About the author
What’s New on AEI
View related content: Pethokoukis
States have a lot of discretion over administering federal anti-poverty programs. Take Medicaid, for instance. As Chicago Fed economist Jacob Berman points out, the eligibility cut-off for a single-parent household with three kids ranges from an annual income of $50,868 in Washington DC to $2,652 in Alabama. In a new study, Berman analyzes which state have the most and least generous safety nets — supposedly accounting for living costs — including the following programs:
— Medicaid Children’s Health Insurance Program (CHIP);
— Earned income credits;
— Unemployment insurance Supplemental Security Income (SSI);
— Temporary Assistance for Needy Families (TANF);
— Supplemental Nutrition Assistance Program (SNAP);
— Special Supplemental Nutrition Program for Women, Infants, and Children (WIC);
— Worker’s compensation;
— Temporary disability insurance.
Berman’s key finding:
Vermont ranks as the most generous state with the average low-income person receiving about $26,000 in benefits. This is due largely to the fact that, using my measure, Vermont has the most generous Medicaid program and Medicaid accounts for about half of all of the programs I consider. Vermont also has its own refundable earned income credit and SSI program. Conversely, Georgia is at the bottom of the ranking since it has some of the most restrictive laws for Medicaid and TANF.
Now here is the part I find really interesting. As Berman concedes, government spending isn’t the only thing that affect living standards for low-income Americans: “Outside of the budget process, regulations influence the prices households pay for goods and services. For example, restrictive zoning laws tend to increase housing costs. Transfer payments are only part of the story.”
Here is the summary of the well-known paper that Berman links to:
Does America face an affordable housing crisis and, if so, why? This paper argues that in much of America the price of housing is quite close to the marginal, physical costs of new construction. The price of housing is significantly higher than construction costs only in a limited number of areas, such as California and some eastern cities. In those areas, we argue that high prices have little to do with conventional models with a free market for land. Instead, our evidence suggests that zoning and other land use controls, play the dominant role in making housing expensive.
Along these lines, a very nice blog post from my pal Ryan Avent on housing markets.
Too many folks on the right think Uncle Sam is fudging the economic data. Would they trust the private sector more? Here is a bit from an Atlanta Fed interview with Hal Varian, chief economist at Google, on whether the Internet can supply better data faster:
Given the predominance of new data coming from Google, Twitter, and Facebook, do you think that this will limit, or even make obsolete, the role of traditional government statistical agencies such as Census Bureau and the Bureau of Labor Statistics in the future? If not, do you believe there is the potential for collaboration between these agencies and companies such as Google?
The government statistical agencies are the gold standard for data collection. It is likely that real-time data can be helpful in providing leading indicators for the standard metrics, and supplementing them in various ways, but I think it is highly unlikely that they will replace them. I hope that the private and public sector can work together in fruitful ways to exploit new sources of real-time data in ways that are mutually beneficial.
A few years ago, former Fed Chairman Bernanke challenged researchers when he said, “Do we need new measures of expectations or new surveys? Information on the price expectations of businesses—who are, after all, the price setters in the first instance—as well as information on nominal wage expectations is particularly scarce.” Do data from Google have the potential to fill this need?
We have a new product called Google Consumer Surveys that can be used to survey a broad audience of consumers. We don’t have ways to go after specific audiences such as business managers or workers looking for jobs. But I wouldn’t rule that out in the future.
MIT recently introduced a big-data measure of inflation called the Billion Prices Project. Can you see a big future in big data as a measure of inflation?
Yes, I think so. I know there are also projects looking at supermarket scanner data and the like. One difficulty with online data is that it leaves out gasoline, electricity, housing, large consumer durables, and other categories of consumption. On the other hand, it is quite good for discretionary consumer spending. So I think that online price surveys will enable inexpensive ways to gather certain sorts of price data, but it certainly won’t replace existing methods.
It is worth reading though whole interview, especially to find out Varian’s thoughts on whether real-time data from the Internet can make economic forecasting more accurate.
The US economy just might do something in the second quarter that it hasn’t done too often of late: grow at a 4% or faster annual rate, adjusted for inflation. Economists at Deutsche Bank are looking for 4.2% real GDP growth in the period. And OECD economists aren’t far behind with a 3.9% forecast.
Now it used to be fairly common for the US economy to post a quarter of 4% or faster growth. In the 1980s (1981-1990), there were 18 such quarters. In the 1990s (1991-2000), another 18 quarters. When a big economy like America’s is growing 4% or faster, it’s really cooking. Indeed, those two decades are recalled as ones when the economy snapped out of its 1970s malaise.
