Economics

People Are Wrong About the World

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A few posts ago, I wrote the following:
In short, ignorance and fear of the unknown or “the other” (which ends up manifesting as racial resentment) lead to anti-immigration sentiments. Many have been quick to point out that economic anxieties didnot play a significant role in the rise of Trump. Cultural values, for example, played a far more significant role. Evidence from Belgium also suggests that declinism–a negative view of the state and evolution of society–is far more important in predicting populist support than economic insecurities. Nonetheless, there is some evidence that economic downturns and uncertainty do lead to a rise in populism, particularly in Europe. Increases in unemployment following the Great Recession eroded trust in mainstream political parties in Europe and led to a rise in support for populist parties.  Harvard’s Dani Rodrik has made a case that economic globalization helped create a populist political backlash.
I linked to several more studies that connected the rise of populism with financial crises. However, a recent Pew study offers support for this notion of declinism mentioned above (at least in Europe):

Nostalgia may be a better predictor of populist sentiments.[ref]Psychological research supports this.[/ref] Roughly six-in-ten French adults with a positive view of the populist National Front (62%) say life in France is worse today for people like them than it was 50 years ago. Only about four-in-ten (41%) of the rest of the French population share that perspective. In Germany, 44% of [Alternative for Germany] supporters say life today is worse than 50 years ago; that compares with just 16% of other Germans. Those with populist sympathies in Sweden and the Netherlands similarly lament the passing of better times in the past.

Those who view populist parties favorably are more likely to say life is worse today than it was 50 years ago

The link between populism and declinism is disconcerting, especially given poll numbers from a 2017 study conducted by Ipsos with the Gates Foundation. Economist Max Roser at Our World in Data has provided the answers in graph formation below:

Roser notes,

The countries I marked with a star are those that were a low-income or lower-middle-income countries a generation ago (in 1990). In these poorer countries more people understand how global poverty has changed. People in richer countries on the other hand – in which the majority of the population escaped extreme poverty some generations ago – have a very wrong perception about what is happening to global poverty…And just as with knowledge about extreme poverty, the share of uninformed people [regarding child mortality] is much higher in the rich countries of the world…The widespread ignorance about these truly important changes in the world feeds into a general discontent about how the world is changing. When YouGov asked in a separate survey the more general question: “All things considered, do you think the world is getting better or worse?” there were very few who gave a positive answer. In France and Australia only 3%(!) think the world is getting better. And again we see that in poorer countries the share of people who answer positively is higher. 

…Finally the survey suggests that there is a connection between our perception of the past and our hope for the future. The chart below shows that the degree of optimism about the future differs hugely by the level of people’s knowledge about global development. Those that were most pessimistic about the future tended to have the least basic knowledge on how the world has changed. Of those who could not give a single correct answer to the survey questions, only 17% expect the world to be better off in the future. At the other end of the spectrum, those who had very good knowledge about how the world has changed were the most optimistic about the changes that we can achieve in the next 15 years…Of course no one can know how the future turns out and there is nothing that would make the progress we have seen in recent decades continue inevitably and not every global development pessimist is ill-informed. But what we do know from these surveys is that these two views go together: Those who are pessimistic are much more likely to have little understanding about what is happening in the world.

Does Economic Insecurity Lead to Populism?

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From my BYU Studies Quarterly article:

A particularly interesting aspect of public attitudes toward immigration is that of political ignorance. Multiple studies have shown that political ignorance is rampant among average voters, and this holds true when it comes to immigration policy. As legal scholar Ilya Somin explains, “Immigration restriction . . . is one that has long-standing associations with political ignorance. In both the United States and Europe,survey data suggest that it is strongly correlated with overestimation of the proportion of immigrants in the population, lack of sophistication in making judgments about the economic costs and benefits of immigration, and general xenophobic attitudes toward foreigners. By contrast, studies show that there is little correlation between opposition to immigration and exposure to labor market competition from recent immigrants.” One pair of economists found that those voting to leave the European Union in the Brexit referendum, who were motivated largely by a desire to restrict immigration, “were overwhelmingly more likely to live in areas with very low levels of migration.” Similarly, voters who supported Donald Trump during the US election were more likely to oppose liberalizing immigration laws (even compared to other Republicans), but least likely to live in racially diverse neighborhoods. In short, both political ignorance and lack of interaction with foreigners tend to inflame anti-immigration sentiments. These sentiments are what George Mason University economist Bryan Caplan refers to as antiforeign bias: “a tendency to underestimate the economic benefits of interaction with foreigners.” In fact, economists take nearly the opposite view from the general public on immigration (pgs. 80-82).
In short, ignorance and fear of the unknown or “the other” (which ends up manifesting as racial resentment) lead to anti-immigration sentiments. Many have been quick to point out that economic anxieties did not play a significant role in the rise of Trump. Cultural values, for example, played a far more significant role. Evidence from Belgium also suggests that declinism–a negative view of the state and evolution of society–is far more important in predicting populist support than economic insecurities. Nonetheless, there is some evidence that economic downturns and uncertainty do lead to a rise in populism, particularly in Europe.[ref]Check out Rudiger Dornbusch and Sebastian Edwards’ “The Macroeconomics of Populism.”[/ref] Increases in unemployment following the Great Recession eroded trust in mainstream political parties in Europe and led to a rise in support for populist parties.  Harvard’s Dani Rodrik has made a case that economic globalization helped create a populist political backlash. A 2016 study looked at the political results of financial crises from 1870 to 2014. The authors conclude,
The evidence we uncover shows that financial crises put a strain on modern democracies. The typical political reaction is as follows: votes for far-right parties increase strongly, government majorities shrink, the fractionalization of parliaments rises and the overall number of parties represented in parliament jumps. These developments likely hinder crisis resolution and contribute to political gridlock. The resulting policy uncertainty may contribute to the much debated slow economic recoveries from financial crises. Financial crises are politically disruptive, even when compared to other economic crises. Indeed, we find no (or only slight) political effects of normal recessions and different responses in severe crises not involving a financial crash. In the latter, right wing votes do not increase as strongly and people rally behind the government. In the light of modern history, political radicalization, declining government majorities and increasing street protests appear to be the hallmark of financial crises. As a consequence, regulators and central bankers carry a big responsibility for political stability when overseeing financial markets. Preventing financial crises also means reducing the probability of a political disaster (pg. 245).
The same authors conducted a short follow-up study, which found
that financial crises of the past 30 years have been a catalyst of rightwing populist politics. Many of the now-prominent right-wing populist parties in Europe, such as the Lega Nord in Italy, the Alternative for Germany, the Norwegian Progress Party or the Finn’s Party are “children of financial crises”, having made their breakthrough in national politics in the years following a financial crash. We also find that the 2008 crisis triggered a wave of governments in which right-wing populists gained power, often as a coalition partner. As discussed, the crisis is just one of many potential factors explaining the recent successes of right-wing populism in Europe and beyond. Other drivers such as “cultural backlash”, the impact of globalization, rising inequality, and the refugee crisis of 2015 surely played a critical role too. However, “the rise of the right” in Europe since 2008 cannot be fully understood without considering the impact of the 2008 and 2011/2012 financial crises…A first potential explanation is that financial crises are perceived as inexcusable events that result from a failure of policies and regulation, rather than from an external shock. This leads to distrust in government and mainstream politics. Secondly, financial crises typically trigger creditor-debtor conflicts (Mian et al. 2014) and a rise in income and wealth inequality (Atkinson and Morelli 2010, 2011) to levels not observed in normal recessions. Thirdly, we know that financial crashes often involve large-scale bank bailouts and these are highly controversial and unpopular (e.g., Broz 2005). Such bail-out initiatives give traction to extremist ideas at the political fringe. In this environment of distrust, uncertainty and dissatisfaction, right-wing populists have learned to gain votes by offering seemingly simple solutions to complex problems, and by attributing blame to minorities or foreigners (pg. 8).
These findings fit with Martin Wolf’s observations in the Financial Times, which lay populism at the feet of “the financial crisis and consequent economic shocks. These not only had huge costs. They also damaged confidence in — and so the legitimacy of — financial and policymaking elites. These emperors turned out to be naked.” Using “unemployment, fiscal austerity, real incomes per head and private sector credit” as “indicators of post-crisis developments,” Wolf determines, “The four most adversely affected of these economies in the long term were (in order) Italy, Spain, the UK and US. Post-crisis, the most adversely affected were Spain, the US, Italy and the UK. Germany was the least affected by the crisis, with Canada and Japan close to it. It is not surprising, then, that Canada, Germany and Japan have been largely immune to the post-crisis surge in populism, while the US, UK, Italy and Spain have been less so, though the latter two have contained it relatively successfully.”
A more recent study supports these insights, “examin[ing] the role of the 2007–9 global financial crisis and its metastasis in Europe on voting and political beliefs in 220 subnational regions of 26 European countries.” It finds
a strong correlation between rising regional unemployment and voting for non-mainstream and especially populist parties. A one percentage point increase in unemployment is associated with a one percentage point increase in the populist vote. The association is especially strong in the south, where voters turn mostly to radical-left parties. In the north increases in regional unemployment are correlated with a rise in far-right party vote. This pattern is also present in eastern Europe, where people are moving towards xenophobic, anti-European parties. These associations do not necessarily imply causality. To advance on causality we associate voting patterns to the component of changes in unemployment stemming from the pre-crisis share of construction (which is strongly related to falling unemployment pre-2007 and rising unemployment post-2008). This approach also yields a strong correlation between the recent rise of the populist vote and industrial specialization–driven unemployment. We then examine the role of the crisis on the Brexit vote across the UK’s 379 electoral districts. In line with the European-wide results, [the data] show that the increases in regional unemployment before the referendum (2007–15) are strong predictors of the Brexit vote, while the level of unemployment is not much related to Brexit. We then study the evolution of trust, political beliefs and attitudes before and after the 2007–10 crisis and examine whether swings in unemployment are related to changing ideology. We use individual-level data on Europeans’ beliefs and attitudes from the European Social Survey that covers the period 2000–2014. [The data] show that increases in regional unemployment have resulted in a deterioration of trust towards national and European political institutions.
All of this suggests what Wolf stated: “Economic and cultural phenomena are interrelated.”

