Why Income Matters

I'm a little bored at the moment. How about another post on income inequality to liven things up? That should bring the page views pouring in, shouldn't it?

I'm going to start by reporting on Will Wilkinson's emotional state: he's sad. He's been trying to explain the idea that there can be different inflation rates for different groups of people, but it's a complicated concept and hard to get across. However, he thinks it's an important part of the inequality argument, and that's the part I want to address.

So here's the simple version. Suppose that rich people tend to consume lots of Porsches and tins of Beluga caviar, while poor people tend to consume lots of Chevrolets and hot dogs. Now suppose that over the past decade the price of Porsches and caviar has gone up 20% while the price of Chevrolets and hot dogs has stayed the same.

Got that? Now suppose you read that the incomes of the poor had been flat during the aughts while the incomes of the rich had gone up 20%. You would be outraged. The rich are getting richer while the poor are stagnating! Inequality is rising! When will it ever stop?

And yet....rich people are consuming the exact same number of BMWs and tins of caviar as they did ten years ago and poor people are consuming the exact same number of Chevrolets and hot dogs. Looking at income is misleading. Both groups are doing about the same.

Now, measuring inflation is hard enough already, and the measurement problems associated with trying to figure out separate inflation rates for rich and poor are convoluted enough to make grown econometricians cry. What's more, you can't just assume that everyone is buying the same stuff today that they bought in the past. Maybe purchasing patterns have changed over time in response to different growth rates in wages. It's a tough nut to crack.

In theory, though, it's a legitimate topic of research if you're interested in understanding the lived experience of different groups. You also need to consider government transfers, tax rates, household compositions, number of hours worked, and lots of other things. It's a fertile field of study.

As it happens, though, it's not the topic I'm usually interested in. The topic that's my normal preoccupation is understanding how the private economy works. That is, how does the private economy reward various groups of people? How has this changed over time? Why has it changed over time? Is it healthy? Can it last?

This second question is purely one of income and wealth distribution. I just want to know how money flows to different classes of people. Because while it's reasonable to say that a particular industry can be a growth driver during some particular period — electricity in the early 20th century, cars during the middle, and computers later on, for example — it's not really reasonable to say that a particular income class is a growth driver. Does anyone really think that 30 years ago rich people suddenly became more responsible for economic growth than the poor or the middle class?

I don't, and the comparative international evidence doesn't suggest it either. Rather, I think the rich in America have simply managed to reengineer our political and economic institutions to suppress middle class income, thus producing a vast pool of money that flows in their direction. As a result, their share of national income becomes ever more swollen. And this is horribly corrosive. I believe pretty strongly that a modern mixed economy can remain healthy only if prosperity is broadly shared, economic values are widely regarded as fair, and the middle class is becoming steadily wealthier. If that stops happening over an extended period of time it spells trouble on a whole bunch of fronts. The middle class becomes alienated and discouraged. The rich wall themselves off from the rest of us. The political process becomes increasingly co-opted. Boom and bust cycles become ever more pronounced.

You can mask this, of course. Technological improvements can make life better even with a stagnant income. Globalization can make low-end consumer goods seemingly cheaper. The rich can loan money to the middle class — for a while. Government programs can redistribute wealth a bit.

But those are just band-aids. The real long-term problem is that the fruits of economic growth are being increasingly funneled to a small group of the super rich in the first place. This just isn't sustainable without becoming a banana republic. Eventually, if we want a prosperous society, the private economy needs to distribute economic growth reasonably equitably in the first place.

Plus there's this: money is money. Even if stagnant incomes can produce growing consumption for a while, it comes at the cost of other things money can buy: leisure, retirement, savings cushions, etc. Rising incomes for the middle class would allow them more of everything that money can buy, not just more consumer goods.

Bottom line (so to speak): how people live their lives is an important topic. But it's not the only topic. How the private economy distributes wealth and income is important too. And on that score, all the signs point to an ever-widening gulf between rich and poor — an unhealthy, unsustainable gulf. We can't just shrug our shoulders and accept it.

