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Inequality may be up, but Americans don’t seem much more interested in economic redistribution. Economic theory suggests the opposite result. But different groups of Americans have very different views on redistribution. And that may explain this apparent puzzle. In “Support for Redistribution in an Age of Rising Inequality: New Stylized Facts and Some Tentative Explanations,” Yale’s Vivekinan Ashok, Ilyana Kuziemko of Princeton, and Yale’s Ebonya Washington find that the elderly and African-Americans are “the two groups who have most moved against income redistribution.”
Why is that? From a Brookings summary of the paper:
They then turn to an examination of elderly social policy that is unique to the U.S.: the guarantee of government health insurance, a universal right abroad but one restricted to the elderly in the U.S. Seniors have grown increasingly negative toward the idea that government should provide coverage for everyone’s medical bills, and this trend explains roughly half of the elderly’s relative decline in redistributive support. “One story consistent with the data…[is that the elderly] worry that redistribution will come at their expense, in particular via cuts to Medicare,” they write.
Looking at race, they find that while blacks are more inclined to support redistribution than whites, black support has waned over time. Even controlling for income, socio-economic variables, subjective well-being and “hot button” political issues, black respondents’ support for redistribution declines relative to other survey respondents. In other words, the two most common explanations for why voters might turn against redistribution – relative economic gains or growing cultural conservatism – do not explain why blacks have grown less supportive of redistribution over the past few decades.
Instead, the authors note that while actual black-white gaps in income and employment have not been closing over the past several decades, the difference between black and white attitudes on some economic issues has shrunk considerably. Ashok, Kuziemko, and Washington posit that although blacks are still more likely to say that success is based on “luck and help” (as opposed to “hard work”) and that the government should provide targeted assistance to blacks – “not surprising given the legacy of slavery and segregation” – they have in fact moved significantly toward the white view on these questions. Declining black support for race-based government aid explains nearly half the decline in black redistributive preferences, they write, “which only raises the question of why blacks’ support for race-based aid has fallen during a period when their economic catch-up to whites has stalled.”
Just fascinating. (more…)
President Obama pushed hard his “middle class economics” message during a Cleveland speech yesterday. And in the process, offered his take on recent US economic history:
For the first eight years of this century, before I came into office, we tried trickle-down economics. We slashed taxes for folks at the top, stripped out regulations, didn’t make investments in the things we know we need to grow. At the end of those eight years, we had soaring deficits, record job losses, an economy in crippling recession. In the years since then we’ve tried middle-class economics. Today we’ve got dramatically lower deficits, a record streak of job creation, an economy that’s steadily growing.
The president modified his usual argument just a bit to frame the economic battle as middle-out Obamanomics vs. trickle-down Bushonomics, But in the past, he has subtlety lumped Bushonomics in with Clintonomics and Reaganomics. All part of the same tax-cutting, regulation-slashing, neoliberal wave from 1981 through 2008 that overall benefited the 1% at the expense of everyone else.
Yet despite the president’s critique, many voters probably recall the 1980s and 1990s with great fondness. For instance: A 2014 Quinnippiac survey founds American consider Ronald Reagan and Bill Clinton to be the best two postwar presidents.
What’s the matter with Kansas? What’s the matter with America?
Both Reagan and Clinton pushed deregulation. Both cut taxes for wealthier Americans. Yes, inequality rose. The share of market income going to the top 1% doubled from 1981 through 2001. But it was also a period when nonfarm payrolls increased by 42 million. The employment rate rose to 63% from 59%. Median incomes — when adjusted for transfers, taxes, benefits, and changing household size — rose by 30%. While the middle class shrank, it was “primarily caused by more Americans climbing the economic ladder into upper-income brackets,” the New York Times recently noted. A recent Brookings study found that through the 1980s and 1990s, “households of virtually every type experienced large, steady income gains, whether they were headed by men or women, by blacks, whites or Hispanics, or by people with high school diplomas or college degrees.” Clearly there was a lot happening during those decades other than just the rich getting richer.
Obama’s negative take also ignores what expectations were like when the tumultuous 1970s ended. As I have written: “In 1980, there were plenty of forecasters who thought the American standard of living would decline over coming decades. Just look at all the dystopian films back then: Blade Runner, Soylent Green, Americathon, Escape from New York. Gloomy stuff.” And it wasn’t just Hollywood. Economist Scott Sumner:
Suppose you had gotten a room full of economists together in 1980, and made the following predictions:
1. Over the next 28 years the US would grow as fast as Japan, and faster than Europe (in GDP per capita, PPP.)
2. Over the next 28 years Britain would overtake Germany and France in GDP per capita.
And you said you were making these predictions because you thought Thatcher and Reagan’s policies would be a success. Your predictions (and the rationale) would have been met with laughter.