“Trade Isn’t War. It’s Peace”

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From The Boston Globe:

Nations don’t trade with each other. We speak as if they do out of habit and convenience, but it’s not true. The United States and Canada are not competing firms. America doesn’t buy steel from China, and China doesn’t buy soybeans from America. Rather, hundreds of individual American companies choose to buy steel from Chinese mills and fabricators, and hundreds of Chinese-owned firms make deals to buy soybeans from far-flung American growers. Unlike wars, which really are fought by nation against nation, international trade occurs among countless sellers and buyers, all acting independently in their own best interest.

Tariffs don’t punish countries. They punish innumerable consumers, wholesalers, importers, exporters, farmers, manufacturers — the myriad discrete actors whose choices and preferences are the true substance of international trade. To those individuals, national trade deficits and surpluses are irrelevant. They aren’t competing — they’re cooperating. Buyers and sellers aren’t in conflict with each other, let alone with each other’s countries.

On the contrary: By doing business together, traders create wealth and connections, knitting the world together in mutual interest, making the planet more harmonious.

Trade war is an insidious term. The metaphor notwithstanding, trade isn’t war. It’s peace.

He’s absolutely right. From my paper currently under review at Economic Affairs:

Using data from the World Bank’s Doing Business rankings and the EFW Index, Michael Strong (2009) finds a close connection between peace, economic liberalization, and business-friendly environments. As a case study, Strong looks to Northern Ireland between 1975 and 2000, determining that the increased economic freedom, the consequential economic boom, and the decrease in violence were interconnected…Using a data set of 243,225 country-pair observations from 1950 to 2000, Lee and Pyun (2016) find that the probability of interstate military conflict is reduced with an increase in bilateral trade interdependence and global trade openness. However, proximity matters, seeing that bilateral trade has a greater peace-promoting effect for neighboring countries, while global trade openness has a greater effect on more distant countries. After analyzing data spanning from 1970 to 2005, De Soysa and Fjelde (2010) find that higher economic freedom lowers the risk of civil war. This corresponds with a later study by De Soysa and Flaten (2012), which finds that higher levels of globalization (particularly economic globalization) reduce the risk of civil war as well as state violations of human rights. Other research finds that free-market conditions and economic liberalization are associated with lower levels of various societal insecurities, including open armed conflict, violent crime, murder, societal militarization and political instability (Stringham & Levendis, 2010; Bjornskov, 2015; De Soysa, 2011, 2016).

Robert Putnam, Our Kids, and the Future

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I have thoughts on Robert Putnam’s most recent book, Our Kids: The American Dream in Crisis, and on the response he gave me when I asked him a question about his optimistic outlook while he signed my copy after giving a lecture at the University of Richmond earlier this year.

