Post) Where The 1 Percent Really Get Their Money:

Much of the debate over taxing the wealthy focuses on taxing giant salaries.

But a new study from the nonpartisan Tax Policy Center found that the real money for the wealthy is made from investments and business income—not compensation. ...

And Mark Perry recaps this article in the Journal of Economic Perspectives: Stunning new study dismantles Obama's "1% vs. 99%" inequality argument.

The JEP article is here: It's the Market: The Broad-Based Rise in the Return to Top Talent

Perry summarizes:

In their paper, Kaplan and Rauh conclude "it's the market" rather than some class-wafaresque malfeasance at play. Here's why:

1.The increase in pay at the highest income levels is broad-based: Public company executives, private company executives, hedge fund and private equity investors, Wall Street bankers, lawyers, and pro athletes have all experienced big jumps in pay over the past few decades. ...

2. Typical measures of high-end income inequality are incomplete. Inequality alarmists typically point to data from Thomas Piketty and Emmanel Saez which show the share of taxable income accruing to the top 1% up markedly since 1980 and at levels not seen since the Roaring '20s. Yet once you add back transfer and taxes, as the Congressional Budget Office does in its analysis, you find that government policy — including the tax code — has already been restraining the rise inequality. Kaplan and Rauh: "In the most recent data from 2009, the aftertax, after-transfer income share of the top 1 percent was around the same level as in 1987–1988, 1996, and 2001."

3. The superrich are getting that way through effort and education — particularly in industries where tech and globalization play a big role — rather than through inheritance: ...

It has long been my suspicion that a central player in the rise of inequality is the ongoing race between technological innovation and human capital development. During times of rapid increase in productivity through technological changes, owners of the technology race ahead. Worker education and the formation of human capital are slower to adapt. But technology can only go so far before it must have plentiful workers who have adapted. As this gain from technology runs its course, the demand for new workers increases labor begins to race ahead. I'm no expert on these matters, but it seems that something like that is happening today. It isn't just the U.S. that experiences this, but the whole industrialized world. Something more systemic appears to be afoot.

Liberals and ‘libertarian populists’ are wrong: politics isn’t a zero-sum fight between corporations and the poor - Ezra Klein

Washington Post: Liberals and ‘libertarian populists’ are wrong: politics isn’t a zero-sum fight between corporations and the poor - Ezra Klein

...Positing this zero-sum death struggle between corporate America and poorer Americans is the key to the emergent arguments around “libertarian populism.” The basic idea there is that if Washington would simply close its doors to corporate pleading then corporations would lose political power and the policy concessions that go with it and lower-income Americans would win economic power. In a zero-sum world, less “crony capitalism” for corporations equals more economic uplift for the poor.

But the “libertarian populism” agenda is more an example of how both corporations and the poor could lose. You can see this reasonably clearly in Ben Domenech’s effort to sketch a “libertarian populist” agenda. After ticking through a number of ways to beat back “crony capitalism,” he comes to the poor, and writes:

the truth, despite much of the left’s complaints, is that economic mobility has actually remained fairly strong even in this lackluster economy, and America’s poor are – in real (consumption) and nominal (when you add wages, transfers and benefits) terms – doing better than ever when compared to previous generations. In fact, most of the biggest problems with today’s economy are the result of government, which has damaged the labor market with awful incentives (disability, overgenerous unemployment, awful retraining programs, minimum wages and other barriers to entry, tax/regulatory discrimination against small businesses, etc.) which need to be eliminated.

So corporations get less and the poor — who really aren’t doing that badly, you know — get less, too. The savings will presumably be pumped into lower tax rates, particularly for the rich (Domenech himself goes on to argue for a flat tax, which is extremely regressive). I’ve yet to see a “libertarian populist” who argues for pumping the money into health insurance for the poor, or really anything to directly improve their lives.

Conversely, the liberal agenda — best embodied in the budget released by the House Progressives — is a vision of how corporations and the rich could lose even as the poor win (the catch is whether you think their taxes would severely damage the economy).

The country’s poor — and everyone else — are right to wonder how much power the altruists have in an age when corporations hold so much political sway. The comforting response, however, is quite a lot, at least in recent years.

Saturday Links

1. Phillip Swagel with a good piece on Inequality and Opportunity

... I am not convinced, however, that the president's proposals are well matched to the problem he describes. Indeed, Mr. Obama is better at describing the outcomes he seeks than at putting forward a coherent set of policies to reach those outcomes. But I think I see what he has in mind.

Mr. Obama is looking at two horizons. The main determinant of inequality is what the Harvard economics professors Claudia Goldin and Lawrence Katz call a "race between technological change and educational attainment." Technology has increased the demand for skilled workers but educational attainment has not kept up, leading to rising payoffs for those at the top. Widening inequality reflects the fact that too many Americans do not have the skills needed for today's economy. But changing this takes time. So while he proposes universal preschool to benefit the future work force and new training programs delivered through community colleges for existing workers, Mr. Obama seeks to foster a stronger economy here and now, to drive higher earnings for people at all income levels rather than just those at the top. ...