But that is just what happened. The growth, I mean, not the laughter. And there is this interesting argument for the efficacy of Reaganomics by Bruce Bartlett:
Liberals argue that the real economic effects of Reagan’s policies show that they failed. However, I believe that these critics overlook the enormous importance of breaking the back of inflation at a relatively small economic cost — certainly far less than any economist would have thought possible in 1981. Reagan’s results should be measured against the (incorrect) expectation that a far more severe economic downturn would be needed to reduce inflation. On that basis, his policies were overwhelmingly successful.
Or as Bill Clinton’s Council of Economic Advisers put it in 1994: “It is undeniable that the sharp reduction in taxes in the early 1980s was a strong impetus to economic growth.”
Hmm. Maybe it’s smart that the president has changed his argument.
From the Wall Street Journal:
The Federal Reserve opened a door to raising short-term interest rates by midyear, but offered several reasons it is still in no great rush to walk through. The Fed, in a statement issued after its two-day meeting Wednesday, dropped an assurance it had been giving the public that it would remain “patient” before acting on rates. That rules out a rate increase at its April meeting but leaves alive the possibility of an increase in June or later. The central bank said it would raise rates when it is reasonably confident that low-inflation is on track to return to its 2% target and as long as the job market keeps improving.
Which brings us to hedge-fund billionaire Ray Dalio. He warns that the Federal Reserve’s (probable) upcoming interest-rate hikes risk a 1937-style economic shock and major stock-market swoon. Now the 1937-38 “recession in a depression” lasted from May 1937 until June 1938. It was the third-worst downturn in the 20th century where, according to the Fed, real GDP fell 10%, the unemployment rate soared to 20%, and industrial production fell 32%. Until then, the US economy had been rebounding from the 1929-1933 collapse, growing 11% in 1934, 9% in 1935, and 13% in 1936. Unemployment had fallen to 14% from 25%. Then came a terrible body blow and the Mother of All Double Dips.
What happened? Topping the list is, of course, the Fed itself. Milton Friedman and Anna Schwartz blamed the central bank’s 1936 decision to double reserve requirements. Or perhaps the story’s villain is the US Treasury. Economist Douglas Irwin in a 2011 paper blamed Treasury’s December 1936 decision to sterilize all gold inflows, freezing the monetary base.
A Fed analysis of the downturn also notes the unhelpful impact of fiscal policy: “The Social Security payroll tax debuted in 1937, on top of the tax increase mandated by the Revenue Act of 1935. The changes in the net effect of government spending have been heavily emphasized as a cause of both the recession and the revival of 1937‒38.”
Finally, there is the “all of the above,” expectations argument from Gauti Eggertsson and Benjamin Pugsley, who explain the “mistake of 1937″ downturn this way:
The mistake of 1937 was in essence a poor communication policy. At the time, President Franklin Delano Roosevelt (FDR), his administration, and the Federal Reserve all offered confusing signals about the objectives of government policy, especially as it related to their goals for inflation. In the first year of his presidency, FDR had vowed to fight the drop in prices and to reflate them back to their pre-depression levels (the reference point was often understood to be the price level in 1926). By every indication, the public believed this commitment. But by 1937, the administration began expressing its alarm over excessive inflation despite the fact that prices had not yet reached their 1926 target. Vague and confusing signals about future policy created pessimistic expectations of future growth and price inflation that fed into both an expected and an actual deflation.
In Lars Christensen’s view, “it is very clear that both the Roosevelt administration and the Fed were quite worried about the inflationary risks and as a consequence increasing signaled that more monetary tightening would be forthcoming.”
So might there be a nasty market-economy reaction this time around, as Dalio fears? Well, as the WSJ notes, the sort of rate hike Fed officials are expecting works out to seven rate hikes over the course of the next 14 meetings. That is half as fast as the 2004-2006 rate increase cycle. So that is encouraging and suggests Team Yellen is trying to avoid what economist Mike Darda calls “the historical precedent of premature exits from near zero short rates” and other monetary tightenings such as Europe in 2011 and Japan in 2000 and 2006. Fingers crossed.