Tax Cut Update

Bloomberg reports the latest on the middle class tax cuts:

Congressional Democrats and a top White House official said Congress will extend soon-to-expire tax cuts for low- and middle-income Americans after the Nov. 2 election. Republicans said the delay and the threat of higher taxes for top earners will hurt the economy.

Illinois Senator Richard Durbin said Democrats will come together to extend Bush-era tax cuts for the first $250,000 of a married couple’s income, including lawmakers who also want to keep the lower rates for high-earning Americans.

We'll see. I still don't see how this would be anything other than an election-year plus if they did it now, but I guess I'm not as smart as the Blue Dogs.

On Not Fixing the Economy

Here's another take on the structural vs. cyclic unemployment issue that I should have mentioned earlier. But better late than never! Here's the nickel summary: a recent IMF report suggested that about 1%-1.75% of our current unemployment is structural. So right off the bat, it means that most of our unemployment problem right now is cyclic: people just aren't buying enough stuff. It's a solvable problem.

But it turns out the structural problem is even smaller than that. Most people, when they talk about structural unemployment, are thinking of skill mismatches. So, for example, the construction industry is in a slump and lots of plumbers and bricklayers are out of work. Meanwhile, the healthcare industry is booming, but they need nurses and caretakers and they can't find any. Or, more generally, our economy needs lots of educated workers and we just aren't graduating enough people from college to meet the demand.

But that, it turns out, accounts for only about a third of structural unemployment. In other words, about half a percentage point, a drop in the ocean compared to our current 10% unemployment rate. The rest of our structural unemployment is caused by home foreclosures. Mike Konzcal explains:

Foreclosures are closely linked with what Ezra Klein calls the anti-stimulus, and what Bruce Bartlett summarizes as: “When the history of the current crisis is written, much of the blame will be placed on the sharp fiscal contraction of state and local governments…I think economists will view this as a preventable error equivalent to the Fed’s passive shrinkage of the money supply in the early 1930s.”

....We can, with one page, adjust the bankruptcy rules to allow lien-stripping of mortgages. There’s all kinds of clever plans coming out every month — here’s yet another voxeu plan — for how to monetize and share the potential upsides as well as arguing over who would carry this out and how, but it all comes back to a lien-stripping (“cramdown”) mechanism.

And the banks hate this. It didn’t even get 50 votes, much less the 60 you would need, in the Senate. This battle is what caused Dick Durbin to say “the banks own the place” about the relationship between financial sector and the Senate. Second-liens could be written-down overnight, but that would cause bondholders and owners of financial assets to take a hit. So that’s not going to happen either.

The evidence is overwhelming on multiple fronts. Only a tiny part — 0.5% — of our unemployment is caused by skill mismatches. The rest is caused by foreclosures and lack of consumer demand. We could reduce the foreclosure problem a variety of ways, but all of them would hurt banks and so we haven't pursued any of them. Instead we have only the hapless HAMP program. Likewise, we could stimulate consumer demand, but we didn't do that either. The federal stimulus program combined with state budget cuts provided a net government stimulus of about zero.

There's a lot we could do to reduce unemployment. We've simply chosen not to do it. Congress and the president have chosen not to seriously address either foreclosures or fiscal stimulus, and the Fed has chosen not to seriously pursue monetary loosening. It's as if a heavy rain were flooding your house and you just decided not to bother putting out sandbags or turning on the pump in your basement. Instead you gave your kids a bucket and told them to bail. And then, when your house was three feet underwater, you shrugged and said you'd done everything you could. But hey — at least Wall Street is happy. That's something.

Would More Reform Have Been More Popular?

Atrios today:

A frustrating thing is that the administration doesn't say, "we'd like to do this but we got the best we can do," instead they say "what we did was awesome." The result is that they don't even come across as advocates for the more liberal (and quite often the more popular) position.

I share this frustration. Still, every incumbent politician in history faced with an election has regaled voters with the awesomeness of their accomplishments. When Ug was running for reelection as clan chief in 50,000 BC, he bragged about discovering fire and carving some great new wheels. He didn't mention the forest he burned down or the fact that his wheel split in two after one trip to the creek. It's not really reasonable to expect anything different during election season.

