It depends on how you measure it. According to a recent NBER paper by Dartmouth economist Bruce Sacerdote, most estimates use the CPI-U as a price deflator. Sacerdote instead
calculate[s] real wages using either the Fed’s preferred inflation measure of PCE (Personal Consumption Expenditures) or using simple adjustments to CPI using magnitudes suggested by the Boskin commission (Boskin et al 1996) and Costa (2001). This adjustment reverses the finding of wage stagnation. Using the PCE to deflate nominal wages suggests real wage growth of 24 percent from 1975-2015 or about .54% growth in real wages per year. Importantly that growth is significantly less than the 1.18% annual growth in real wages (using PCE inflation) seen in the earlier decade 1964-1975 and is significantly less than GDP per capita growth of 1.8 percent over the 1975-2015 period. But 24 percent growth over the 1975-2015 is substantially better than zero growth and the PCE inflation could itself still contain upward bias. Adjusting for the Hamilton (1998) and Costa (2001) estimates of CPI bias implies real wage growth of 1 percent per year during 1975-2015 and GDP per capita growth of 2.7 percent per year.
In short, “PCE adjusted wages appear to have grown at .5% per year during 1975-2015 while the de-biased CPI adjusted wages grew at 1% per year over the same time period.”
So why do so many Americans feel worse off? Sacerdote hypothesizes,
First, I am only examining consumption within very large sections of the income distribution and there may be specific groups (for example less than high school educated men) for whom consumption is actually falling. Second, it’s possible that the quality of some services such as public education or health care could be falling for some groups. Third, the rise in income inequality coupled with increased information flow about other people’s consumption may be making Americans feel worse off in a relative sense even if their material goods consumption is rising. Fourth, changes in family structure (e.g. the rise of single parent households) , increases in the prison population, or increases in substance addiction could make people worse off even in the face of rising material wealth. A deep future research agenda would be to understand how America has lost its sense of optimism about living standards and whether the problem is one of consumption, relative consumption (relative to other people) or something entirely different.
On top of this, Harvard’s Martin Feldstein points out that innovation and new products are often ignored when measuring economic growth and the state of living standards:
Ignoring the introduction of new products is therefore a serious further source of understating the real growth of output, incomes, and productivity. New products and services are potentially valuable in themselves and are also valued by consumers because they add to the variety of available options. In an economy in which new goods and services are continually created, their omission in the current method of valuing aggregate real output makes the existing measure of real output even more deficient and more of a continually increasing underestimate of true output. Hulten (2015) summarizes decades of research on dealing with new products done by the Conference on Research in Income and Wealth with the conclusion that “the current practice for incorporating new goods are complicated but may miss much of the value of these innovations.” …[T]he official statistics ignore the very substantial direct benefit to consumers when new products and services become available, causing an underestimate of the rate of increase in real output and an overestimate of the corresponding price index…The failure to take new products into account in a way that reflects their value to consumers may be an even greater distortion in the estimate of real growth than the failure to reflect changes in the quality of goods and services. There is no way to know (pgs. 11-12, 14).
Feldstein has made this argument before in more popular writing. A good number of economists agree. While growth in real wages could be better, it seems to be inaccurate to say that they have stagnated.
I’ve written about global income inequality inseveralpastposts. As Nathaniel and I wrote in SquareTwo a few years ago,
[W]ith the continual rise of the poor out of destitute poverty, it seems logical that global inequality would also be declining. Happily, recent evidence seems to supports the logic. As former World Bank economist Branko Milanovic put it, “[P]erhaps for the first time since the Industrial Revolution, there may be a decline in global inequality…For the first time in almost two hundred years—after a long period during which global inequality rose and then reached a very high plateau—it may be setting on a downward path.” Though cautious in his conclusions, Milanovic nevertheless finds that when population is factored into the data, the evidence demonstrates that the world became a “much better (“more convergent” or more equal) place” between 1980 and 2011. When country price levels (used to determine purchasing power) are factored in, a decline in global inequality can be seen over the past decade.
Several studies over the past few years have found that as the world poverty rates plummeted, so did global inequality. As one pair of researchers explains,
We can compute not only the world poverty rates and the poverty rates of any country or region, but also other statistics related to the distribution of income. For instance, we can compute the world gini coefficient, a measure of world inequality, for every year between 1970 and 2006. We show that world inequality measured by the gini fell from 67.6 to 61.2 (Figure 3), and similar declines in inequality can be shown for other inequality statistics, such as the mean logarithmic deviation, the Theil Index, and the Atkinson family of inequality indices.
While inequality is still high and increasing within countries, global inequality (between countries) has seen an unprecedented decline. “Even though the bulk of this decline is due to the performance of China and other Asian countries,” evidence shows “that a (weaker) declining trend survives even when these countries are excluded from the analysis.” Economist and Nobel laureate Friedrich Hayek noted that “after rapid progress has continued for some time, the cumulative advantage for those who follow is great enough to enable them to move faster than those who lead and that, in consequence, the long-drawn-out column of human progress tends to close up…[O]nce the rise in the position of the lower classes gathers speed, catering to the rich ceases to be the main source of great gain and gives place to efforts directed toward the needs of the masses. Those forces which at first make inequality self-accentuating thus later tend to diminish it.”
The above describes relative inequality. However, a more recent study shows that absolute inequality has increased.
As one of the researchers explains,
[T]ake the case of two people in Vietnam in 1986. One person had an income of US$1 a day and the other person had an income of $10 a day. With the kind of economic growth that Vietnam has seen over the past 30 years, the first person would now in 2016 have $8 a day, while the second person would have $80 a day. So if we focus on ‘absolute’ differences, inequality has gone up, while a focus on ‘relative’ differences suggests that inequality between these two people has remained the same.
