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Scott Winship doesn’t think much of the Great Gatsby Curve, the supposed inverse relationship between income inequality and intergenerational mobility promoted by former White House economist Alan Krueger. And right now Winship and Krueger are have a blog debate over at the Brookings web site. An interesting discussion worth reading, but let me pull out this bit from Winship (related to the above chart):
Robert Putnam and others argue that rising inequality might hurt the mobility of today’s children, whose outcomes we won’t know for decades. Of course, it might: but by definition we can’t know. However, new research by Raj Chetty and his colleagues shows that mobility did not fall for Americans born between the early 1970s and the early 1990s, a period that both saw inequality rising below the top one percent and income becoming concentrated within the top one percent. Similarly, my own forthcoming research finds that men born in the early 1980s had the same mobility as those born in the late 1940s.
Winship also points out recent research that finds the US has the same upward mobility rates as Canada and Sweden, “despite the fact that the three countries have, respectively, high, moderate, and low levels of inequality.”
Wise words from Warren Buffett. The Oracle of Omaha predicts how the rush to sharply raise the minimum wage will end. (Spoiler: badly for the people the policy purports to help.) And Buffett also offers a smart alternative to help low-income workers:
In my mind, the country’s economic policies should have two main objectives. First, we should wish, in our rich society, for every person who is willing to work to receive income that will provide him or her a decent lifestyle. Second, any plan to do that should not distort our market system, the key element required for growth and prosperity.
That second goal crumbles in the face of any plan to sizably increase the minimum wage. I may wish to have all jobs pay at least $15 an hour. But that minimum would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty.
The better answer is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC), which currently goes to millions of low-income workers. Payments to eligible workers diminish as their earnings increase. But there is no disincentive effect: A gain in wages always produces a gain in overall income. The process is simple: You file a tax return, and the government sends you a check.
In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment.
The existing EITC needs much improvement. Fraud is a big problem; penalties for it should be stiffened. There should be widespread publicity that workers can receive free and convenient filing help. An annual payment is now the rule; monthly installments would make more sense, since they would discourage people from taking out loans while waiting for their refunds to come through. Dollar amounts should be increased, particularly for those earning the least.
There is no perfect system, and some people, of course, are unable or unwilling to work. But the goal of the EITC—a livable income for everyone who works—is both appropriate and achievable for a great and prosperous nation. Let’s replace the American Nightmare with an American Promise: America will deliver a decent life for anyone willing to work.
Yep. Wage subsidies so work pays better without the potential anti-employment effects of the minimum wage. (Here is my plan to try and meld both policies.) I love that last bit especially: “America will deliver a decent life for anyone willing to work.” Right on. That’s a pretty good lens through which to examine public policy. Buffett is also is great on explaining why a rising tide is no longer lifting all boats. And “worker voice” or “Reagan-Bush tax cuts” don’t get a mention:
The poor are most definitely not poor because the rich are rich. Nor are the rich undeserving. Most of them have contributed brilliant innovations or managerial expertise to America’s well-being. We all live far better because of Henry Ford, Steve Jobs, Sam Walton and the like. Instead, this widening gap is an inevitable consequence of an advanced market-based economy. Think back to the agrarian America of only 200 years ago. … Visualize an overlay graphic that positioned the job requirements of that day atop the skills of the early American labor force. Those two elements of employment would have lined up reasonably well. Not today. A comparable overlay would leave much of the labor force unmatched to the universe of attractive jobs. That mismatch is neither the fault of the market system nor the fault of the disadvantaged individuals. It is simply a consequence of an economic engine that constantly requires more high-order talents while reducing the need for commodity-like tasks.
A NRO Corner piece by Deroy Murdock that compares the Obama vs. Reagan jobs recoveries contains this chart:
And here is Murdock’s analysis: “Using data from the Bureau of Labor Statistics, the staff of the Congressional Joint Economic Committee (JEC) compared the private sector job-creation records of Obama, President Reagan, and the average after every recession since 1960 that lasted more than one year. According to these hard numbers, Obama wheezes behind Reagan. Also, Obama is — literally — below average.”