Second, Atrios links to a Dave Dayen post that links to a report that says, "A new AP poll finds that Americans who think the law should have done more outnumber those who think the government should stay out of health care by 2-to-1." And the poll does say that. However, it doesn't say what "done more" means, and the actual numbers suggest that a more liberal law wouldn't have been any more popular than what we got. Here are the basic results from the AP poll: 30% favor the healthcare reform law, 40% oppose, and 30% aren't sure. Then they asked the 70% who were opposers and not surers a second question:

So 23% of that 70% thought the law didn't do enough. That's 16%. Add that to the 30% who favor the law and you get 46%.

That leaves 54% who oppose all or most of the law. So you're still at 54%-46% opposed, and this is the best case since it's possible that making the law more liberal might also have turned some of the favorers into opposers. Of course, you can argue that this is still slightly better than 40%-30% opposed, but it's a pretty iffy thing. What's more, only 39% said they agreed with the Drum/Atrios/Dayen view that our system required a "great deal" or "a lot" of change compared to what we had before healthcare reform passed. Unfortunately, there's really not much evidence that making the law more liberal would have had a big impact on public opinion one way or the other.

No Baggage, No Refund

Gotta love this. Since airlines now routinely charge large fees for checked baggage, it makes sense that the fee should be refunded if your checked baggage doesn't successfully get to your destination with you. Airlines, of course, are outraged at the idea:

In comments filed with the federal agency last week, the [Air Transport Assn.] said each airline should have the choice of offering a refund, depending on competition in the marketplace....The airline group also said it opposed the refund idea because a government mandate like this would only raise fares for everyone, including people who don't check bags. Finally, the association said a refund won't work because the requirement for "timely delivered" bags is a "subjective standard" and would "not account for varying conditions."

Varying conditions indeed. It's one thing if your flight is late due to weather or mechanical problems or whatnot. But if your flight makes it to your destination but your bags don't? What's the excuse other than airline incompetence? And why should I pay $25 a bag for that?

Feel free to take this kvetching with a grain of salt. I'm annoyed because Delta Airlines managed to trash yet another piece of my luggage yesterday. Considering that Marian and I don't travel more than a few times a year, it's remarkable how quickly our luggage falls apart these days. Is it crappy luggage or is it airline abuse? I guess I'll never be able to prove it one way or the other, will I?

From John Boehner, responding to Chris Wallace's complaint that the Republican Pledge to America doesn't contain any proposals to cut entitlement programs:

When you start down that path, you just invite all kind of problems. I know. I’ve been there....Let’s not get to the potential solutions. Let’s make sure Americans understand how big the problem is. Then we can talk about possible solutions and then work ourselves into those solutions that are doable.

Boehner is being a smart pol. Actually telling the American public what the Republican Party wants to do after it's in office would indeed invite all kinds of problems. Namely that Americans would all hate it and start voting against Republicans. So I think we can safely predict that they'll continue to be resolute in their unwillingness to fess up to the "potential solutions" they have in mind. They want to leave that as a surprise.

Wiretapping the Internet

The New York Times reports today that the Obama adminstration plans to propose "sweeping new regulations for the Internet" that will help them wiretap communications by criminal and terrorism suspects. In particular, they want anyone who provides encrypted communications services to have the ability to monitor, decrypt, and make messages available to the feds when they ask for them:

Susan Landau, a Radcliffe Institute of Advanced Study fellow and former Sun Microsystems engineer, argued that the proposal would raise costly impediments to innovation by small startups. “Every engineer who is developing the wiretap system is an engineer who is not building in greater security, more features, or getting the product out faster,” she said.

I look forward to conservatives at Fox News and the Heritage Foundation expressing outrage over a proposal that will heighten uncertainty and burden our small businesses with yet another set of bureaucratic rules. After all, we know how important small businesses are to these guys. So they'll surely object. Right?

The Liberal Future

Apparently Matt Yglesias has been getting some questions about the neoliberalish direction of his blog lately, so he explains where he's coming from:

There’s a couple of reasons. One is simply product differentiation — I don’t think just writing the same posts as Kevin Drum and Ezra Klein and Jon Chait is what the world needs from me, but we obviously all have similar political opinions. The other is the point I’ve made before, namely that with the passage of the Affordable Care Act the long struggle to expand the scope of the welfare state is largely over.