Relative inequality indicators have been by far the most widely used in empirical economic analysis, but, based on economic theory and empirical evidence, it is far from clear that we should favour relative over absolute notions of inequality. The evidence suggests that many people do perceive absolute differences in incomes as being an important aspect of inequality (Amiel and Cowell 1992, 1999).
However, the authors concede,
Over the past 40 years, over one billion people around the world have been lifted out of poverty, driven largely by substantial growth in income in developing countries. While this growth has been accompanied by a striking rise in absolute inequality, it has also improved the lives of hundreds of millions of people. It is difficult to imagine how in practice such growth, and the associated poverty reduction, could have occurred without an increase in absolute inequality. There would be huge implications for the fight against global poverty if attempts were made to halt economic growth in order to appease absolute inequality. Instead, the policy emphasis should be on creating more inclusive growth with falling ‘relative’ inequality – these two goals are complementary.
Is it true, though, that it’s “far from clear that we should favour relative over absolute notions of inequality”? For example, most studies favor absolute poverty over relative poverty. Could the same case be made for absolute inequality? I’m not so sure. Branko Milanovic, one of the leading scholars on income inequality, provides the following reasons for preferring relative measurements in regards to inequality:
Conservatism: “[R]elative income measures are conservative because they show no change in in equality in cases where absolute measures would show an increase (when all incomes go up by the same percentage) or a decrease (when they all go down by the same percentage). On in equality, which is a topic of considerable moral and political importance, and at times a very inflammatory topic indeed, we do not want to err in the direction of inflaming it further. Conservatism (in terms of measurement, not necessarily in terms of policy) is to be preferred.”[ref]Milanovic, Global Inequality: A New Approach for the Age of Globalization (Cambridge, MA: The Belknap Press of Harvard University Press, 2016), 27.[/ref]
Precision: “Think of the distribution as a balloon. As the balloon expands, the absolute distance between the points on the balloon increases. Focus on absolute distances presents the disadvantage that practically every increase in the mean (blowing up the balloon) could be judged to be pro-inequality. We would lose the sharpness with which we can currently distinguish between pro-poor and pro-rich growth episodes.”[ref]Ibid.[/ref]
Relative Growth: “Growth is simply the relative increase in the first moment, and in equality is the relative increase in the second moment. The measures that we use to assess success or failure in economic development (relative change in GDP per capita) should be related to the measures we use to assess success or failure in distribution of resources (relative change in a measure of inequality). Focus on the absolutes in growth, as in inequality, would lead us to nearly always find that growth in rich countries, however small in percentage terms, would be greater than growth in poor countries, however huge. If the United States grew by 0.1 percent per capita annually, that growth would increase the absolute GDP per capita of each American by about $500, which is more than the GDP per capita of many African nations. Should we then deem Congo, in any given year, to have been as successful as the United States only if it doubles its per capita income— a feat that no human community has ever achieved in recorded history? So the logic of relativity that applies to growth should also apply to inequality.”[ref]Ibid., 28.[/ref]
Personal Utility: “[F]or a person whose income is $10,000 to experience the same increase in welfare as a person whose income is $1,000, the absolute income gain ought to be ten times greater. In other words, one additional dollar will yield less utility, or seem less important, to a rich person than to a poor person. If we think that this is a reasonable assumption, we can then also interpret the data given in the growth incidence curve as changes in utility: an 80 percent income increase around the global median adds to the utility of people there more than a 5 to 10 percent increase in real income adds to the utility of the lower middle classes in rich countries (even if the absolute dollar gains of the latter may be larger). By this route too, we come to the conclusion that relative income changes are a more reasonable metric than absolute income changes.”[ref]Ibid., 29.[/ref]
While absolute measures in inequality may have their use, relative measures do a better job of complementing analyses of growth and poverty. In short, relative inequality provides a better framework by which to gauge standards of living.
Jason Furman, the chair of the Council of Economic Advisors under President Obama and now a senior fellow at the Peterson Institute for International Economics, argues that “both microeconomic and macroeconomic evidence” point to declining competition:
On the micro level, most industries today have fewer players than before. Just think about hospitals or cellphone service providers or beer companies. Throughout our economy you see larger companies, older companies, and, in any given industry, fewer companies. Growth in international trade has been a counterweight — but only within the tradable sector. Most of our economy is not tradable, and so for most of our economy, international trade isn’t a factor.
On the macro level, companies’ rate of return on capital has stayed the same or risen, while the safe rate of return on bonds has fallen precipitously. If there were really vigorous competition, you wouldn’t see increases in return on invested capital. In addition, we see an increase in the share of national income going to capital — that is, to investors — rather than to wages. That income shift has been larger in industries that have seen bigger reductions in competition.
He believes that this lack of competition plays a role in the increasing income inequality within the United States:
Wages aren’t determined strictly by supply and demand; they also depend on institutional arrangements and bargaining power. And with greater industry concentration, the bargaining power of employers rises. If there are four hospitals in your town and you’re a nurse at one of them, you can threaten to leave and go work at another one as a way to get a raise. If there’s only one hospital, it’s a lot harder to advocate for a raise.
[O]ne problem with American capitalism has been overlooked: a corrosive lack of competition. The naughty secret of American firms is that life at home is much easier: their returns on equity are 40% higher in the United States than they are abroad. Aggregate domestic profits are at near-record levels relative to GDP. America is meant to be a temple of free enterprise. It isn’t.
