Rags to Riches to Rags

Mark Rank, professor of social welfare at Washington University, has an excellent piece in The New York Times on income inequality and mobility that further supports the video above:

But is it the case that the top 1 percent of the income distribution are the same people year in and year out? Or, for that matter, what about the top 5, 10 and 20 percent? To what extent do everyday Americans experience these levels of affluence, at least some of the time? …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.

This demonstrates that

most American households go through a wide range of economic experiences, both positive and negative…Ultimately, this information casts serious doubt on the notion of a rigid class structure in the United States based upon income…Rather than talking about the 1 percent and the 99 percent as if they were forever fixed, it would make much more sense to talk about the fact that Americans are likely to be exposed to both prosperity and poverty during their lives, and to shape our policies accordingly. As such, we have much more in common with one another than we dare to realize.

Check it out.

Nobel Laureate’s Graduation Speech

Nobel economist Thomas Sargent gave a 2007 graduation speech using 12 economic concepts:

1. Many things that are desirable are not feasible.

2. Individuals and communities face trade-offs.

3. Other people have more information about their abilities, their efforts, and their preferences than you do.

4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.

5. There are tradeoffs between equality and efficiency.

6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well-meaning outsiders to change things for better or worse.

7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.

8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.

9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).

10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.

11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

This explains exactly why I find economics so valuable.

500+ Economists Against Raising Labor Costs

Over 500 economists (including three Nobel laureates) have signed a letter to “Federal Policy Makers” arguing that hiking the minimum wage would be damaging to job creation and the economy:*

As economists, we understand the fragile nature of this recovery and the dire financial realities of the nearly 50 million Americans living in poverty. To alleviate these burdens for families and improve our local, regional, and national economies, we need a mix of solutions that encourage employment, business creation, and boost earnings rather than across-the-board mandates that raise the cost of labor. One of the serious consequences of raising the minimum wage is that business owners saddled with a higher cost of labor will need to cut costs, or pass the increase to their consumers in order to make ends meet. Many of the businesses that pay their workers minimum wage operate on extremely tight profit margins, with any increase in the cost of labor threatening this delicate balance…For these reasons, we encourage federal policymakers to examine creative, comprehensive policy solutions that truly help address poverty, boost incomes from work, and increase upward mobility by fostering growth in our nation’s economy.

Check it out.

*Pic from Mark Perry

The Great Enrichment

Economist Deirdre McCloskey presented a paper entitled “The Great Enrichment Came and Comes From Ethics and Rhetoric” at a New Delhi conference for the Centre for Civil Society in January. The following excerpt is, in large part, why I support markets:

Free markets, that is, have not been bad for the poor of the world. The sole reliable good for the poor, on the contrary, has been the liberating and the honoring of market-tested improvement and supply. Private charity and public works, socialism and central planning, by contrast, have often made people worse off. Yet economic growth since 1800 has almost always made them better off, by enormous factors of increase. The enrichment of the poor, that is, has not come from charity or planning or protection or regulation or trade unions, all of which, despite their undoubted first-act popularity among our good friends on the left, merely redistribute a constant or a shrunken pie. The mere arithmetic shows why. If all profits in the American economy were forthwith handed over to the workers, the workers (including some amazingly highly paid “workers,” such as sports and singing stars and big-company CEOs) would be 20 percent or so better off, right now. One time only. The 20 percent is to be compared with a rise in real wages 1800 to the present by a factor of 10 or 30 or (allowing for improved quality of goods) 100, which is to say 900 or 2,900 or 9,900 percent. If we want to make the non-bosses or the poor better off by a significant amount, 9,900 percent beats 20 percent every time. At 5 percent per year market-tested improvement and supply goes beyond the one-time 20 percent in a scant four years, and then cumulates to a quadrupling.

Check it out. The third volume of her trilogy on the Bourgeois Era- (the 2nd of which is pictured above)-The Treasured Bourgeoisie: How Markets and Innovation Became Virtuous, 1600-1848, and Then Suspect–will be out in 2015.

The Dalai Lama and…Capitalism?

The American Enterprise Institute hosted His Holiness the Dalai Lama for an event titled “Happiness, Free Enterprise, and Human Flourishing.” The two panels were “Moral Free Enterprise: Economic Perspectives in Business and Politics” and “Unlocking the Mind and Human Happiness.” The speakers (besides the Dalai Lama) included Arthur C. Brooks (AEI), Jonathan Haidt (New York University), Glenn Hubbard (Columbia University), Daniel S. Loeb (Third Point LLC), Diana Chapman Walsh (MIT), Richard Davidson (University of Wisconsin), Otto Scharmer (MIT), and Arthur Zajonc (Mind & Life Institute). “This is such a wonderful day when a religious leader particularly loved on the left comes to a free market think tank,” said Jonathan Haidt (as quoted in a Yahoo News piece). “It makes me think we can break out of the rut we’ve been in for so many years in our arguments about business and government.”

Check it out.

The Economics of Sex

Controversial sociologist Mark Regnerus had a Slate article a couple years back entitled “Sex Is Cheap,” which argues that the “market price” of sex is currently very low. The Austin Institute for the Study of Family and Culture (where Regnerus is a senior fellow) recently put out a short video called “The Economics of Sex,” which seems to cover a lot of the same material. Check it out below.