Now here is a different chart that shows recessions in the early 1980s and before were followed by very different jobs recoveries than the later ones. Jobless recoveries or slow job growth recoveries have become typical:
What’s more, there is some evidence that downturns associated with financial crises and housing busts have slower recoveries. Recently, I wrote a fairly lengthy post on all those Obama vs. Reagan charts, and why they are too simplistic. Now, this is hardly to suggest fiscal or monetary policy has been optimal. The recovery could have been stronger. But it’s complicated, and astute analysis reflects that — or at least it should.
View related content: Pethokoukis
Look, I am sure self-driving cars will create jobs and spin-off industries that we can’t imagine right now. But that doesn’t mean there won’t be losers who may never recover. Over at Medium, there’s a piece looking at the impact of driverless trucks beyond the obvious of drivers losing their jobs:
It should be clear at a glance just how dependent the American economy is on truck drivers. According to the American Trucker Association, there are 3.5 million professional truck drivers in the US, and an additional 5.2 million people employed within the truck-driving industry who don’t drive the trucks. That’s 8.7 million trucking-related jobs.
We can’t stop there though, because the incomes received by these 8.2 million people create the jobs of others. Those 3.5 million truck drivers driving all over the country stop regularly to eat, drink, rest, and sleep. Entire businesses have been built around serving their wants and needs. Think restaurants and motels as just two examples. So now we’re talking about millions more whose employment depends on the employment of truck drivers. But we still can’t even stop there.
Those working in these restaurants and motels along truck-driving routes are also consumers within their own local economies. Think about what a server spends her paycheck and tips on in her own community, and what a motel maid spends from her earnings into the same community. That spending creates other paychecks in turn. So now we’re not only talking about millions more who depend on those who depend on truck drivers, but we’re also talking about entire small town communities full of people who depend on all of the above in more rural areas. With any amount of reduced consumer spending, these local economies will shrink.
One further important detail to consider is that truck drivers are well-paid. They provide a middle class income of about $40,000 per year. That’s a higher income than just about half (46%) of all tax filers, including those of married households. They are also greatly comprised by those without college educations. Truck driving is just about the last job in the country to provide a solid middle class salary without requiring a post-secondary degree. Truckers are essentially the last remnant of an increasingly impoverished population once gainfully employed in manufacturing before those middle income jobs were mostly all shipped overseas. If we now step back and look at the big national picture, we are potentially looking at well over 10 million American workers and their families whose incomes depend entirely or at least partially on the incomes of truck drivers, all of whom markedly comprise what is left of the American middle class.
So, at the very least. the most common job in most U.S. states probably will no longer be truck driver. I would also add that there are plenty of jobs that shouldn’t require a college degree but currently do. Finally, this piece is part of series pushing for a universal basic income, which I think is the wrong direction and ignores the value of work in creating meaningful life.
The Information Technology and Innovation Foundation doesn’t think much of “middle-out economics,” the recent progressive rebranding of Democratic redistributionist policies:
Regardless of the label it is wrapped in, middle-out economics is still fundamentally Keynesian in its logic, emphasizing consumption and the demand side of the economy while giving little attention to production and the supply side. Indeed, the report’s entire policy framework rests on a central, but ultimately flawed assumption: that increased demand for goods and services is the primary driver of economic growth. According to this logic, spending—not investment—drives growth. This means that, because higher-income people save more, there is a compelling argument for funneling a greater share of economic output to the “middle class” (a catchall term for roughly the bottom 80 percent of the income distribution). The political genius of this framing is that it marries the progressive cause of fairness with the political imperative of framing any economic agenda in growth terms.
Postwar Keynesian demand-side framing argued that robust demand was needed to keep the economy at full employment and avoid recessions. But in the past 15 years, the Keynesian left has attempted to modernize this narrative around long-term growth. In 2000, in their book Growing Prosperity: The Battle for Growth with Equity in the Twenty-First Century, liberal economists Barry Bluestone and Bennett Harrison were among the first to recast the rationale, arguing that increased demand spurred increased business investment: “[W]hat initially energized the post WWII economy boom had less to do with supply-side factors [like technology] and more to do with extraordinary buoyant demand.” But they went on to argue that consumer demand led companies to invest more in growth-enabling factors like machines. …
In other words, it is not the rate of return on investments (e.g., tax rates on business, interest rates, regulatory climate, etc.), nor the supply of investment opportunities (e.g., the pace of technological innovation) that drives investment; it is the expectation of growing demand. No need for an enterprise-focused growth policy; simply enact policies to transfer output to the bottom 80 percent, which will happily spend it, thereby leading business to increase output.
