Economics

Last month, I posted a few links on why today’s middle-class salary may actually be better than we often think. Harvard professor and president emeritus of the National Bureau of Economic Research Martin Feldstein adds more food-for-thought on the subject:

…[I]t is frequently said that the average household income has risen only slightly, or not at all, for the past few decades. Some US Census figures seem to support that conclusion. But more accurate government statistics imply that the real incomes of those at the middle of the income distribution have increased about 50% since 1980. And a more appropriate adjustment for changes in the cost of living implies a substantially greater gain.

The US Census Bureau estimates the money income that households receive from all sources and identifies the income level that divides the top and bottom halves of the distribution. This is the median household income. To compare median household incomes over time, the authorities divide these annual dollar values by the consumer price index to create annual real median household incomes. The resulting numbers imply that the cumulative increase from 1984 through 2013 was less than 10%, equivalent to less than 0.3% per year.

Any adult who was alive in the US during these three decades realizes that this number grossly understates the gains of the typical household. One indication that something is wrong with this figure is that the government also estimates that real hourly compensation of employees in the non-farm business sector rose 39% from 1985 to 2015.

The official Census estimate suffers from three important problems. For starters, it fails to recognize the changing composition of the population; the household of today is quite different from the household of 30 years ago. Moreover, the Census Bureau’s estimate of income is too narrow, given that middle-income families have received increasing government transfers while benefiting from lower income-tax rates. Finally, the price index used by the Census Bureau fails to capture the important contributions of new products and product improvements to Americans’ standard of living.

Worth a read.

Stanford’s Josiah Ober has a recent article in Foreign Affairs based on his new Princeton-published book The Rise and Fall of Classical Greece that should interest those concerned about economic matters:

Greek states competed fiercely with one another, and with their imperial neighbors, notably Persia. Wars were frequent and bloody. But in the midst of conflict came new forms of social cooperation and a sustained era of rapid economic growth.

The total population of Greek speakers rose from some 330,000 persons in 1000 BCE to 8-10 million by the fourth century BCE. In the same period, average per capita consumption appears to have roughly doubled across the Greek world, and it probably tripled in Athens, the most advanced and among the most democratic of the city-states. The aggregate growth rate was low compared to high-performing modern states, but the rate was blistering compared to other pre-modern civilizations…Trade in commodities (including slaves), manufactured goods, and luxury goods boomed within the Greek world and between the Greeks and their neighbors. Among the remarkable features of the ancient economy of democratic Athens was the relatively low level of income inequality. Athens was home to many foreign “guest workers” and Athenians employed large numbers of slaves. But even taking slaves and foreigners into account, the distribution of Athenian income was much less unequal than in most premodern societies. Athenian wages for non-skilled laborers were high—comparable to the wages being paid in the most advanced economy of early modern Europe, Holland during its seventeenth century Golden Age…As…economists have long pointed out, there is a strong correlation between relatively low inequality and robust and sustained economic growth. 

The mounting evidence for the remarkably strong performance of the ancient Greek economy helps to explain what is sometimes called the “Greek Miracle”—the cultural explosion of Greek literature, visual and performing arts, and science that laid the foundations for Rome, the Renaissance, and the Enlightenment.

…So what made the impressive growth of the ancient Greek economy possible? The basic answer is good institutions.[ref]This notion of open institutions in ancient Greece reminds me of the work of economists Daron Acemoglu and James Robinson.[/ref] Greek city-states were governed by a range of regimes, but, by the fourth century BCE, the typical Greek city-state was, by world historical standards, very democratic. In Athens, and hundreds of other Greek states, most native adult males were participatory citizens, who set policy in citizen councils and assemblies, judged legal cases as jurors on people’s courts, and were elected or chosen by lot to serve as public officials.

See the full article for a good read.

• Occupational licensing
• Zoning laws and other small business regulations
• Regressive taxation

As he explains in the opening of the study,

A common assumption in public policy is that government regulation of the market generally works to protect the poor and disenfranchised. However, such regulations more often have the opposite effect: that is, they benefit the wealthy and powerful at the expense of the poor. The key to understanding this point is recognizing that the regulatory process is not, in general, a pristine attempt to instantiate the public interest. Instead, economic actors see in the political process a means of enhancing their profits at the expense of their competitors, but without meeting the wants of consumers in the process. Support for regulations that create barriers to entry in an industry or occupation may well be couched in terms of the need to protect public interest, but such regulations are often demanded by (a) incumbent producers who wish to acquire monopoly profits by making it harder for new producers to enter the marketplace and (b) consumers whose income enables them to afford higher prices, while the burden is shouldered by lower-income producers and consumers. Such regulations effectively become a regressive transfer of income from the poor to the relatively well-off.

When considering new regulations or eliminating existing ones, policymakers should pay more attention to the regressive effects of government, from the way in which it prevents upward mobility to the way in which some policies and programs burden the poor more than other groups.[ref]Pgs. 3-4.[/ref]

Important observations. Give it a read.