…You might think that voters would be happy that their employers are thriving. But if they are not reinvested, or spent by shareholders, high profits can dampen demand. The excess cash generated domestically by American firms beyond their investment budgets is running at $800 billion a year, or 4% of GDP. The tax system encourages them to park foreign profits abroad. Abnormally high profits can worsen inequality if they are the result of persistently high prices or depressed wages. Were America’s firms to cut prices so that their profits were at historically normal levels, consumers’ bills might be 2% lower. If steep earnings are not luring in new entrants, that may mean that firms are abusing monopoly positions, or using lobbying to stifle competition. The game may indeed be rigged.
…Unfortunately the signs are that incumbent firms are becoming more entrenched, not less…A $10 trillion wave of mergers since 2008 has raised levels of concentration further…Having limited working capital and fewer resources, small companies struggle with all the forms, lobbying and red tape. This is one reason why the rate of small-company creation in America has been running at its lowest levels since the 1970s. The ability of large firms to enter new markets and take on lazy incumbents has been muted by an orthodoxy among institutional investors that companies should focus on one activity and keep margins high. Warren Buffett, an investor, says he likes companies with “moats” that protect them from competition. America Inc has dug a giant defensive ditch around itself.
What can be done?:
The first step is to take aim at cosseted incumbents. Modernising the antitrust apparatus would help. Mergers that lead to high market share and too much pricing power still need to be policed. But firms can extract rents in many ways. Copyright and patent laws should be loosened to prevent incumbents milking old discoveries. Big tech platforms such as Google and Facebook need to be watched closely: they might not be rent-extracting monopolies yet, but investors value them as if they will be one day. The role of giant fund managers with crossholdings in rival firms needs careful examination, too.
The second step is to make life easier for startups and small firms. Concerns about the expansion of red tape and of the regulatory state must be recognised as a problem, not dismissed as the mad rambling of anti-government Tea Partiers. The burden placed on small firms by laws like Obamacare has been material. The rules shackling banks have led them to cut back on serving less profitable smaller customers. The pernicious spread of occupational licensing has stifled startups. Some 29% of professions, including hairstylists and most medical workers, require permits, up from 5% in the 1950s.
A blast of competition would mean more disruption for some: firms in the S&P 500 employ about one in ten Americans. But it would create new jobs, encourage more investment and help lower prices. Above all, it would bring about a fairer kind of capitalism. That would lift Americans’ spirits as well as their economy.
Let me add, as a second point, that the issue of unequal treatment of women is very much alive today, and affects many women, especially those working in male-dominated sectors like engineering and computer science. We’ll come back to that at the end.[ref]I added this paragraph on 2017-April-01 after a Facebook discussion with a woman in one of these sectors. I hadn’t added it before then because I thought it was obvious.[/ref]
The mini-debate that has been ongoing on about Pence’s policy has been quite interesting. At least one friend on Facebook compared it to The Great Dress Debacle of 2015: conservatives found Pence’s stance perfectly normal while liberals were split between ridiculing him and accusing him of practicing Sharia. Lest you think I’m joking, here’s one example cadged from The Federalist:
Sincere question. How is this different from extreme repressive interpretations of Islam ("Sharia Law!") mocked by people like Mike Pence
First, some folks seem to be missing the primary point of a rule like this. It is not, as the mockers deride, because Mr. Pence’s self-control is so flimsy he is afraid that merely sitting next to a woman in a restaurant without supervision would place him in danger of fornicating right there on the spot.
This isn’t a minor confusion. It’s a fundamental misapprehension of an ancient worldview that Christians still adhere to. In religious language: we’re all weak, vulnerable, and prone to sin. In modern, secular language: we’re irrational and often behave in ways that counter our own best interests and/or confound the values and goals we think we have. Doesn’t matter if you call it “fallen nature” or “cognitive bias”, in this context we’re talking about the same thing.
So how does this play out? The most common way that Christians (or other social conservatives) might try to explain a rule like Pence’s goes something like this: Anyone who goes on a diet will start by throwing out all the tempting food in their house.
The problem is that this analogy is very easy to misunderstand. One interpretation–the wrong one–is that cheating on your wife is the same kind of momentary lapse as cheating on your diet. It’s as though absent-mindedly chomping down on a Krispy Kreme you forgot to throw out is equivalent to absent-mindedly wandering into a hotel room with a woman you’re not married too. Lots of folks get as far as this (silly) interpretation and stop there.
The actual interpretation of the metaphor is quite different. It is saying that good behavior is not just about making the right decisions in the moment. It’s about manipulating your environment to make it conducive to the kind of behavior that you want in your life. Social conservatives understand that because we’re irrational creatures with amazing abilities to rationalize our ways into following short-term desires part of being virtuous isn’t just saying no to temptation in the moment, but avoiding it altogether.
Pence’s rule doesn’t draw the line at the moment when he’s tempted to be sexually unfaithful to his wife. It draws the line much, much earlier and so prevents the first seeds of infidelity from ever having a chance to take root in the first place.
I don’t follow Pence’s rule. I think it’s overkill. I’m not interested in trying to convince anyone that his particular rule should be some kind of universal standard for everyone. But I don’t think it’s ridiculous or absurd either. After all–in addition to the concerns about compromising marital fidelity out of an initially innocent friendship–there’s also legitimate concerns about being taken advantage of. Politicians are powerful and that also makes them vulnerable. Just ask the KGB (the FSB, these days) which has employed agents to try and seduce traveling politicians and officials for decades and decades in order to blackmail their targets into betraying state secrets. This is, by the way, one of the reasons that the CIA, FBI, and many other agencies are fond of hiring Mormons.[ref]Catch up here, if that is news to you.[/ref] Not only are we extremely family-focused (I know lots of Mormons who follow Pence’s rules), but we also don’t drink. Taken together, this means observant Mormons are less likely to be compromised in this way than the average population.