But this demand-side formulation fails on two counts. First, to the extent companies respond to growing demand, it is by investing in more of the same machines, used by workers doing similar jobs to produce the same goods and services for more customers. If the economy is not at full employment, this increase in demand would increase output and GDP, but it would likely do little to increase productivity (e.g., output per hour worked). If the economy is at full employment, stimulating more spending will only increase inflation and interest rates, likely reducing investment.
Second, this framing does not explain the long-term per-capita growth patterns of the last half century, which have been driven more by the development of and investment in productive technologies rather than growing demand. In fact, over the last half century, years with high consumption growth are actually associated with lower productivity growth three to five years later.13 Productivity growth slowed considerably in the 1970s despite continued increases in the workforce size and growing demand that followed. (See Figure 1.) In the late 1980s and early 1990s, employment growth moderated, but productivity increased in the following decade. This pattern might be expected given that higher consumption is likely to mean less investment. In fact, new growth theory shows that most growth in productivity and per-capita income stems from innovation (the development and adoption of new technologies).
View related content: Pethokoukis
I expect (hope) 2016 will be the last GOP presidential primary where many — if not most — candidates feel compelled to publicly dismiss the potential dangers of climate change and need for action. The science rolls on. If I only had as much evidence for my prediction. That said, I’m sure there will be a bit of hubbub about some new Jeb Bush climate comments because he only downplayed the risks of a much hotter planet rather than summarily dismissing them as the products of a vast, left-wing, scientific hoax. Bush, via the Washington Post:
“The climate is changing. I don’t think the science is clear on what percentage is man-made and what percentage is natural. It’s convoluted,” he told roughly 150 people at a house party here Wednesday night. “And for the people to say the science is decided on this is just really arrogant, to be honest with you. It’s this intellectual arrogance that now you can’t have a conversation about it even.” … Bush said that climate change should be just “part of, a small part of prioritization of our foreign policy.” He suggested that the United States should encourage countries that have higher carbon emissions rates to reduce them. But, he added, “We’ve had a pretty significant decrease and we’ll continue on, not because of Barack Obama, but because of the energy revolution.” He credited hydraulic fracking, horizontal drilling and an increased use of natural gas for helping cut American carbon emissions. “I don’t think it’s the highest priority,” he said of climate change, “I don’t think we should ignore it, either.
Now that stance — encourage other nations to lower emissions by fracking, I guess — as I read it, seems a step backward from where Mitt Romney was during his last presidential run. Here is Romney on the stump in 2011: ”Do I think the world’s getting hotter? Yeah, I don’t know that but I think that it is. “I don’t know if it’s mostly caused by humans. What I’m not willing to do is spend trillions of dollars on something I don’t know the answer to.”
Not much there that’s different from Bush today. Yet in his campaign book, No Apology, Romney spent considerable time explaining the pros and cons of a carbon tax-payroll tax swap — a plan favored by economist and Romney adviser Greg Mankiw and many other Republican-leaning economists — before concluding “a great deal of work needs remains to be done if it is to become a viable option.” I can’t imagine that take is a viable option for GOP 2016ers today, much less supporting a cap-and-trade plan like John McCain did in 2008.
But if some Republican wants to break out of the existing policy box (the climate is changing, man’s contribution is uncertain, China won’t act so why should we?) a few of my AEI colleagues just released a budget plan that does include this version of a carbon tax, a kind of carbon tax-energy regulation/subsidy swap:
Subsidies for ethanol and other alternative fuels would be abolished, but basic research on renewable energy would be funded on the same stringent terms as other basic research. As we have discussed, business and household energy tax credits would be abolished. Regulations designed to lower greenhouse gas emissions would be repealed. In place of these measures, a tax on greenhouse gas emissions (“carbon tax”) would be imposed. The tax would take effect in 2018 at a rate of $4 per metric ton of carbon dioxide equivalent. The tax would thereafter increase at the rate of increase of the chain-weighted CPI plus 2 percent per year. The tax rate is intended to approximate the domestic social cost of carbon. In the absence of a binding and operative international agreement to curtail emissions, the United States should curb only those emissions that can be eliminated at a cost below the domestic social cost of carbon. For this reason, the rate we propose is significantly lower than commonly proposed by others.