My first thought, and I might as well get this out of the way, was the jaw-dropping irony when someone at the lecture stood up to ask an “us-vs-them”-style question juxtaposing “the rich” against ordinary people, like those of us here in the audience. I don’t remember the exact phrasing, just that it assumed as a premise that rich people were some weird, money-grubbing, alien group far away and the students, faculty, and alumni in the room were all very different from them.

That’s an astonishing lack of self-awareness, given the fact that you can expect to cough up more than $60,000 per year to attend the University of Richmond. That’s right up there with the most expensive colleges in the country. The students at the University of Richmond come from some of wealthiest families in the country. The decadence was really off-putting for someone like me, who attended for free thanks to generous faculty benefits, and never could figure out how to fit in with the kinds of people who are chauffeured from their family’s private jet to their dorm room in a limousine.

The question was a stark contrast with Putnam’s own views. One of the primary functions of modern identity politics is the way that it absolves upper-class Americans of guilt and redirects inquiry away from any social or economic critique that could threaten their entrenched power. This is one half of the danger presented by this ideology: no matter it’s original intent or origins, it has been firmly and decisively co-opted by America’s upper class and obediently serves their interests.[ref]I’ve written about this before, especially in When Social Justice Isn’t About Justice.[/ref]

The other half of the danger was best articulated in the Slate Star Codex post Against Murderism, where the threat was summarized like this:

People talk about “liberalism” as if it’s just another word for capitalism, or libertarianism, or vague center-left-Democratic Clintonism. Liberalism is none of these things. Liberalism is a technology for preventing civil war. It was forged in the fires of Hell – the horrors of the endless seventeenth century religious wars. For a hundred years, Europe tore itself apart in some of the most brutal ways imaginable – until finally, from the burning wreckage, we drew forth this amazing piece of alien machinery. A machine that, when tuned just right, let people live together peacefully without doing the “kill people for being Protestant” thing. Popular historical strategies for dealing with differences have included: brutally enforced conformity, brutally efficient genocide, and making sure to keep the alien machine tuned really really carefully.

And when I see someone try to smash this machinery with a sledgehammer, it’s usually followed by an appeal to “but racists!”

Putnam didn’t contradict his interlocutor directly, but he didn’t really need to because his book is so adamantly opposed to an identity-based view of social and economic inequality, channeling the focus instead on class. For example:

That gap corresponds, roughly speaking, to the high-income kids getting several more years of schooling than their low-income counterparts. Moreover, this class gap has been growing within each racial group, with the gaps between racial groups have been narrowing (the same pattern we discovered earlier in this inquiry for other measures, among them nonmarital births). By the opening of the twenty-first century, the class gap among students entering kindergarten was two to three times greater than the racial gap. (162-163)

And later:

What we found in our interviews is that upper-middle-class kids–even across differences of race, gender, and region–look and sound remarkably similar across the nation. The same goes for working-class kids. For example, a black working-class boy like Elijah in Atlanta share many more life experiences (parental abandonment, jail, poor school, and so forth) with David, a white working-class boy in Port Clinton, than he does with Desmond, a black upper-middle class boy in suburban Atlanta. This is not to say that race does not matter for children’s outcomes; as we say in Atlanta, both Desmond (upper-middle-class) and Elijah (working-class) face harmful prejudices and discrimination in their schools and neighborhoods. However, Desmond’s mother’s class-based parenting practices–intervening in institutions, thoughtfully building cognitive skills and self-confidence from early childhood, and even monitoring how Desmond dressed when he left the house–sheltered him from many of the harsh realities experienced by Elijah on a daily basis. (273)

Not only does Putnam refuse to allow identity politics to be used as a cloaking device for class, but he also eschews the more radical economic criticisms that equate wealth with immorality.

Perhaps unexpectedly, this is a book without upper-class villains. Virtually none of the upper-middle-class parents of our stories are idle scions of great wealth lounging comfortably on family fortunes. Quite the contrary, Earl and Patty and Carl and Clara and Ricardo and Marnie were each the first in their families to go to college. Roughly half of them came from broken homes. Each has toiled exhaustingly to climb the ladder, and they have invested much time, money, and thought in raising their kids. Their own modest origins–though not destitute–were in some respects closer to the circumstances facing poor kids today than to the circumstances in which their own kids have grown up. (229)

Aside from class, the major theme that Putnam addressed was family structure, although he also noted that the two frequently go hand in hand.