In the wake of the Republicans failing to pass the AHCA, there was a nauseating avalanche of cutesy Facebook posts from liberal fans of Hamilton. Here’s one:
If you missed the reference, it’s from Cabinet Battle #1, when Madison and Jefferson taunt Hamilton. Other favorites included “Winning was easy… Governing’s harder” and “Do you know how hard it is to lead?”
The funny thing is, if Alexander Hamilton had followed a rule like Mike Pence’s, he could have avoided his part in America’s first political sex-scandal, saved his family a lot of agony, and spared Lin-Manuel Miranda a song or two.[ref]Die-hard Hamilton fans are probably not persuaded by that last one, of course.[/ref]
And that brings me to my second point. Just as liberals are happy to take very selective lessons from Hamilton, there’s an awful weird dichotomy in a town where liberals practice all kinds of non-judgmentalism for open marriages but are more than happy to ridicule and deride someone for trying to keep their marriage closed. That’s the point Jonah Goldberg made at the National Review:
Last summer, when Bill Clinton spoke about his wife at the Democratic convention (“In the spring of 1971, I met a girl . . . ”), liberals gushed at the “love story,” and the rule of the day was that marriage is complicated and the Clintons’ ability to stay married (though practically separated) was admirable. Besides, “Who are we to judge?” — no doubt Bill Clinton’s favorite maxim.
It’s a very strange place we’ve found ourselves in when elites say we have no right to judge adultery, but we have every right to judge couples who take steps to avoid it.[ref]Emphasis added.[/ref]
He’s not wrong, you know.
I do think there are some legitimate concerns. The most important being that if you’re, say, a business executive who follows these rules, does it mean that you’re creating an environment where you give preferential treatment to men? If a young, up-and-coming male executive could ask you out to lunch to seek your advice, but a young, up-and-coming female executive cannot, then we do have a legitimate problem. It’s also possible to simply take this stance too far. I don’t recall conservatives having a problem with forcing Muslim boys to shake hands with their (female) teachers in Switzerland, for example.[ref]Unsurprisingly, liberals have a double standard that cuts against traditionalist Christians while social conservatives have a double standard that cuts against traditionalist Muslims.[/ref]
So I’m not saying that it’s impossible to have questions and concerns about a position like Pence’s. But the degree of hostility and deliberate (or at least, lazy) misunderstanding of the rules that the Pences have agreed on for their own marriage are at least as concerning as the rules themselves.
It’s hard to find a good reason to wag your finger disapprovingly at Elon Musk’s idealistic crusade to take us in to outer space, but wherever a talented individual is working hard to make the world a materially better place you will find a contrarian academic with an axe to grind and rhetorical snake oil to peddle. After all, that’s really the inevitable consequence of the ideological homogenization of American academia.[ref]See Walker’s post.[/ref] In a world where professors have substantially divergent views, there’s room for substantive arguments. But in a world where professors are all cut from the same ideological mold, the drive to differentiate oneself from the herd leads to increasingly bizarre and extreme signalling. Novelty supplants ingenuity, provocation supplants integrity, and the next thing you know space travel is racist.
That, essentially, is the point of Andrew Russell’s piece at Aeon: Whitey on Mars.[ref]You thought I was exaggerating, didn’t you?[/ref] The motivating question can be summarized this way: why throw away money on science that’s of no benefit to anyone while we’ve got real problems to solve down here on Earth?
Like much that passes for serious conversation today, the question is sheer Bulverism. Russell isn’t sincere. He doesn’t want to talk about the relative trade offs of money spent on space exploration vs. money spent fighting poverty. Nope, that would be much too old-fashioned. In the 21st century, we never make the argument we say we’re making. We just assume conclusions and skip straight to psycho-analyzing, the better to virtue-signal. Here, I’ll let C. S. Lewis explain:
You must show that a man is wrong before you start explaining why he is wrong. The modern method is to assume without discussion that he is wrong and then distract his attention from this (the only real issue) by busily explaining how he became so silly.
In the course of the last fifteen years I have found this vice so common that I have had to invent a name for it. I call it “Bulverism”. Some day I am going to write the biography of its imaginary inventor, Ezekiel Bulver, whose destiny was determined at the age of five when he heard his mother say to his father — who had been maintaining that two sides of a triangle were together greater than a third — “Oh you say that because you are a man.” “At that moment”, E. Bulver assures us, “there flashed across my opening mind the great truth that refutation is no necessary part of argument. Assume that your opponent is wrong, and explain his error, and the world will be at your feet. Attempt to prove that he is wrong or (worse still) try to find out whether he is wrong or right, and the national dynamism of our age will thrust you to the wall.” That is how Bulver became one of the makers of the Twentieth Century.
I know Russell isn’t interested in an argument on the actual merits, but I’m going to pretend that he is. Why? Because I don’t really know of any other way to respond to Bulverism, for one thing. And because the subject is actually pretty interesting, for the second. So: why should we seriously consider spending a lot of money on space travel while things are so desperately out of whack down here on Earth? I present two arguments.
The first begins with a video game analogy. Most modern multiplayer games come int two flavors: PvE and PvP. The first stands for “Player vs Environment” and the second for “Player vs. Player.” In PvP game modes, the primary action comes from players trying to kill each other. Of course, cooperation is possible. In fact, cooperation is often essential in these games. This is an age-old truth of human biology: we cooperate in order to become better at competition. As the old proverb goes: “Me against my brother, me and my brother against my cousin, me and my cousin against the stranger.”