But in the 53 quarters since then, the US economy has generated only six three-month periods of 4% RGDP growth or faster, including just two (4Q 2011 and 3Q 2013) during the Not-So-Great Recovery.
Of course, the bad winter weather is playing big role here. Deutsche Bank: ” … we continue to maintain the view that whatever growth was ‘lost’ in Q1 due to inclement weather will be made up in the current quarter.” Although the first print of first-quarter RGDP showed a 0.1% gain, new data suggests the economy may have shrunk by 0.2% or so.
And for the rest of the year? Well, the OECD gives the bullish case:
Economic activity is projected to pick up in 2014 once the effects of severe winter weather dissipate. Given ample corporate cash flow and an improved demand outlook, business investment should accelerate significantly. Sizable gains in asset prices have boosted household wealth, which, combined with steady progress on the labour market, should provide support to private consumption and residential investment.
Fiscal contraction is creating less of a drag on economic growth, although further consolidation at a slower pace will be needed to ensure fiscal sustainability. Monetary policy appropriately remains very accommodative, with slack remaining in the labour market and inflation remaining weak. The Federal Reserve began the process of reducing the pace of its asset purchases, which should continue through most of 2014. It will be appropriate to keep policy rates low for some time, but they are expected to begin to rise by mid-2015.
The OECD expects growth to average 2.6% this year and accelerate to 3.5% in 2015. The big question, of course, is how fast the US economy can grow over the long-term. The new Obama budget accepts a “new normal” growth potential of just 2.3%, much like the CBO does. That compares to average growth of 3.5% from 1950 through 2007. If those White House and CBO economists are correct, we might not see too many 4% quarters in the future. It should be a primary goal of policymakers to nudge growth closer to the postwar average and away from that new normal forecast. We can do better — and should.
Regarding the above chart, Keith Hall of Mercatus:
Data released by the BLS on Tuesday also highlights another concerning long-term trend holding back a more robust jobs recovery. Historically, the formation of new businesses is an important source of job growth in the U.S., and job creation through business creation was as high as 2 million new jobs a quarter in 1999. But that number has been steadily declining since then, and the third quarter of 2013 saw only 1.3 million jobs created by new business formation—an improvement from the end of recession but still below pre-2008 levels.
The subject of American business dynamism is one I’ve written a bit about. And as it happens, Brookings also is out with a report on the subject from Ian Hathaway and Robert Litan. This first chart from that report show that firm entry rate—or firms less than one year old as a share of all firms—fell by nearly half in the thirty-plus years between 1978 and 2011.
This second Brookings chart “illustrates that job reallocation—a broad measure of labor market churning resulting from the underlying business dynamism of firm expansions, contractions, births, and closures—has been steadily declining during the last three decades, and appears to have accelerated in the last decade or so.”
Overall, the message here is clear. Business dynamism and entrepreneurship are experiencing a troubling secular decline in the United States. Existing research and a cursory review of broad data aggregates show that the decline in dynamism hasn’t been isolated to particular industrial sectors and firm sizes.
Here we demonstrated that the decline in entrepreneurship and business dynamism has been nearly universal geographically the last three decades—reaching all fifty states and all but a few metropolitan areas.
Our findings stop short of demonstrating why these trends are occurring and perhaps more importantly, what can be done about it.
Doing so requires a more complete knowledge about what drives dynamism, and especially entrepreneurship, than currently exists. But it is clear that these trends fit into a larger narrative of business consolidation occurring in the U.S. economy—whatever the reason, older and larger businesses are doing better relative to younger and smaller ones. Firms and individuals appear to be more risk averse too—businesses are hanging on to cash, fewer people are launching firms, and workers are less likely to switch jobs or move.
They don’t offer a theory, but I do.
Economist Brian Wesbury and Bob Stein nicely summarize the work of the late Gary Becker:
Becker, who won the Nobel Prize in 1992, led an invasion of classical economic thought into previously sloppy and hidebound areas of study such as sociology, demography, and crime. He studied human capital. Think of it this way: Without Becker, bestselling books like Freakonomics wouldn’t even be possible.
Prior to Becker, the academic study of these topics was dominated by social determinists in general and Marxists in particular. So, for example, conventional wisdom held that people commit crime because of discrimination, overly strict fathers, capitalist oppression, or the exploitation of the working class.
Becker shoved all these simplistic (and unscientific) answers aside, applying the free-market principle that people have an incentive to pursue their self-interest not only as producers and earners but also outside the workplace.