2. Shared Justice: Beyond Purely Economic Solutions to Poverty

Christians must agree on a holistic definition of poverty that includes relational and spiritual elements. ...

... But is the problem of poverty really that simple, a lack of opportunity given to those in the lowest economic class? It depends on how you define the terms "poverty" and "opportunity," as well as the terms "justice" and "charity"—all of which require multi-dimensional definitions if we hope to build a constructive conversation around the problem of poverty. Throughout the next two months at Shared Justice, we'll be fostering that conversation; to do so, though, we first must return to the basics and refine the questions. In other words, the question is: What are the right definitions?

But is the problem of poverty really that simple, a lack of opportunity given to those in the lowest economic class? It depends on how you define the terms "poverty" and "opportunity," as well as the terms "justice" and "charity"—all of which require multi-dimensional definitions if we hope to build a constructive conversation around the problem of poverty. Throughout the next two months at Shared Justice, we'll be fostering that conversation; to do so, though, we first must return to the basics and refine the questions. In other words, the question is: What are the right definitions? ...

... Broken relationships lie at the root of all of these things, so solving poverty demands that we meet more than just material needs—and that isn't easy. Generally Christians today have engaged in one-way giving and service amounting to little more than charity in the end, which is only part of our calling. And the result? Christians and the church have been relatively ineffective at providing lasting opportunities for the poor to overcome their situations. ...

3. Charitable Giving: Baby Boomers Donate More, Study Shows

4. Economist: Rewriting history - "A new measure for GDP adds billions to America's economy"

5. Why the Church and Charity Aren't Enough - Derek Penwell

...My friend argues that taking care of the poor is the church's responsibility -- that people who work hard shouldn't have to give so much of what they earn back to the government in taxes. Government is notoriously inefficient and sloppy.

So, I tell him that all of that might be true, but to people on the outside looking in, to folks who don't share his strong faith in the church's ability to get it right either, such a theology of social organization looks suspiciously like a dodge -- a flimsy attempt to baptize selfishness. To them it sounds like "I got mine … through a paradoxical admixture of my hard work and God's blessing, which means God wants me to have all this stuff; and conversely, it means God doesn't want poor people to have any stuff, let alone my stuff."...

6. Why China's 'Dominance' of Manufacturing Is Misleading

Gaudy statistics aside, the country has struggled to do what it needs to do -- move up the value chain.

On Monday, The Atlantic wrote a story based on an International Business Times infographic that portrayed China's enduring prominence in manufacturing. Remember, though; prominence is not the same as success. (Just consider this sentence: "Alex Rodriguez continues to be a very prominent baseball player.") China will play a major role in global manufacturing for years -- and probably decades -- to come. But the country's role is not a healthy one, and the weaknesses in Chinese manufacturing outshine the huge numbers displayed in the graph. ...

 

7. The Average American Car Is Older Than Ever Before

 

"The average age of the 247 million light vehicles on American roads today is 11.4 years, an all-time high, according to a new study from Polk. ..."

 

8. Redistributing Wealth Is the Wrong Way to Fix a Rigged Game

 

Elites shouldn't be forced to share ill-gotten gains -- they should be prevented from ever getting them.

 

9. How should the US deliver food aid?

 

Food shipped from America has saved the lives of millions of people since the Food for Peace programme was set up in 1954, but the strict rules demanding almost all of the food has to be sourced in the US and sent on American ships are coming under increasing attack.

10. Many Americans have no friends of another race: poll

About 40 percent of white Americans and about 25 percent of non-white Americans are surrounded exclusively by friends of their own race, according to an ongoing Reuters/Ipsos poll.

 

Are We Talking About Inequality or Poverty?

Clive Crook wrote an interesting piece: All This Inequality Talk Does Nothing for the Poor - Bloomberg

... Inequality is rising, and that's a bad thing. What's worse is that the issue is getting mixed up with what should be a more pressing debate over economic opportunity, which would be better kept separate. This is both a distraction and a danger.

The U.S. system, according to many critics, is fundamentally flawed, its failings all of a piece. The rich have rigged the system so that the fruits of the nation's labor accrue largely to them. Nobody else can get ahead. The incomes of the middle class stagnate as labor productivity keeps rising. And if you're born poor, you stay poor. The plutocrats are killing the American Dream.

This encompassing theory of national decay is wrong. As Scott Winship of the Brookings Institution has pointed out, many of the simple facts that are claimed to support it aren't so simple on closer inspection. For one thing, comparing incomes over time for this purpose isn't easy. (What's meant by "income"? Are we discussing households, individuals, tax units, full-time workers?) You might keep this in mind: Until the recession, according to the Congressional Budget Office, U.S. median household incomes kept rising in inflation-adjusted terms, decade by decade.