I also recommend this Vox piece, “The arguments that convinced a libertarian to support aggressive action on climate.”
View related content: Pethokoukis
A bunch of stuff worth reading or at least giving a thorough skim:
How to reconcile great technology with lousy productivity – Andrew McAfee | “But we don’t need mismeasurement to get low or negative productivity growth, even in a time of strong tech progress, as long as two conditions are met: weak demand growth in high-productivity industries, and employment growth in low productivity ones.”
Our Schools All Have a Tragic Flaw: Silicon Valley Thinks It Has the Answer – Kevin Carey
Tesla’s New Strategy Is Over 100 Years Old – Josh Suskewicz
Inspiring Economic Growth – Robert Shiller | “Higher government spending could stimulate the economy further, assuming that it generates a level of inspiration like that of the Interstate Highway System. It is not true that governments are inherently unable to stimulate people’s imagination. What is called for is not little patches here and there, but something big and revolutionary.”
The Left’s Worst Inequality Bogeyman Attempt Yet – Scott Winship | “There is much confusion–sadly, even among top economists–about the extent to which the middle class and the poor have or have not seen improvements in living standards over the past generation.”
The Rise of AltSchool and Other Micro-schools – Michael Horn
How to Avoid the Age of Ultron – Charles Q. Choi
Bitcoin: A Remarkable Innovation and Its Limitations – Timothy Taylor | “As virtual currencies become larger, governments will insist on increased disclosure and degrees of regulation. As governments requirements rise, the advantages of virtual currencies will diminish. Another vision is that the main use of Bitcoin-like technology may not be in the area of money, but in transferring other pieces of digital property.”
Why Google’s Self-Driving Bubble Cars Might Catch On – Mark Harris
Don’t Fear the CRISPR – Ramez Naam
View related content: Pethokoukis
In my new The Week column, I write about the GOP’s problem — particularly Jeb Bush’s — with the Great Recession and Financial Crisis: Republican George W. Bush happened to be president when it happened. That is a tough-to-remove stain on the Bush brand and the GOP brand. Now as I wrote awhile back, “Obama didn’t end the Great Recession that Bush didn’t cause.” W.’s tax cuts/budget deficits/income inequality/financial deregulation aren’t the real story.
But life isn’t fair. Presidents get much of the blame or credit for what happens when happens when they’re in the Oval Office. What’s more, the economic collapse has tempered the public’s enthusiasm for pro-market policies. Now it is certainly worthwhile to try and correct the record on causality. I think the GR&FC were more or less a replay of the Great Depression where the Fed took a modest downturn in the making and made it much, much worse. In their Financial Crisis Inquiry Report dissent, Keith Hennessey, Douglas Holtz-Eakin, and Bill Thomas outline a variety of domestic and international factors: credit bubble, housing bubble, nontraditional mortgages, credit ratings and securitization, financial institutions concentrated correlated risk, leverage and liquidity risk, risk of contagion, common shock, financial shock and panic. In that same report, my colleague Peter Wallison states “the sine qua non of the financial crisis was U.S. government housing policy.”
As I write in The Week: “Perhaps Republican policymakers will eventually be successful in persuading the public that it was mainly the Fed or perhaps Fannie Mae and Freddie Mac that caused the downturn and not Bush and the big banks. But it will likely be a long, hard slog to win that PR battle. After all, most Americans still think it was Wall Street and Hoover that caused the Great Depression — even though economists have mostly blamed the Fed since the 1960s.”
Meanwhile, push for (a) policies to grow the economy both quickly and broadly, (b) higher equity capital requirement to make big banks more resilient, (c) a less debt-subsidized economy, which would also improve resiliency.