In the alternative PvE mode, combat between human players is impossible. Cooperation is still usually required, because the the environment becomes the enemy. Players have to work together to overcome computer-controlled bad guys (in the most common arrangement) or other constraints and challenges.
My contention is that the PvE and PvP paradigms are the only two major paradigms through which human beings can confront the universe. We define ourselves in contrast to something else. In the short run, at least, that much is inevitable. Waiting around for an age of enlightenment when conflict and oppositions disappear is–at best–a kind of foolish utopianism. If you want to deal with humanity as it exists today you have to accept that these are basically you’re only oppositions. It’s either us-vs-them (PvP) or us-vs-it (PvE) where “it” is the challenge, danger, risk, and opportunity of hazardous exploration.
I do not believe that a robust space program that captivated the popular imagination would in a single stroke obviate all the political tensions dividing Americans let alone the older and deeper ethnic and national hatreds separating so many people around the globe. But I do believe there is nothing wrong with moving a little bit along the spectrum away from PvP and towards PvE. More than that, I believe it would help–in a small but meaningful way–to give Americans and humans something to root for, some opposition entity that enabled an us without relying on an otherized them. I can think of no program more amenable to this goal than a program of exploration and really our only choices in this regard are space or the ocean. Since space is both more romantic (for most people) and less hazardous to our own ecosystem, the choice seems clear.
So let’s get to the second major reason that space exploration is a worthwhile investment: survival. The reality is that as long as the human race lives exclusively on Earth, we’re literally keeping all our eggs in one basket. This is a recipe for extinction. The most likely source of this extinction will be from asteroid impact. Small rocks routinely impact the Earth, most frequently burning up in orbit and doing no harm. Here’s a map of small asteroids (1-20 meters in diameter) hitting the Earth between 1993 and 2014.
Map from NASA/Planetary Science. Click for more information. (Public Domain)
These little rocks are no threat, but they illustrate that asteroids hitting the Earth are not some kind of rare event. It’s very, very common. The question is just: when are we going to get hit with a really big one? By studying impact craters on the Moon, it’s possible to come up with some basic estimates, which Wikipedia summarizes:
Asteroids with a 1 km (0.62 mi) diameter strike Earth every 500,000 years on average. Large collisions – with 5 km (3 mi) objects – happen approximately once every twenty million years. The last known impact of an object of 10 km (6 mi) or more in diameter was at the Cretaceous–Paleogene extinction event 66 million years ago.
So, these are very rare events. But they are also–over a long enough period of time–inevitable. We’re a sitting duck, and one day another one of those really big space rocks is going to come hurtling our way. With no extra-terrestrial humans and no active defenses whatsoever, that would spell the end of human civilization and possibly the end of the human species. It probably won’t happen. Not in our lifetime, not in our nation’s lifetime, maybe not in our species’ lifetime. Then again, it might.
These are the two simplest reasons I believe we shouldn’t wait to turn Earth into an egalitarian utopia before we turn our eyes to the stars. There are a couple more that I will only skim over. One is that research into space exploration has already led to lots of benefits for life on Earth. Another is just the general problem with trying to solve the world’s problems in serial instead of parallel. This is a ludicrously bad model for tackling the problems we face for the simple reason that we couldn’t all coordinate on attacking just one problem at a time even if we wanted to, and even if we agreed on what problem that would be. It makes more sense for different people and institutions to work on the problems that they are–by temperament and opportunity–most able to address. In other words: we don’t have to pick either/or. It’s always going to be “yes, and…” Let’s embrace that.
Final thought: NASA’s budget has been slowly climbing towards $20billion for the last few year, but it’s relative share of the federal budget has fallen from about 1% in the early 19990s to 0.5% today. This is significantly down from the all-time high of 3-4% in the mid 1960s when the Space Race was at its height. Throwing a few more billion NASA’s way seems like a small investment in a critically endangered resource: social unity. Of course, the most striking thing about Russell’s article is that he’s attacking Elon Musk’s privately funded space exploration efforts. It’s very, very hard to understand how one man’s quest to bring a widely-shared human dream to reality and make the world a better, safe place for humanity could draw condemnation as racism, but these are the times we live in.
A couple years ago, I linked to a post by AEI’s James Pethokoukis that claimed income inequality was in part explained by more profitable companies paying their employees more. A recent Harvard Business Review article by economist Nicholas Bloom further supports this insight. He says,
If we want to truly understand income inequality — if we want to mitigate it and its pernicious effects — we must look beyond CEO compensation and tax policy and consider the role played by firms and their hiring and compensation policies for ordinary, non-millionaire workers. This is not a simple morality play in which evil companies are pitted against the middle class. There is nothing nefarious about Google’s goal of being the global leader in software and machine learning, or in its hiring the best employees it can find. Yet the result of countless strategic decisions in pursuit of such goals by Google and other elite companies throughout the world — not just in tech — has been to raise the compensation of some workers far more than others.
Bloom points out that “it’s not just the top 1% who are pulling away. The gap between workers with a college education and ones with only a high school diploma has increased dramatically as well. In 1979, the average annual salary for American men with a college degree was $17,411 higher (after adjusting for inflation) than the average for men with a high school degree. By 2012, the gap had nearly doubled, to almost $35,000; the gap between women with college degrees and those with high school diplomas nearly doubled as well.”
So what explains this growing gap?
Over the past several years, economists have begun to examine pay gaps between and within firms to see how company strategy and corporate trends affect the broader rise of inequality. The findings from this new area of study are striking and help explain why incomes have risen so much for some and not at all for others. They also explain why so many executives, managers, and other well-paid workers have failed to notice the growing disparity.