From “Plunging Crude Prices: Impact on U.S. and State Economies” by Mine Yücel Federal Reserve Bank of Dallas from February:
1.) An amazing change of direction.
2.) A now textbook example of the power of innovation.
3.) Down, down, down go the imports.
4.) Cheaper energy helps workers, well at least in most places.
5.) What’s next? A bit of a retracement, perhaps.
An updated Brookings report finds that “income inequality remains a salient issue in many big cities today. Moreover, they lend support to the concern that rising incomes at the top of the distribution are not—at least in the short term—lifting earnings near the bottom, even in local markets.”
Interesting, but I find that solutions bit of the report even more so:
Since the debate over the $15/hour minimum wage started in Seattle in late 2013, many other cities—including Chicago, Los Angeles, New York, and San Francisco—are considering or have enacted increases to the minimum wage locally. While the minimum wage is a potentially important means for helping low-earner households living in high-cost places, local policymakers should not ignore the other tools they have at hand—from education to economic development to housing and zoning policies—that are essential for improving social mobility and sustaining income diversity in big cities today.
Housing, housing, housing. Let me again point out Tyler Cowen’s reply to Thomas Piketty” … deregulating urban development and loosening zoning laws, which would encourage more housing construction and make it easier and cheaper to live in cities such as San Francisco and, yes, Paris.”
There’s been lots of speculation lately about the impact of robotics and other sorts of automation on workers. So this study, via VoxEU, is quite timely. From “Estimating the impact of robots on productivity and employment” by Guy Michaels and Georg Graetz:
We compile a new dataset spanning 14 industries (mainly manufacturing industries, but also agriculture and utilities) in 17 developed countries (including European countries, Australia, South Korea, and the US). Uniquely, our dataset includes a measure of the use of industrial robots employed in each industry, in each of these countries, and how it has changed from 1993-2007. … We find that industrial robots increase labour productivity, total factor productivity, and wages. At the same time, while industrial robots had no significant effect on total hours worked, there is some evidence that they reduced the employment of low skilled workers, and to a lesser extent also middle skilled workers.
So higher productivity overall and less employment for the less skilled. Indeed, the researchers found “no significant effect on the employment of high-skilled workers.” They also note that this “pattern differs from the effect that recent work has found for ICT, which seems to benefit high-skilled workers at the expense of middle-skilled workers.” So robots and AI are perhaps different kinds of automation with different impacts, at least so far. Maybe a manufacturing vs. services / factory workers vs. office workers difference.
Michaels and Graetz also estimate the economic impact of robotic automation:
We conservatively calculate that on average, the increased use of robots contributed about 0.37 percentage points to the annual GDP growth, which accounts for more than one tenth of total GDP growth over this period. The contribution to labour productivity growth was about 0.36 percentage points, accounting for one sixth of productivity growth. This makes robots’ contribution to the aggregate economy roughly on par with previous important technologies, such as the railroads in the nineteenth century and the US highways in the twentieth century. The effects are also fairly comparable to the recent contributions of information and communication technologies.
Bloomberg has two (!) editorials up regarding the Lee-Rubio tax plan and its child tax credit expansion. From “Republicans’ Middle-Class Economics”:
Which then leads to a final question: Why pay any attention at all? Mainly because it captures an emerging strain of Republican thinking in the political debate over the meaning of “middle-class economics.”
On that score, the plan is less ambitious than its authors claim, but not as feckless as its critics contend. Eliminating taxes on estates and investments certainly won’t do much to help middle-class wage earners. But an increased child tax credit would — as would, to choose but one example, streamlining and simplifying the confusing array of tax-free vehicles Americans use to save for retirement.
None of this is likely to happen in the next two years, of course. But a prerequisite for any change is expanding the range of acceptable choices. That’s what Rubio and Lee have done.
And this from “Have Kids? You Deserve a Tax Break”:
Fairly compensating parents for what their newborns will contribute to entitlement programs would require a credit closer to $10,000, estimates Robert Stein, a former Treasury official. That would surely be too costly. But Stein suggests a $4,000 credit — applied against both the income tax and payroll taxes — would be reasonable and could supplant other elements of the tax code related to kids, including the child-care credit, the dependent exemption and the adoption credit. This would simplify things, offer some relief for parents and help correct the system’s inherent bias against having children. Studies indicate that it might even boost fertility.