That's a notable achievement for a country so long at the front of the pack (and therefore without opportunities for catch-up growth) during a time when the supply of foreign labor (hence, pressure on rich-country wages) was growing faster than ever.

Despite what you read, until 2007, most U.S. families were getting ahead. By global standards, their economic system, far from being fundamentally broken, has delivered mass affluence. ...

... Inequality has worsened in the U.S., and that's a problem. But the idea that plutocrats are enriching themselves at the expense of others needs to be unpacked. In some cases, it's true. Some executives have found ways to pay themselves more than they're worth to their companies: They're profiting at shareholders' expense. In other cases, though, technology and globalized markets have boosted the incomes of superstar entertainers, athletes and business leaders. That's different. If those innovations hadn't happened, incomes would be more equal -- but the middle class wouldn't be better off.

One basic point is often forgotten: The size of the pie isn't fixed. It's right to ask whether the distribution of incomes is fair and to lean against worsening inequality -- say, by fixing corporate governance so the market for top-executive pay works as it should or by taxing the rich more heavily. But it's wrong to see the gains at the top as proof of the system's ingrained wickedness, or to forget that clumsy intervention might affect everybody else's incomes.

The numbers on generational mobility are complicated, too, but one fact is undisputed: A child of a poor family in the U.S. is more likely to stay poor as an adult than his counterparts are in many comparable advanced economies. ...

... Miles Corak of the University of Ottawa and other economists argue that high inequality causes low mobility. The question isn't settled. I find it easy to believe that the recent surge in the incomes of the super-rich -- the main driver of U.S. inequality -- will make it easier for the very richest children to stay very rich, but I find it hard to believe it will help the poorest to stay poor. They're separate issues with separate causes calling for different policy responses, not different symptoms of the same underlying disease. ...

Cook has keyed in on a key concern of mine. Many people who are concerned about the poor keep harping on inequality. I am convinced that many who do this instinctively view the economy as a zero-sum game; namely someone else's win is someone else's loss. Flowing logically from this is the belief that the wealth at the top has come directly at the expense of those at the bottom. Solution: A reduction in the wealth of those at the top will mean a corresponding increase in wealth for those at the bottom. This is bad reasoning.

It is possible to significantly reduce the wealth of those at the top and see no significant change in the plight of those at the bottom. The plight of those at the bottom could even get even worse. Conversely, improving the plight of those at the bottom is possible while inequality increases.

The issue for the poor is opportunity and mobility. Why are we not doing better on these issues? That is a complex question. The issue for inequality is to ask what contribution to the common good we are rewarding through our socio-economic system. And let me be clear. Inequality is just and good. Exceptional performers should be rewarded handsomely, and those capable of productively employing vast quantities of assets contribute to the common good. But is that what actually has been happening with the wealth accumulation at the top in recent decades?

When I try to decouple these two issues in conversations, I find suspicion is frequently raised that I am justifying the rich or that I'm indifferent to inequality. In reality, I'm concerned about the poor, and moralistic posturing about inequality doesn't address their problems. Incredulously, I'm asked if I believe the rich shouldn't be required to pay more to help support the social safety net. To which I respond, maybe so. But will you be satisfied if we achieve an adequately funded social safety net, and inequality continues to widen? If not, your concern isn't about poverty but an ill-defined need to see less divergence. That is not a poverty issue. We need to untangle what we are talking about.

I know it makes our world simpler and more satisfying when we can find scapegoats on which to project our frustrations (i.e., the top 1% is the root of all evil), but such projections do little to solve problems and can even do serious harm.

The Middle Class is Disappearing ... into the Upper Class.

The poor are getting poorer, and the rich are getting richer is a common meme these days. The middle class is sinking into poverty as the top 1% just gets wealthier. Is that true?

Economist Mark Perry posted the graph below last week. It has been creating a buzz. (I included it in last Saturday's Saturday Links, but I've decided to highlight it here.) He divides family income into low, middle, and high-income categories and then charts the percentage of families in each category over the last forty-five years, using constant (inflation-adjusted) dollars. The chart shows that the percentage of low-income families has modestly decreased, the percentage of middle-income families has dropped by a third, but the percentage of high-income families has become 2.5 times larger. 

This chart may actually understate things a bit. I suspect the data is pre-taxes and pre-transfers, in which case I think we would see the low-income family percentage decreasing a little more and modest corresponding changes in the other two groups.

Also, I suspect a significant factor in the change has been the entry of women into the workforce. Fewer families were two-income families in 1967. Families with two full-time wage earners are going to have much higher incomes. Families left the middle class by becoming two-wage families, not because of constant increases in the real value of individual wages.

Here is Mark Perry's analysis.