Companies can contribute to rising income inequality in two ways. As we’ve just discussed, pay gaps can increase within companies — between how much executives and administrative assistants are paid, for example. But studies now show that gaps between companies are the real drivers of income inequality. Research I conducted with Jae Song, David Price, Fatih Guvenen, and Till Von Wachter looked at U.S. employers and employees from 1978 to 2013. We found that the average wages at the firms employing individuals at the top of the income distribution have increased rapidly, while those at the firms employing people in the lower income percentiles have increased far less. (See exhibit “Inequality Between Companies Is Also Growing.”)
In other words, the increasing inequality we’ve seen for individuals is mirrored by increasing inequality between firms. But the wage gap is not increasing as much inside firms, our research shows. This may tend to make inequality less visible, because people do not see it rising in their own workplace.
This means that the rising gap in pay between firms accounts for the large majority of the increase in income inequality in the United States. It also accounts for at least a substantial part in other countries, as research conducted in the UK, Germany, and Sweden demonstrates.
Bloom writes, “[O]ur research suggests…that companies are paying more to get more: boosting salaries to recruit top talent or to add workers with sought-after skills. The result is that highly skilled and well-educated workers flock to companies that can afford to offer generous salaries, benefits, and perks — and further fuel their companies’ momentum. Employees in less-successful companies continue to be poorly paid and their companies fall further behind.
Bloom attributes this between-firm inequality to “three factors: the rise of outsourcing, the adoption of IT, and the cumulative effects of winner-take-most competition”:
Outsourcing: “As companies focused on their core competences and outsourced noncore work, the corporate world began to divide between knowledge-intensive companies such as Apple, Goldman Sachs, and McKinsey and labor-intensive companies such as Sodexo, which provides food service and facilities management services. Workers with lots of education and desirable skills were hired in the knowledge sector, with high pay, perks, and benefits. Less-educated workers got jobs in labor-intensive firms, where pay was stagnant or even falling and benefits such as health insurance were hardly guaranteed. Employees from these two types of firms often work in the same building, but they’re no longer in the same orbit.”
IT and Automation: “My research and other studies suggest that between-firm pay inequality has grown faster in industries that spend more on IT. Investments in technology allow successful online firms to rapidly scale up and reap the benefits of network effects. In this way, leading companies such as Amazon and Facebook dominate their markets. Offline, improved enterprise software and automation of routine tasks make it far easier to manage and grow large businesses, from Shake Shack (burgers) to Xiaomi (smartphones).”
Winner-Take-Most Competition: “[O]ver the past 35 years, firms have divided between winners and losers, and between those that rely heavily on knowledge workers and those that don’t. Employees inside winning companies enjoy rising incomes and interesting cognitive challenges.”
Bloom ends by listing several policy recommendations. There is also a link to further commentary on this subject by various experts, all of which are worth reading.
This is an important insight in the inequality debate. Policymakers and voters should take notice.
Neil Gorsuch, nominee for Associate Justice to the U.S. Supreme Court, and President Donald Trump, via the official White House YouTube page. (Public Domain)
As you might be able to tell from my last post, I like Judge Gorsuch. I’d never heard of him before his nomination, but I listened into a lot of his hearing, and quickly came to respect his philosophy of judicial integrity.[ref]That’s actually what was at the heart of my last post about his hearing.[/ref]
Earlier today, I had a Facebook friend castigating Gorsuch for the “frozen trucker case.” This refers to a dissent that Gorsuch wrote in 2016. According to a critical Slate article by Jed Shugerman, here are the basic facts of the case:
Alphonse Maddin was a truck driver for TransAm. Late on a January night in temperatures below zero, he discovered that his trailer’s brakes had locked up due to the cold weather. (The truck itself could drive but not when attached to the trailer). He called TransAm’s road service for help at 11:17 p.m., and then discovered that the truck cabin’s heat was broken. He fell asleep and woke up two hours later with a numb torso. Maddin also could not feel his feet. He called the road service again, and they told him to “hang in there” despite the life-threatening conditions. He waited about 30 more minutes before unhitching the broken trailer. Although his supervisor ordered him to stay, Maddin decided to drive off with the truck after almost three hours in the subzero cold. A service truck did arrive 15 minutes after he left, but it’s hard to blame him for deciding not to risk his life. It’s amazing he waited so long at all.
TransAm fired Madding for leaving behind his trailer. In his turn, Maddin filed a complaint with OSHA, arguing that his decision to drive away from the trailer was statutorily protected. Then Tenth Circuit sided with Madding and OSHA, but Gorsuch wrote a strong dissent. This strong dissent has come back to haunt him, as Democrats in his confirmation hearing and journalists and pundits outside of it are using the dissent to paint him as having an “arrogant and cold judicial personality.”
I thought I’d look into this, so I read Gorsuch’s dissent, which you can find online here. Here’s the most important paragraph, where Gorsuch explains why he believes TransAm’s firing of Maddin wasn’t illegal:
It might be fair to ask whether TransAm’s decision was a wise or kind one. But it’s not our job to answer questions like that. Our only task is to decide whether the decision was an illegal one. The Department of Labor says that TransAm violated federal law, in particular 49 U.S.C. § 31105(a)(1)(B). But that statute only forbids employers from firing employees who “refuse[] to operate a vehicle” out of safety concerns. And, of course, nothing like that happened here. The trucker in this case wasn’t fired for refusing to operate his vehicle. Indeed, his employer gave him the very option the statute says it must: once he voiced safety concerns, TransAm expressly — and by everyone’s admission — permitted him to sit and remain where he was and wait for help. The trucker was fired only after he declined the statutorily protected option (refuse to operate) and chose instead to operate his vehicle in a manner he thought wise but his employer did not.