And it could be a boon to the poor: In 2013, the child tax credit kept some 3.1 million people out of poverty, including 1.7 million children. Keeping kids out of poverty can have lifelong benefits in terms of their educational attainment and earnings.
This approach also makes more sense than expanding the child-care credit, as many Democrats advocate. That credit subsidizes one particular cost of parenting that may not make sense for every family. And expanding it is likely to increase the price of commercial day care and to place the government’s finger on the scale in parents’ decisions about whether to work outside the home. A bigger child credit would let parents make up their own minds about how to spend the money and thus about who minds their kids.
Paying for this, of course, will require trade-offs. They ought to be debated if tax reform gets a serious airing in this Congress. (One idea: Scale back the mortgage-interest deduction, which already subsidizes parents as they buy larger homes but comes with a long and costly list of distortions.) Expanding the child credit, however, remains the right thing to do as a matter of fairness and principle — which can’t be said of every break in the Internal Revenue Code.
While there is much in Lee-Rubio that one might expect to find in a GOP tax plan — for good and ill — there is also much else that shows different thinking, or an expanded “range of acceptable choices,” as the Bloomberg comments put it. And that’s for the good.
You can believe there’s a Lieutenant Commander Data in our future without also believing he’ll be visiting soon. Economist Robin Hanson agrees with the former speculation, not so much the latter. Hanson thinks “super-robots are likely to arrive eventually” and will “eventually get good enough to take pretty much all jobs.”
Eventually, eventually. But what about right now or pretty soon? What about IBM’s Jeopardy champ Watson, Baxter the flexibly programmable robot, and the Google driverless car? And what about that scary Oxford paper that predicts 47% of US. jobs are just a decade or two from being automated away?
Well, there is evidence that automation is already having a big impact on workers, particularly those in middle-skill jobs composed of “routine, codifiable tasks,” according to economist David Autor. And this may be contributing to the “jobless” recoveries of the past three recessions. What’s more, you can thank automation for this simple chart looking at manufacturing employment and output:
And perhaps we are on our way toward a future where a small, tech-adept slice of the population has high-paying jobs while the rest will be physical therapists and high-end butlers — if most have jobs at all. Note the current recovery where GDP is expanding, jobs are being created, but median wages are going nowhere.
But let’s not get ahead of ourselves. Hanson thinks “Rise of the Robots: Technology and the Threat of a Jobless Future” by Martin Ford does just that, which is why he doesn’t much like it. Ford frets that a mostly jobless, automated world is fast approaching, Hanson writes, and thus we need to soon tax the rich heavily to fund a basic income for the rest of us. The book comes out in May, but according to the publisher description, Ford argues that “artificial intelligence is already well on its way to making “good jobs” obsolete … The result could well be massive unemployment and inequality as well as the implosion of the consumer economy itself.”
Hanson offers a numbers criticisms: For starters, that 47% job-loss figure is not rigorously calculated. And while median wages have been stagnant and the labor share of income falling, many factors are probably at play. Indeed, Autor recently wrote that “the deceleration of the U.S. labor market after 2000, and further after 2007, is more closely associated” with bursting bubbles and the rise of Chinese manufacturing than computerization. More from Hanson:
But while computer prices have been falling dramatically for 70 years, the job-displacement rate has held pretty steady. This suggests that jobs vary greatly in the computing power required to displace them and that jobs are spread out rather evenly along this parameter. We have no particular reason to think that, contrary to prior experience, a big clump of displaceable jobs lies near ahead.
And then there is Ford’s fourth reason: all the impressive computing demos he has seen lately. … . Only rarely does Ford air any suspicions that such promoters exaggerate the rate of change or the breadth of the impact their new systems will have. … And of course several generations have seen A.I. demos with just as impressive advances over previous systems.
To be fair, I have not read Ford’s book, only Hanson’s critique. But even if Ford is wrong and over the long run technology and mass employment can coexist, “the lessons of the Industrial Revolution suggest that the transition could last quite a while and could be very painful,” as AEI’s Michael Strain has written.
So why not get to work on the smart policies that would equip workers for a more automated future and are obviously good ideas on their own? Before we crank up taxes and start writing big checks to the forever jobless, how about some of these ideas from Erik Brynjolfsson and Andrew in “The Second Machine Age“: (a) improve education with higher teacher salaries, more accountability, and new digital models; (b) create more startups through less regulation and more high-skill immigration; (c) loosen intellectual property regimes; (d) more government support for scientists, including via prizes; and (e) upgrade infrastructure.