Wrote the other day about Tyler “Great Stagnation” Cowen’s theory about the “Great Reset,” the idea that the US economy –particularly the rise in living standards — is resetting at a more subdued pace. The Great Downshift, maybe. But Noah Smith isn’t all in:
First, Cowen posits that some sort of deep, underlying shift has permanently lowered our economic potential. But has it lowered the level of gross domestic product, or its trend growth rate? This isn’t made clear. The latter would be much, much worse than the former. A permanent shock to the level of GDP would mean that the damage from the recession would leave a permanent scar, but that our economy would someday resume growing at something like its old rate. But a permanent downward shock to the GDP trend would mean our economic growth would be slower in the future, eventually pushing us out of the first world and into the ranks of the middle-income countries.
My second problem is the question of why we might be experiencing a Great Reset, a term coined by University of Toronto economist Richard Florida. There are many theories for why the Great Recession (note that every event in macroeconomics is now labeled “Great”) might have left a scar. Workers, spending a long time unemployed, may have lost their skills and work ethic. Or there might have been a permanent reduction in productivity, or a permanent worsening of government policy. As for a permanent downturn in the economic growth trend, that would fit with Larry Summers’ idea of secular stagnation. … The problem is, we just don’t know what these “economic structures” are, or why they are failing, or why they didn’t fail before.
My third problem with the Great Reset theory is that there aren’t many historical examples of countries permanently shifting to slower growth. There are a few — Argentina used to be counted among the world’s affluent countries, but sustained poor economic policy and (probably) isolation from global supply chains steadily eroded its status, until it is now a middle-income country. But usually, countries bounce back from the big shocks, even if it takes a decade or more. Take Japan, for instance. The 1990s truly were a lost decade. But since 2000, Japan’s real GDP per working-age person has outperformed that of the U.S. or Europe. The U.S. Great Depression probably looked like a Great Reset to many, as did the stagnation of the 1970s, but both of those turned out to be temporary.
Smith finishes with this: “If creeping doom is inevitable, then so be it, but there’s no reason not to try our best to avert it.” What’s wrong with assuming (a) this is a thing and (b) it’s a thing we can reverse? Is regulatory/tax/education/infrastructure/basic research policy within a long-stretch-of-the-legs of being optimal? Don’t think so.
By deciding to raise its minimum wage 70% over the next five years to $15 an hour, America’s second-largest city is taking a big gamble with the lives and futures of some of its most vulnerable residents. Maybe economist Arindrajit Dube is correct that “the best evidence suggests that state and federal minimum wage increases have had a very small impact on employment, while moderately reducing turnover, poverty and inequality.” And maybe Jeffrey Clemens and Michael Wither are wrong that minimum wage increases “significantly reduce” upward mobility for low-skill workers who “become significantly less likely to transition into higher-wage employment.”
The debates goes on. Certainly LA’s big minimum wage hike provides an excellent laboratory for study. From the New York Times piece: “Even economists who support increasing the minimum wage say there is not enough historical data to predict the effect of a $15 minimum wage, an unprecedented increase.” So if the results don’t look good, perhaps the increase can be halted and reversed. I imagine, though, the politics of doing so would be treacherous. And as economist Don Boudeaux wrote earlier this year, “Keep in mind that if minimum-wage proponents are wrong in their analyses, then the bulk of the ill-consequences of minimum-wage legislation falls on people who can least afford to be burdened by misguided government policies.” And that would be a shame when there is a better way. AEI’s Aparna Mathur:
To my mind, a risk-free strategy to boost incomes for minimum wage workers is to expand the Earned Income Tax Credit program. The federal EITC program is now the largest anti-poverty program for non-elderly workers in the United States. It does so by encouraging work and increasing the after-tax wage for those with low earnings. Since it is a refundable tax credit, it is available as a cash payment to those without a tax liability. As per a recent estimate, almost 28 million people received over $66 billion in EITC payments for tax year 2013. The EITC has lifted an estimated 6.5 million people above the poverty line including 3.3 million children. There are other programs that help low-income households as well, such as SNAP (food stamp program) and Temporary Assistance for Needy Families (TANF). However, these are not as effective as the EITC in helping people move out of poverty. As opposed to minimum wage hikes which are potentially associated with losses in employment and less income mobility for low-skilled workers, a vast literature shows that the EITC increases employment of low-skilled adults while supplementing incomes. Studies suggest that the EITC was responsible for 60 percent of the 8.7 percentage point increase in labor force participation of single mothers between 1984 and 1996. The EITC is also associated with better healthoutcomes for children and mothers in households that receive EITC support.