The logic is pretty straight forward and irrefutable. The law protects people who don’t operate equipment out of safety concerns. It doesn’t protect people who do operate equipment under safety concerns. And so–applying the statute–TransAm was free to fire Maddin as far as the law is concerned. And that is the only thing that Gorsuch (and his fellow judges) were called to decide. Gorsuch goes on:
… there’s simply no law anyone has pointed us to giving employees the right to operate their vehicles in ways their employers forbid. Maybe the Department would like such a law, maybe someday Congress will adorn our federal statute books with such a law. But it isn’t there yet. And it isn’t our job to write one — or to allow the Department to write one in Congress’s place.
This is a theme that Gorsuch talked about frequently during his hearing. Again and again he reiterated his position that a judge has to apply the law as it is actually written and can’t simply “interpret” the law in ways that suit our notions of justice or fairness or propriety or even common sense.
Reading between the lines, the majority opinion in this case was especially egregious because the judges invented a rationale for their position (siding with Maddin) that wasn’t even raised by the OSHA lawyers. Gorsuch points out that the majority opinion cites a prior ruling (Cehvron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.) even though:
…the Department [OSHA] never argued the statute is ambiguous, never contended that its interpretation was due Chevron step two deference, and never even cited Chevron. In fact, the only party to mention Chevron in this case was TransAm, and then only in a footnote in its brief and then only as part of an argument that the statute is not ambiguous.
I don’t think there’s any doubt that Maddin should not have been fired. As a matter of morality and basic decency, that’s a given. But the responsibility to grant him that legal protection rests with the legislative branch. It’s their job to write the law to cover that case. They failed to do so. Relying on the judicial branch to fix their mistake by–in effect–amending the law to be what it should have been is impermissible under American rule of law. As Gorsuch put it, “it is our obligation to enforce the terms of that compromise as expressed in the law itself, not to use the law as a sort of springboard to combat all perceived evils lurking in the neighborhood.”
I don’t like the ruling that Gorsuch came to, and Gorsuch didn’t like it either, but it was certainly the correct ruling to make under the Constitutional system of law we are supposed to live under. According to his critics, this case is supposed to make me like Gorsuch less, but it’s not working. It makes me like him more.
[Trump’s] nationalistic view reminds me, of course, of [Juan] Peron, in some regards.
– Sebastion Edwards
Financial Times‘s Cardiff Garcia has an incredibly enlightening interview with UCLA economist Sebastian Edwards on the economics of populism.
Garcia: …Americans have been taken off-guard by some of the phrasings of Donald Trump and what he says is part of his agenda. But that if you’re from Latin America, you’ve seen how a lot of this movie plays out before.
Edwards: That is correct. You’ve seen it before. The modus operandi is very similar. And it’s very ironic. You have Donald Trump, and the way he approaches many of these issues is not too different to what Hugo Chavez did in Venezuela. And that’s exactly what makes this whole story quite fascinating.
How is “populism” defined? Edwards elaborates,
Rudi Dornbusch and I defined the economics of populism as an economic programme, a package of policies, that disregarded good, solid received wisdom on economics. And in the case of Latin America, which is going to be interesting when we compare it to Donald Trump, disregarded all budget and monetary constraints – and violated all those constraints, as the populists do, in a way that generates euphoria in the immediate short run, but ultimately results in a very deep crisis that affects, in particular, those that were supposed to be benefited by the whole programme. So populist economics is an economic policy package that disregards budget constraints, macroeconomic constraints, good solid productivity constraints, and generates short run benefits at the cost of crisis in the future.
…So those are the policies, what I described. And what the populist leader does then is that in a rhetoric that is quite extreme, and where he or she divides the population between “us, the people” and “them” – and it’s a vague “them”…In that rhetoric, the populist leader takes the discourse directly to the people through big rallies, a referendum, plebiscites. I’m talking about Hugo Chavez and Donald Trump, who continues to be, although he’s now the president, in campaign mode. And in doing this [he] skips the institutions. For instance, they tend to dislike the central bank because it is an institution that tends to maintain sound policies in most countries. First thing that Hugo Chavez did was fire Ruth de Krivoy, the Governor of the central bank of Venezuela, right. So they disregard the institutions, both economic and political.
Garcia notes “that the majority of the populist leaders [Edwards] studied have been left wing. A lot of Marxists.” But as Edwards explains,
In some ways, [Juan] Peron, who had great sympathy for the fascist movements – he was a great admirer of Benito Mussolini – was right wing in many respects. 3 So there is no reason why we cannot have corporatist right-wing populist leaders that favour specific groups in their rhetoric and in their policies and again, very clearly blame, in quotation marks, “the other” for the suffering of “us, the people”. And in the case of Latin America, often “the other” was related to some foreign force – the multinationals, international speculators and, of course, the International Monetary Fund. And what is very ironic is that in the case of Donald Trump, foreigners also are blamed for the plight of the people and, in this case, they are immigrants, the Chinese and international terrorists.
Edwards then lays out the conditions for a populist leader to emerge:
[T]he first phase is a deep public dissatisfaction and discontent. And this dissatisfaction and discontent is of two types. Sometimes it’s quite abrupt. And in Latin America, usually that abrupt crisis has been associated historically with a very large devaluation of the currency…In other cases, the crisis develops much more slowly and it’s a simmering crisis. And that is what we can see in the United States where there is a simmering dissatisfaction, in particular among white, blue collar workers. So first phase, great dissatisfaction. And you can see it in country after country after country…The second phase is the emergence of this populist leader, very charismatic, who operates outside of the political institutions…So this leader that comes out is extremely forceful, very articulate, and in rallies and in direct appeal to the people, provides this very nationalistic rhetoric and gets the people to approve this particular political programme that disregards all sorts of constraints of good, solid economic management.