Longer-term, the MIT economists would prefer a negative income tax over a basic income since the wage subsidy “encourages people to start working and keep finding more work to do even if the wages they receive for work are low.” Another option, suggested by economist Tyler Cowen, are so-called universal 401(k) plans where government would help fund tax-free retirement accounts for lower-income Americans. I would also recommend taking a look at these ideas from venture capitalist Marc Andreessen on creating a more dynamic economy.
The prospect of an Age of Automation, whenever its arrival, is a good reason for policy action. Let’s just make sure they are the right policies.
Is the US job market back to full health? It pretty much is if you look at the “official unemployment rate” of 5.5%, a number at “the top of the 5.2%-to-5.5% range many Fed policy makers consider to be full employment, or the rate the economy can sustain without stoking too much inflation,” according to the WSJ’s Eric Morath.
Or look at it this way: If the 2015 job market reran the 2014 job market — same employment gains, labor force participation, etc. — the jobless rate at year end would be 4.5%. And as it is, monthly job growth is actually running a bit hotter than 2014.
But that single number hardly tells the whole story of the American labor market in 2015. Morath:
But other job-market measures suggest the labor market isn’t that tight. Wage growth remains tepid, a reflection of relatively weak demand for labor. A historically small share of Americans are working or looking for jobs. And a broader unemployment measure from the Labor Department, including people who have given up looking for work and those stuck in part-time jobs, remains elevated compared to the official measure. …
The disconnect is shown in the broader U-6 reading, which is 5.5 percentage points higher than the most common gauge of unemployment. In the decade before the recession began in late 2007, the average spread was 3.6 percentage points.The gap has narrowed by 0.4 percentage point over the past year, but remains stubbornly wide. The gap suggests that despite steady job creation, an unusually large number of Americans are underemployed or on the fringes of the job market.
That gap can be see in the above chart. Morath goes on to cite the work of two economists who think another 3 million jobs — about year’s worth given the rate of the past twelve months — would put the US at actual full employment. But I would also like to see what wage growth, the employment rate, and long-term unemployment look like a year from now. Inflation, too.
New York Times reporter David Leonhardt asserts that “for all their similarities, Hillarynomics (the phrase “Clintonomics” is already taken) and Obamanomics will not be identical.”
Maybe not, but the piece makes me think they’ll be pretty darn similar. For instance: Like President Obama, Clinton may seek middle-class tax cuts and pay for them through higher taxes on the rich. Would those tax hikes come through higher rates or scaling back tax breaks? Obama has done both. Would Clinton want to take the top statutory income tax rate above the current 39.6%, the top rate during hubby Bill’s administration? Similarly, as Times reporter Josh Barro wonders, would she take the capital gains tax rate above 20%, the current rate (not counting the 3.8% Obamacare tax) and the top rate during Clinton I. Back during her 2008 presidential campaign she said she would not.
Leonhardt goes on to mention a recent report put forward by the Center for American Progress’s Commission on Inclusive Prosperity, “a group with close ties to Mrs. Clinton,” which contains a number of policy suggestions. It was co-written by Larry Summers, economic adviser to Obama and Bill Clinton and focuses both on growing the economy faster and increasing labor’s share of the gains. (I would advise paying close attention his writings for clues to how Hillarynomics might evolve.)
Among its suggestions (which I summarize broadly): (a) increase support for profit sharing and employee stock ownership plans; (b) increase union power; (c) more infrastructure spending; (d) encourage home ownership through more Fannie and Freddie lending, plus principal reduction; (d) more public service jobs for young people; (e) “ensure a level playing field for global trade”; (f) raise effective tax rates on wealthier Americans; (g) more financial regulation; (h) “paid parental leave, paid caregiving leave, paid sick days, paid vacation,protections for part-time workers”; (i) more immigration at all skill levels; (j) more spending on early childhood education; and (k) executive pay reform.
Let’s say Clinton more of less adopts this “the era of big government is not over” agenda. Directionally, it seems in sync with Obamanomics, 2015 version, as seen in the president’s most recent State of the Union speech. That is to say, it would be to the left of Bill Clintonomics. It would be more skeptical of trade and Wall Street, more pro-union, and more redistributive. It would be where the Democratic Party is today, not 1999, even though candidate Clinton would surely recall the 1990s as a Clinton-led golden age. So Barack’s third term, not Bill’s, seems more likely. And the party’s slide to the left would continue.