Economist Jeff Smith Won’t Sign Minimum Wage Petition

I’ve written about my criticisms of minimum wage a couple of times already. (Walker has weighed in as well.) Here’s a good article, posted by Michigan economist Miles Kimball but quoting fellow professor Jeff Smith, on reasons why Jeff Smith refuses to sign a petition supporting a raise in the minimum wage. His concerns are:

1. It is poorly targeted relative to alternative policies such as the Earned Income Tax Credit (EITC). And, yes, I am familiar with the argument that the minimum wage and the EITC are complements; what is thin on the ground, so far as I am aware, is evidence of the empirical importance of this argument.

2. As pointed out recently by Greg Mankiw, it distributes the costs of the increased minimum wage in a less attractive way than alternative policies such as the EITC, which implicitly come out of general tax revenue.

3. Most importantly, raising the minimum wage fails to address the underlying issue, which is that many workers do not bring very much in the way of skills to the labor market. Rather than having a discussion about raising the minimum wage, we should be having a discussion about how to decrease the number of minimum wage workers by increasing skills at the low-skill end of the labor market. This would, of course, mean challenging important interest groups. It is also a bigger challenge more broadly because it is less obvious how to do it. But that is the discussion we should be having because that is the one that will really help the poor in the long run, in contrast to a policy that feels good in the short run but only speeds the pace of capital-labor substitution in the long run.

None of these arguments are novel, and I’ve cited all of them in the past, but they are worth repeating. Minimum wage: the best you can say is that it’s a really inept and obsolete policy.

Rivalry and Marriage

Bryan Caplan
Bryan Caplan

Not that kind of rivalry, but the kind spoken of in economics. GMU economist Bryan Caplan has a fascinating blog post in which he examines how rivalrous a married couple’s consumption bundle typically is with some aid from equivalence scales. Caplan takes an imaginary couple with the high earner making $60,000 and the low earner making $40,000 annually. Using four distinct empirical strategies, he finds that “the low-earning spouse makes out like a bandit.  The surprise: The high-earning spouse gains as well – for all four ways to estimate real-world rivalry…[I]f one partner outearns the other by 50%, share-and-share-alike marriage raises the high-earner’s effective consumption by about 30%, and the low-earner’s effective consumption by about 100%.  To quote Keanu, “Woh.””

He concludes,

These calculations deliberately ignore all the evidence that marriage makes family income go up via the large male marriage premium minus the small female marriage penalty.  So the true effect of marriage on economic well-being is probably even more massive than mere arithmetic suggests.  Why then are economists – not to mention poverty activistsso apathetic?

See the full post for the calculations.



Giving Back to Society

Drawing on data from the Congressional Budget Office, economist Mark Perry provides the following two charts:

“As the data show in the top chart,” writes Perry,

the shares of pre-tax income for the four lower income groups was greater than their shares of federal taxes paid in 2010. In contrast, the highest quintile earned about half (51.9%) of all income in 2010 but paid more than two-third (68.8%) of all federal taxes collected. The top 1% earned 14.9% of pre-tax income in 2010 but paid 24.2% of all federal taxes collected…The federal tax system is highly progressive (higher income households shoulder an increasingly greater tax burden), especially for federal income taxes, as the bottom chart shows. The top income quintile paid almost all federal income taxes in 2010 (94.1%), and the top 1% paid almost 39% of all income taxes. In contrast, the bottom two income quintiles actually had negative shares of income taxes in 2010 and were in fact “net tax receivers” because their refundable tax credits exceeded the income tax otherwise owed.

Not only do the top earners pay the highest amount of taxes, but it tends to be their innovations that benefit society as a whole. Yale economist William Nordhaus’ 2004 paper “Schumpeterian Profits in the American Economy: Theory and Measurement” found that innovators only capture 2.2% of the total present value of social returns. As GMU economist Don Boudreaux pointed out, “The smallness of this figure is astounding. If it is anywhere close to being an accurate estimate, the implication is that “society” pays a paltry $2.20 for every $100 worth of welfare it enjoys from innovating activities.”

The rich may be evil and all that, but they sure do pay for it.

Minimum Wage Hikes: Still (Possibly) Dumb

Nathaniel recently argued that minimum wage hikes were dumb, largely due to the policy harming those it intends to help. New research (2012 working paper version here) examines turnover rates in relation to minimum wage increases. The researchers

find that when the minimum wage is higher, all low educated workers face jobs that are more stable (in the sense that they are less likely to end in a lay-off) but harder to get. This shifts the debate over the usefulness of minimum wages to the question of whether workers are better off with improved job stability or improved chances of finding a job when unemployed. It also means that minimum wages affect a much larger part of the labour market than is usually recognised and potentially raises the stakes in the policy debatesThus, the policy debate should not just be about the employment rate effects of minimum wage increases but about the trade-off between good jobs with higher wages and more job stability versus easier access to jobs. And the debate is relevant for all of the low educated labour market, not just teenagers.