What does this begin to look like in practice?:
And what we see in many of these populist extremisms in Latin America is that the authority starts picking up on specific companies, firms, conglomerates. And the strong man or the strong woman (Cristina in Argentina) would call the CEO or the controlling figure of that company and would threaten him or her personally or would denounce that company in public rallies, and would direct the mobs to riot and to maybe even break into those stores. And then they are called in and they are told, you have to reduce your prices, or you have to do this, or you have to do that, and you have to raise wages by 50% while, at the same time, you cannot increase the prices of your product. Which, of course, is a variant of what Trump is doing with companies that want to invest and start plans in other parts of the world. So the rule of law, and in particular, the impersonal treatment – equal treatment of everyone in front of the regulators, and so on and so forth – starts to disappear.
“Roughly a quarter of the world’s people—some 1.8 billion—have turned 15 but not yet reached 30,” reports The Economist.
In many ways, they are the luckiest group of young adults ever to have existed. They are richer than any previous generation, and live in a world without smallpox or Mao Zedong. They are the best-educated generation ever—Haitians today spend longer in school than Italians did in 1960. Thanks to all that extra learning and to better nutrition, they are also more intelligent than their elders. If they are female or gay, they enjoy greater freedom in more countries than their predecessors would have thought possible. And they can look forward to improvements in technology that will, say, enable many of them to live well past 100.
So how can these youngsters be described as “oppressed”?
Many of their woes can be blamed on policies favouring the old over the young. Consider employment. In many countries, labour laws require firms to offer copious benefits and make it hard to lay workers off. That suits those with jobs, who tend to be older, but it makes firms reluctant to hire new staff. The losers are the young. In most regions they are at least twice as likely as their elders to be unemployed. The early years of any career are the worst time to be idle, because these are when the work habits of a lifetime become ingrained. Those unemployed in their 20s typically still feel the “scarring” effects of lower income, as well as unhappiness, in their 50s.
Housing, too, is often rigged against the young. Homeowners dominate the bodies that decide whether new houses may be built. They often say no, so as not to spoil the view and reduce the value of their own property. Over-regulation has doubled the cost of a typical home in Britain. Its effects are even worse in many of the big cities around the world where young people most want to live. Rents and home prices in such places have far outpaced incomes. The youngsters of Kuala Lumpur are known as the “homeless generation”. Young American women are more likely to live with their parents or other relatives than at any time since the second world war.
Young people are often footloose. With the whole world to explore and nothing to tie them down, they move around more often than their elders. This makes them more productive, especially if they migrate from a poor country to a rich one…[And yet,] many governments discourage not only cross-border migration but also the domestic sort. China’s hukou system treats rural folk who move to cities as second-class citizens. India makes it hard for those who move from one state to another to obtain public services. A UN study found that 80% of countries had policies to reduce rural-urban migration, although much of human progress has come from people putting down their hoes and finding better jobs in the big smoke. All these barriers to free movement especially harm the young, because they most want to move.
…[M]any governments favour the old: an ever greater share of public spending goes on pensions and health care for them. This is partly the natural result of societies ageing, but it is also because the elderly ensure that policies work in their favour. By one calculation, the net flow of resources (public plus private) is now from young to old in at least five countries, including Germany and Hungary. This is unprecedented and unjust—the old are much richer.
…The young are an oppressed minority—albeit an unusual one—in the straightforward sense that governments are systematically preventing them from reaching their potential. That is a cruel waste of talent. Today’s under-30s will one day dominate the labour force. If their skills are not developed, they will be less productive than they could be…What is more, oppressing youngsters is dangerous. Countries with lots of jobless, disaffected young men tend to be more violent and unstable, as millions of refugees from the Middle East and Africa can attest.
We tend to forget that “the poor” often means “the young.”
To distill the finding, a team of researchers based out of Tel-Aviv University first developed an algorithm to model wealth inequality in the United States between 1930 and 2010. Primarily based on income from wages, income from wealth (profits, rents, dividends, etc.), and changes in capital value (property, shares, etc.) the resulting model correlated closely (p=.96) with historical data on wealth inequality.
The researchers then used their model to predict the future. What would happen, they wondered, if income inequality was varied? In their model, income inequality was tied to a metric called the Gini index, a statistical measure of inequality used for decades. They found that altering income inequality to a Gini index of 0.1 (very low inequality) resulted in the top 10% controlling 78.6% of wealth in 2030, while raising income inequality to a Gini index of 0.9 (very high inequality) resulted in the top 10% controlling 79.3% of wealth in 2030, hardly a significant difference.
The article continues,
According to the researchers, the lack of effect isn’t actually surprising.
“When income tax is increased, the top earners, who are not necessarily the wealthiest individuals in the population, have a larger difficulty of accumulating wealth, with respect to the wealthiest. On the other hand, it barely affects the wealthiest individuals. Therefore, such an increase might even deepen the wealth gap.”
“Progressive taxation, which might have a significant effect on the distribution of income, will have a small effect on wealth inequality,” they add.
The team behind the current study is not the only group to return such a result. Just last year, experts at the Brookings Institute created their own model and found that increasing the top tax rate from 39.6% to 50% wouldn’t even dent income inequality, let alone wealth inequality.