[Chart showing federal spending rising rapidly thanks to spiraling cost of Medicare.]

Realistically, does anyone think we’re going to increase the overall size of the government faster than that? I sure don’t. And yet there are actually some areas in which I’d like to see the government doing more — specifically nutrion, early childhood education, infrastructure, and probably K-12 education writ large....So the future of American politics is necessarily going to be about things like making the tax code more efficient, finding areas of government spending to cut relative to projection, and thinking of policy measures that will help people that don’t involve spending more money.

Sadly, this is not going to do the trick when it comes to product differentiation since it pretty much mirrors my own views. When it comes to domestic politics, my version of the narrative goes something like this:

  • Liberals have gotten a lot done in the past 80 years. There are plenty of things still left on our plate, but among big ticket legislative programs the only thing left is national healthcare. Link.
  • We now have a good start on that. What's left is constant evolution and improvement.
  • This, along with modest fixes to Social Security, will eventually put total state/local/federal spending somewhere around 40-45% of GDP. That's as high as I'm comfortable with. Link.
  • So we can't spend huge sums on much of anything else, and to spend even modest sums we're going to have to cut some existing programs and figure out ways to make others more efficient. Link.

To make things even worse on the product differentiation front, I even agree that of the medium scale programs liberals should focus on, education in general and, more specifically, early and intense interventions in high-poverty areas should probably be one of our highest priorities. I'd also add climate change legislation to the top of this list, but that's likely to be a long, grinding fight for small advances, not one or two big ticket items. For the time being, then, the main way to tell us apart is that Matt is the one preoccupied with basketball and parking regulations while I'm the one preoccupied with cats and the growth of income inequality. Maybe someday we'll figure out something else to gin up a fight over.

Jerry Brown's Stage of Life

I'm curious. Jerry Brown has been running the ad on the right for the past week or so here in California. It ends with this line:

We've got to pull together not as Republicans or as Democrats, but as Californians first. At this stage in my life, I'm prepared to do exactly that.

Question: is this an effective way to blunt criticism that he's old and kind of tired looking? Would you buy the idea that Brown is now sort of an elder statesman who no longer has a career to worry about and only wants to do what's best for the state? It actually seems sort of clever and possibly effective to me, but what do I know? Comments?

Is Diet Coke Dangerous?

Adam Ozimek is perplexed that so many of his friends think that diet soda is dangerous or causes cancer. After reviewing the considerable evidence that they're all perfectly safe, he says:

You can’t really be suspicious of artificial sweeteners without taking a paranoid stance towards leading health and scientific organizations in this country, and towards science itself. Most educated people who hold suspicions about artificial flavorings nevertheless trust the conclusions of science and scientific institutions on other issues, like global warming and evolution. So how do these people decide when to trust scientific consensus and when not to? If you’re going to be a scientific nihilist, then you should do so consistently.

Generally speaking, I agree that laymen ought to have some kind of consistent attitude toward consensus in the scientific community. However, I think there's one reasonable way that people might hold what seem like inconsistent views on scientific matters like this: they don't trust results in which powerful private interests clearly have a lot of lobbying power. So you might believe that global warming is real because there's a scientific consensus in favor of it even though lots of money from the business community is fighting it. Conversely, you might be suspicious of aspartame for fear that the scientific results are skewed by tidal waves of money from the food industry sponsoring studies designed to find it safe. After all, it's happened before with cigarettes and asbestos and PCBs and lead and benzene and chromium 6 and beryllium and Vioxx and a million other things.

There are limits here, and people who cross them risk sliding into conspiracy theory territory. But you don't have to be anywhere near that territory to be (a) suspicious of results hawked by self-interested private corporations and (b) equally suspicious that these private interests have a lot of influence over government regulators. So it might make perfect sense to believe that cigarettes are dangerous and global warming is real but remain skeptical that aspartame is safe or that GM foods have been thoroughly tested.

(For the record: I believe that cigarettes are dangerous, global warming is real, aspartame is safe, and GM foods should be subjected to considerable scrutiny.)