Ironically, the new research findings [into parenting strategies] tend to amplify class differences, at least in the short run, because well-educated parents are more likely to learn of them, directly or indirectly, and to put them to use in their own parenting. As we’ll see, a class-based gap in parenting styles has been growing significantly during recent decades. Simone and Stephanie both clearly love their children, but as their stories and the scientific research make clear, when it comes to parenting, love alone is not enough to guarantee positive outcomes. (117)

I don’t want to give anyone the wrong impression: I’m not claiming that Robert Putnam is a conservative. He’s clearly not. Nor does he suggest that race is irrelevant or unimportant. Although he’s generally skeptical of the idea that specific policies either caused the widening class-gap in the United States or could easily fix it, he does call out one particular group of policies that did “contribute to family breakdown” and thus the widening chasm in our society: the War on Drugs, ‘three strikes’ sentencing, and the sharp increase in incarceration.” (76)[ref]I basically agree with this critique, having been convinced by reading The New Jim Crow[/ref]

So it’s not that I claim Robert Putnam as an ideological fellow traveler. He isn’t. But he’s the kind of nuanced, serious, open-minded, fact-based, honest researcher that I believe improves the conversation even when I disagree with him.

Now, let me get to my brief exchange with him during the book signing.

Putnam’s optimistic spin on all the negative statistics is pretty simple: America has been here before and it made us better. The last time things were this unequal and unfair in our society was the Gilded Age and it was eventually followed a wave of progressive reforms that remade our society and ushered in an era of unprecedented equality and social mobility. I’m not sure I buy this historical narrative, but even if I grant all of it to Putnam for the sake of argument, there’s one dark reality that overshadows his optimistic belief that we can reproduce last century’s turn-around.

You see, one of the most vital causes of our current inequality is (as I mentioned above) family structure. And on that metric more than any other, our current dismal state of affairs is not like what has happened before. It’s unprecedented. As Putnam observes:

Unlike today, desperately poor, jobless men in the 1930s did not have kids outside of marriage whom they then largely ignored. Today the role of father has become more voluntary, which means that, as Marcia Carlson and Paula England have put it, “only the most committed and financially stable men choose to embrace it.” (75)

He also draws the connection to economic prosperity and equality directly:

Given these handicaps, it is hardly surprising that recent research has suggested that the places in American where single-parent families are most common are the places where upward mobility is sluggish. (79)

So, I asked him as he signed his book, how did he think we could turn things given the erosion of the family? He gave me a direct and honest reply. First, he pointed out that he left those points (and especially the quote on page 75) in the book intentionally to rile his own political allies. Second, he criticized conservative ideas that you could directly strengthen American families through policy intervention. (Which seems reasonable to me.) Finally, given these two facts, he suggested that we just had to hope that somehow our society could rediscovery prosperity and equality without strong families.

It’s an honest answer, but a bleak one.

The longer I’ve written and read about politics—not to mention the dumpster fire that is American politics in an age of Trump—the more I’ve come to see culture as fundamental.  I have my political and economic views, sure. But they pale in importance relative to the essential question of culture. A fundamentally honest and civil culture is resilient and can tolerate an awful lot of policy mistakes. A fundamentally dishonest and angry culture is brittle and probably can’t thrive even with perfect policies.

Much as I’d like to share in Putnam’s optimism, I just can’t.

Worldwide Income Inequality

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I’ve highlighted the decline in global income inequality several times before. A new working paper suggests that this trend will continue into the near future:

Considerable recent research has focused on changes in income inequality within countries [Atkinson, Piketty, and Saez 2011; Alvaredo et al. 2013; Saez and Zucman 2016; Assouad, Chancel, and Morgan 2018; Novokmet et al. 2018]. There is substantial variation in income inequality within countries. Income inequality after taxes and transfers is relatively low in Canada, Japan and most western European countries and quite high in Brazil, Egypt, India, Mexico, and South Africa [Solt 2016]. Moreover, within-country income inequality has increased in recent decades in several large economies, including China, Russia, and the United States [Assouad, Chancel, and Morgan 2018].

