Charles Ferguson has “a nice piece”:http://chronicle.com/article/Larry-Summersthe/124790/ in the _Chronicle of Higher Education_ about Larry Summers, the economics profession and their position in American public life. Definitely worth a read.
From the category archives:
Economics/Finance
“Matt Yglesias”:http://yglesias.thinkprogress.org/2010/09/new-labour-and-inequality/ and “Brad DeLong”:http://delong.typepad.com/sdj/2010/09/in-which-matthew-yglesias-observes-that-innumeracy-is-an-awful-thing.html have argued that this graph, from “Lane Kenworthy”:http://lanekenworthy.net/2009/06/01/did-blair-and-brown-fail-on-inequality/, shows that we shouldn’t be too critical of Labour’s performance with respect to inequality over their 12 years of government in Britain.
Both Matt and Brad are pushing back against “Chris’s post below”:https://crookedtimber.org/2010/09/30/its-about-the-distribution-stupid/, which argued that Labour had done very little about equality. (Although in his remark on my comment on his post, Brad now seems to suggest that his post was a pre-emptive strike against what Chris would go on to write in comments.) There’s a natural rejoinder on behalf of Chris, which has been well made in both Matt and Brad’s comments threads. Namely, if the graph really showed that things had gotten better, equality-wise, the Gini coefficient for the UK would have fallen. But in fact it rose, somewhat significantly, over Labour’s term. Indeed, the “IFS Report”:http://www.ifs.org.uk/publications/4524 that the graph is based on shows quite clearly that it rose markedly towards the end of Labour’s term.
So I got to thinking about how good a measure “Gini coefficients”:http://en.wikipedia.org/wiki/Gini_coefficient are of equality. I think the upshot of what I’ll say below is that Chris’s point is right – if things were really going well, you’d expect Gini coefficients to fall. But it’s messy, particularly because Gini’s are much more sensitive to changes at the top than the bottom.
In May this year, I did an interview with Amartya Sen in Cambridge (the British one) on the Quality of Life. The concrete occasion for this interview was “a workshop/conference”:http://www.nwo.nl/nwohome.nsf/pages/NWOP_86JGUU I was involved in, organized by the Dutch National Science Foundation, on the Quality of Life.
Sen couldn’t come to give a talk at this conference, but was happy being interviewed by me. So if you fancy watching 22 minutes of Sen’s views on how to conceptualise and measure the quality of life, on the Sarkozy report on the measurement of economic progress (Mismeasuring Our Lives: Why GDP Doesn’t Add Up
Last time I looked at a proposal to spend $50 billion on infrastructure to stimulate the economy, I thought it was a great idea. This time, I think it’s scarcely worth the bother. Why have I changed my mind?
In my post on EU-US convergence, I found that the US was similar to the leading eurozone countries in both productivity (output per hour worked) and employment-population ratio, so that the difference in income per person is mostly explained (in some cases more than explained) by differences in hours worked per employment person. I didn’t take the distribution of income into account, since the data sources I was using there did not provide anything useful. But commenter Detlef found a blog post by Maximilian Hagemes at the World Bank site which links to a useful paper by Piketty and Alvaredo on cross-country comparisons of income concentration. For most eurozone countries, they show that the top 1 per cent of households gets about 8 per cent of total income (the presentation is graphical, but in any case, there is no point in going for spurious precision with numbers like this). For the US, the most recent data gives an 18 per cent share. So, the share of national income going to the remaining 99 per cent is about 10 per cent smaller in the US than in the eurozone.
There are a couple of ways of looking at this.
I’ve spent a lot of time double-tapping[1] the zombie ideas of market liberalism. But the comments on my recent rejoinder to Dan Drezner remind me that there are some zombie ideas on the Keynesian side of the fence as well. Perhaps the most important is the claim that the breakdown of the Keynesian system of demand management was the result of an exogenous event – the oil price shock of October 1973, which arose out of the embargo imposed by OPEC during the 4th Arab-Israeli war.
There’s a tiny element of truth in this – after the oil shock, the collapse was rapid and disorderly. But the Keynesian economic order had already broken down by October 1973, and the oil shock was a consequence of that breakdown, not a cause.
The NYT ran yet another round in the long-running EU vs US series a week or so ago. Although it’s not covered explicitly in the NYT, there is actually some news to report here, in addition to rehearsal of the same old themes.
For quite some time, the US and the leading EU countries have been fairly comparable in terms of output per hour worked. The US has had higher output per person for two reasons: a relatively high employment/population ratio and very high average hours worked per person. The first of these is important because it raises the possibility that EU countries performing well on productivity measures are benefiting from the “Thatcher effect” . If low-skilled workers are excluded from employment, for example by restrictive macro policy, as in Thatcher’s case, or by labor market sclerosis, as claimed by critics of European institutions, then productivity measures are artificially boosted.