Recent scholarly research has also addressed cross-country and worldwide income inequality [Bourguignon and Morrisson 2002; Sala-i-Martin 2006; Hellebrandt and Mauro 2015; Milanovic 2013; Bourguignon 2015; Milanovic 2016]. This article makes three major contributions to the literature on global income inequality. First, development as a process is integrated into the analysis of income inequality. Researchers have generally ignored the impact of the development process on demographic changes and income inequality. Changes in demographic factors as countries move through different phases of the development process will be examined and their impact on economic growth and income inequality analyzed. Second, Gini coefficient measures are developed for cross-country income inequality from 1820 to 2015 and for each of the three types of income inequality for 1960 to 2015. Third, the impact of development as a process and changes in other factors that influence economic growth, are used to project future changes in income inequality.

During 1960-2000, demographic changes accompanying the development process contributed to the sizeable increases in cross-country and worldwide income inequality. However, beginning in the 1990s, changing demographic factors accompanying the development process led to a reversal of this situation. Increasingly, developing countries have moved into phases of development associated with high rates of economic growth, while the high-income countries have moved into a development phase that results in slower growth. As a result, there has been a dramatic reduction in income inequality during 2000-2015. Moreover, it is a virtual certainty that the demographic factors underlying the recent reductions in inequality will continue for at least a couple more decades, leading to further reductions in global income inequality (pg. 2-3).

In an interview, Nobel economist Angus Deaton noted, “I both love inequality and am terrified of it. Inequality is partly a marker of success, so that if someone thinks of something, some new innovation that benefits us all, and the market works properly, they get richly rewarded for that. And that’s just terrific. And that creates inequality. So some of the greatest inequalities in the world have come from the greatest successes.” This seems to fit with the phases of development discussed above.

“The Captured Economy” Site

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I picked up Brink Lindsey and Steve Teles’ book The Captured Economy last week at Half-Price Books and added it to my never-ending to-read list. Turns out they’ve created a website based on the book. They describe the site as follows:

Image result for the captured economyIn November 2017, Oxford University Press published The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality. Coauthored by Niskanen Center scholars Brink Lindsey and Steven M. Teles, The Captured Economy argues that systematic breakdowns in democratic governance have allowed wealthy special interests to capture broad domains of the policymaking process and twist the rules for their own benefit. Steadily worsening “upward redistribution” via “regressive regulation” has contributed significantly to the American economy’s twin woes of stagnating growth and sky-high inequality.

This website builds on and expands the analysis provided in The Captured Economy. In the book, Lindsey and Teles briefly examined four broad policy areas that showcase the problem of regressive regulation: financial regulation, intellectual property protection, occupational licensing, and land-use regulation. They admitted, though, that space constraints permitted them to cover “only the tip of the iceberg.” This website is dedicating to explore the phenomenon in all its murky depths.

We begin by focusing on the four policy areas covered in the book, but over time we plan to include additional, related policy and issue areas. For each covered area, capturedeconomy.com will serve as a comprehensive repository of analysis and news, including not only academic research and journalistic analysis but also the latest news on policy developments. Our goal is to make capturedeconomy.com an indispensable resource for journalists, policymakers, and concerned citizens interested in better understanding and remedying the deep structural problems that afflict American policymaking and economic performance.

Seems like an exciting development.

Income vs. Consumption Inequality, 1961-2016

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I’ve highlighted this before, but Bruce Meyer has an article in the NBER Reporter on consumption vs. income inequality. He explains,

The debate over inequality relies almost exclusively on income data that indicate that inequality has increased sharply in recent decades. Yet economists generally prefer using consumption rather than income to measure well-being…Income typically fluctuates more than economic well-being, because people can save when income is temporarily high and borrow when it is temporarily low. Income also fails to reflect the flow of services received if one already owns a house or a car, and has no expenditures but significant consumption. A retired couple in their own home living off the savings accumulated over a lifetime may be living quite comfortably even if they have no income. Consumption measures will reflect the loss of housing-services flows if homeownership falls, the loss in wealth if asset values fall, and the belt-tightening that a growing debt burden might require — all of which an income measure would miss. Furthermore, consumption is more likely than income to be affected by access to public insurance programs, and to capture the effects of changes in access to credit or the government safety net. Consumption is better than income at reflecting deprivation. In a series of papers, Sullivan and I show that measures of material hardship or adverse family outcomes are more severe for those with low consumption than for those with low income.

What does inequality look like when viewed through the lens of consumption?

Official measures of income inequality suggest a steady rise in the U.S. since the early 1970s. An important limitation of the official statistics is that they are based on pre-tax money income, which does not account for tax credits and in-kind transfers, such as housing benefits and food stamps, which have increased sharply over time. Income inequality still rises for measures of income that more closely reflect family resources available for consumption, but the rise is less noticeable. Using our improved measure of consumption, however, a very different story emerges.

These differences are evident in Figure 1, where we report the ratio of the 90th percentile to the 10th percentile (the 90/10 ratio) for pre-tax money income, after-tax money income, and well-measured consumption. Since the early 1960s, the rise in after-tax income inequality as measured by the 90/10 ratio (26 percent) has significantly exceeded the rise in consumption inequality (7 percent). Furthermore, this much smaller percentage increase in consumption inequality started from a considerably lower base. In some decades, such as the 1960s and 1990s, income and consumption inequality moved in parallel, but in other decades the differences were sharp. In the 1980s, inequality for both measures rose, but the increase was much greater for income (28 percent) than for consumption (5 percent). After 2005, these measures moved in opposite directions: income inequality rose sharply while consumption inequality fell.

The center and right panels of Figure 1 show that income inequality has risen for the top (90/50 ratios) and bottom (50/10 ratios) of the distribution, but increases in consumption inequality are only evident for the top. The finding that the patterns of consumption and income inequality at the top are fairly similar from the early 1960s through 2005 suggests that underreporting of consumption by the rich is not behind the differences in inequality over time.

Our evidence of only a modest rise in consumption inequality over the past five decades contrasts sharply with evidence from tax data that an increasing share of the nation’s income is going to the very highest income families, though several papers using broader and more consistent measures of income reported on income tax forms do not show large increases in the top 1 percent’s income share. Our analyses are distinct from these studies that focus on the highest income households. We do not include the extreme tails of the distribution because resources are likely to be poorly measured in survey data for these observations. Tax returns alone are also unsuitable for measuring incomes at the bottom, since they miss non-filers and important sources of income such as TANF, SSI, SNAP and housing benefits, which are not taxable.

Meyer1

Meyer concludes,

Most of the discussion around recent trends in inequality highlights growing dispersion. However, the evidence from consumption data indicates that changes in inequality in economic well-being are more nuanced than a simple story of rising income dispersion would suggest. In the bottom half of the distribution there is little evidence of rising consumption inequality, and in the top half of the distribution the rise in consumption inequality has been much more modest than the rise in income inequality, particularly since 2000.

Do Individualistic Values Lead to Less Inequality?

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That appears to be the case, according to a 2017 paper. From a working paper version,

Our results challenge the conventional view that individualistic societies are more prone to higher levels of income inequality. On the contrary, we find that even if people in more individualistic cultures are more likely to accept and encourage greater individual differences, they end up living in far more equal societies at the end of the day. In our 2SLS analysis, we find that the historical prevalence of infectious diseases is strongly and negatively correlated with individualistic values, which then, in the next stage, are a strong determinant of economic inequality, measured by the net GINI coefficient from the Standardized World Income Inequality Database (SWIID). These results hold even when we control for a number of confounding factors including the level of economic development, social capital, formal institutions, local factor endowments, geographic dummies, and other cultural values. The results are furthermore robust to different sub-samples of countries and alternative measures of income inequality and individualism.

One possible explanation for these findings is that citizens in individualistic cultures favor more inclusive institutions that are characterized by respect for the rights, liberties, and well-being of all members of society, not just their immediate circle. This is consistent with recent empirical findings which show that more individualistic societies are far more likely to develop high quality political and economic institutions including respect for the rule of law, protection of private property and strong democratic institutions (Greif, 1994; Nikolaev and Salahodjaev, 2017; Kyriacou, 2016; Nikolaev and Salahodjaev, 2016; Gorodnichenko and Roland, 2015; Licht et al., 2007; Inglehart and Oyserman, 2004). People in more individualistic cultures are also more likely to tolerate minorities and have higher levels of interpersonal trust and lower levels of corruption (Thornhill and Fincher, 2014; Allik and Realo, 2004), which can further reduce transaction costs and facilitate market exchange leading to higher rates of human and physical capital investment, technological innovation and long-run economic growth (Oyserman et al., 2002; Gorodnichenko and Roland, 2012) and encouraging people to put more effort and get a fairer share of the economic pie (Alesina and Angeletos, 2005). When citizens perceive state institutions to be fair, less corrupt, and more efficient, they are far more likely to tolerate higher taxes and government spending on welfare programs (Dimitrova-Grajzl et al., 2012; Svallfors, 2013; Pitlik and Kouba, 2015; Daniele and Geys, 2015; Pitlik and Rode, 2016). When they trust and care about the wellbeing of their fellow citizens, they will be more inclined to support welfare programs that benefit others. Finally, when people earn higher incomes, they are more likely to be able to bear the burden of higher taxation while still maximizing their own talents through their free choices (pgs. 3-4).