This issue is now moot. As a result of the crisis, the US employment/population ratio has dropped sharply, to the point where the US is now little different from the EU. The difference in GDP per person between the US and leading European countries is driven primarily by differences in average hours worked by employed people.
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A “recent piece of research”:http://ideas.repec.org/p/lec/leecon/09-23.html by British economist James Rockey into people’s misperception of their place on the political spectrum got a certain amount of “gleeful mileage”:http://blogs.telegraph.co.uk/news/edwest/100047245/why-middle-class-lefties-believe-stupid-things-because-their-friends-do/ in the right-wing press, and for predictable reasons. The research claimed that many people mislocate themselves – identifying with the “left” even though they hold opinions that are fairly right-wing. Having worried this over for a few weeks now, my considered view is that whilst the research is flawed at a quite fundamental level, the conclusion might contain some truth. Let’s see if I can express that thinking without contradicting myself!
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A question that comes up at CT quite a bit is: who has benefited from the massive increase in US income inequality over recent decades. I finally got around to chasing down Congressional Budget Office data (derived from tax records for the period 1979 to 2005), and the answer, in short is:
* The top 1 per cent roughly doubled their share of both pre-tax income (9 per cent to 18 percent) and after-tax income (7.5 per cent to 15 per cent)
* The rest of the top 10 per cent slightly increased their share (from about 20 to about 22 per cent)
* The next 10 per cent held their share (about 15 percent)
* The remaining 80 per cent of households saw their share drop (from 58 per cent to 48 per cent of post-tax income, with the biggest drops coming at the bottom. The bottom 40 per cent of households now get a smaller share of post tax income (14 per cent, down from 19) than the top 1 per cent.
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A “bloggingheads”:http://bloggingheads.tv/diavlogs/29563 with Dan Drezner, where we discuss in passing the recent dust-up between Tyler Cowen and Paul Krugman on Keynesian demand-stimulation strategies and Germany (see “here”:http://www.nytimes.com/2010/07/18/business/18view.html?_r=1&scp=1&sq=tyler%20cowen&st=cse, “here”:http://www.marginalrevolution.com/marginalrevolution/2010/07/what-germany-knows-about-debt.html “here”:http://krugman.blogs.nytimes.com/2010/07/18/more-stimulus-despair/, “here”:http://www.marginalrevolution.com/marginalrevolution/2010/07/germany.html. I’m mostly on Krugman’s side of this argument, but not entirely – a few points.
Chicago economist Raghuram Rajan offers the following explanation for the long-term stagnant real incomes of Americans at the 50th percentile of the income distribution (compared to their compatriots at the 90th):
bq. A number of factors are responsible for the growth in the 90/50 differential. Perhaps the most important is that technological progress in the US requires the labor force to have ever greater skills. A high school diploma was sufficient for office workers 40 years ago, whereas an undergraduate degree is barely sufficient today. But the education system has been unable to provide enough of the labor force with the necessary education. The reasons range from indifferent nutrition, socialization, and early-childhood learning to dysfunctional primary and secondary schools that leave too many Americans unprepared for college.
I really find this difficult to believe. My guess is that, in terms of the real skills objectively needed to do the job, a high school diploma is more than adequate for most office work. Of course, it may be that, because of competition for those jobs, you need a higher level of qualification to get one. But that’s a different story.
The idea that Obama (or rather, the wisdom of crowds in anticipating the election of a socialist-Islamist Obama administration) caused the recession is getting another run, this time from Nobel[1] prizewinner Ed Prescott. I haven’t been able to track down more than a precis of Prescott’s argument, but I assume it’s similar to the version put forward by Casey Mulligan. I had a go at this in my Zombie economics book [2], and here on CT, so, I thought I would link to it here, to give a bit of context to the current flap.
[1] Yes, yes, I know about the Sverige Riksbank. And winners of the economics prize aren’t the only ones to say silly things later on.
[2] Still on track for Halloween, and already taking pre-orders! Join the Facebook group here.
Thanks very much to Nick S for this news – Diageo plc is going to be dealing with its pension fund deficit by making a contribution of up to 2.5m barrels of whisky. Back in the dawn of CT[1], we addressed some of the financial aspects of this sort of thing …
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“The FT today”:http://www.ft.com/cms/s/0/39e9f212-82a1-11df-85ba-00144feabdc0.html (I wonder how long this will stay uncorrected).
Some thoughts on the nature of the European crisis, which I’m writing up for an opinion piece. Comments much appreciated