 

Tariff Tracker

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Image result for tariffs trade

Want to track the impact of the Trump administration’s tariffs? The Tax Foundation has made that possible with its new tariff tracker. In the introduction, the analysts explain,

The Trump administration has imposed and threatened several rounds of tariffs in 2018, and other countries have responded to these measures in kind. Using the Tax Foundation Taxes and Growth Model, we analyze the effects of enacted, threatened, and retaliatory tariffs on the United States economy. Tariffs damage economic well-being, and lead to a net loss in production and jobs, and lower levels of income.

According to the Tax Foundation model, the tariffs enacted so far by the Trump administration would reduce long-run GDP by 0.06 percent ($15 billion) and wages by 0.04 percent and eliminate 48,585 full-time equivalent jobs. If the Trump administration enacts additional tariffs on automobiles and parts and additional Chinese tariffs, GDP would fall by an additional 0.3 percent ($89.60 billion), resulting in 0.2 percent lower wages and 277,825 fewer full-time equivalent jobs.

Other countries have also announced intentions to enact tariffs on U.S. exports. If these tariffs are fully enacted, we estimate that U.S. GDP would fall another 0.05 percent ($12 billion) and cost an additional 38,182 full-time equivalent jobs.

If all tariffs announced thus far were fully enacted, U.S. GDP would fall by 0.47 percent ($117.6 billion) in the long run, effectively offsetting one-quarter of the long-run impact of the Tax Cuts and Jobs Act. Wages would fall by 0.33 percent and employment would fall by 364,593.

Check it out.

Do Parents Matter More Than Country?

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Several years ago, I linked to a Brookings post that highlighted parenting as having a massive effect on children’s outcomes. I was reminded of it while reading a 2016 post at the World Bank’s Development Impact blog. The author David McKenzie, Lead Economist in the Development Research Group, writes,

I was surprised by a paper by Todd Schoellman in the most recent AEJ Macro which argues that parents, not country, are what matters for early childhood development.

He studies the adult outcomes of refugees who immigrated to the U.S. as children, but who differed in the age of arrival. The main analysis is on IndoChinese refugees fleeing the Vietnam War and Khmer Rouge. The thought experiment is to compare the labor market outcomes and completed education of a refugee who arrived at age 1 to one who arrived at age 3 or 4. The latter had 2 or 3 more years of that critical early childhood period in a poor country (Vietnam, Laos and Cambodia) where conflict was going on, and then both come to the U.S. and grow up there.  The key result is seen in this graph – which shows that adult wages are no different for those who arrived at age 4 or 5 versus those who arrive at age 0 or 1:

Schoellman argues (according to McKenzie)

that the theory most consistent with this data is that parents, rather than country environment, are the most important inputs to early childhood human capital formation. Of course one can argue that country environment in turn shapes parents – it determines parental education, parental wealth, etc. But the result that parents, and not goods or place, matter is a surprising one. By the way, if you are worried about external validity, he shows the same flatness of log wages with respect to age of arrival between 0 and 5 also holds for Ethiopian and Afghani refugees, Cuban immigrants, Mexican immigrants, and for the set of immigrants from poor countries as a whole.

If you want to argue about another type of external validity, I would argue that the U.S. may not be very good at providing early childhood care for refugees (at least at the time of the study) – this is not discussed in the paper, but it seems likely to me that the U.S. is a worse place to receive early childhood care if you are a poor family than most European countries or Australia and New Zealand – so perhaps it is only when you get into public schools here that you start to get the benefits. The type of data the authors have doesn’t tell us anything about what early childhood educational facilities, if any, were available to these refugee kids.

You can read a working paper version of the study here.