To Becker, people commit crimes more often when they perceive that the benefits outweigh the costs. So, better policing to apprehend criminals and harsher sentences would result in less crime because they raise the potential costs of crime. To Becker, becoming a predator was a choice, like becoming an engineer, or a bus driver, or a politician (known as predators in some circles).
Becker was instrumental in developing the economic analysis of the family, fertility and marriage. He also focused on drug addiction and education. Decades ago, he analyzed education as an investment choice, with time as a key cost of investment. Becker is largely responsible for this now being the mainstream view.
One of his early path-breaking findings was that employment discrimination can hurt not only workers who are discriminated against but also the firms that discriminate, particularly in more competitive business sectors. And so, firms in competitive sectors have an incentive to hire the best workers regardless of race, ethnicity, religion, or sex.
It’s also fair to say that he didn’t think highly of the direction of economic policy in the US over the last several years. Becker noticed that the largeness of some corporations could undermine effective decision-making, but thought the problem much worse with the federal government because it was involved in so many endeavors and faced no competition at all.
Becker opposed further increases in the minimum wage, opposed Dodd-Frank, supported lower taxes on Corporate America, and argued that a larger more-intrusive government cuts economic growth.
In recent years some economists have argued that we are in an era of “secular stagnation,” where we simply have to accept slow economic growth. Becker said the theory was just another version of a similar theory that had popped up in the past, and would likely be proven untrue with time. Innovations in energy and health care could push the economy back toward a faster growth path and government policy should focus more on economic growth and less on redistribution.
The world would be a better place if lawmakers of both political parties were more familiar with his work. We’re not holding our breath waiting for that to happen. But long term shifts in public thinking sometimes start in the academic world, which Gary Becker changed for the better by challenging and enlightening, making many see the world with clearer vision than they had before.
Plenty of gloomy economic scenarios involve a financial crisis and recession in China leading to all sorts of bad stuff. For instance, a cash-strapped Beijing would begin dumping Treasuries, causing US interest rates to spike. But a new note from Capital Economics offers an optimistic take on how a recession in China would affect the US economy. Among its major points:
… a crisis in China would surely boost safe haven demand for Treasuries from elsewhere, which could lower Treasury yields. … Since the US sends only 6.5% of its exports to China, however, even an 80% drop in sales to China would reduce US GDP by only 0.7%. … The total direct exposure of US banks to China and Hong Kong is just $142bn, or 0.8% of US GDP. Even if all those loans and investments became worthless, the Tier 1 capital ratio of US banks would only fall from 13% to 12%. … The stock of US direct investment in China is $51bn. Even if all of that had to be written off, the total loss would be worth only 0.3% of US GDP. … Finally, the US economy would actually benefit if a recession in China prompted some American businesses to bring production back home, resulted in lower US inflation and led to lower commodity prices. For example, a 25% fall in oil prices would boost US GDP growth by 0.4%.
So no worries, right? This last point from the firm is less than comforting: “Of course, the US is not completely immune and financial crises have a habit of spreading to areas that previously appeared robust.”
I think I would like a thorough examination of that contagion scenario.
When economists talk about income inequality, what exactly do they mean by “income?” Usually they are talking about market income, which is, as described in an enlightening new Minneapolis Fed paper, “wages, salaries, business and farm income, interest, dividends, rents and private transfers (such as alimony and child support), of all household members.”
Then you have disposable income, which includes market income but also adds in “all government transfers (such as Social Security, unemployment insurance and welfare) and subtracts tax liabilities. This is a measure of resources actually available to household members for spending.”
Turns out that when you are analyzing income inequality trends, it makes a great deal of difference whether you are using market income or disposable income, the latter of which gives a better feel for actual purchasing power. The above chart looks at inequality — as defined by the income ratio of the 95th percentile vs. the 50th percentile — using both income measures. From the Minneapolis Fed economist Fabrizio Perri:
The blue line in Figure 1 shows that since the early 1980s, there has been a sharp increase in market income inequality at the top. That is to say, market income for the high part of the U.S. household distribution (the 95) has been growing much faster than market income for the middle (the 50).
Less well-known are the dynamics of disposable income at the top, depicted by the red line in Figure 1. This line shows that over the 1980-96 period, disposable income inequality and market income inequality tracked quite closely.
After 1996, however, the two series started diverging:Market income inequality kept increasing at a steady pace, but disposable income inequality remained roughly flat. Indeed, over 1996-2012, market income of the top grew a total of 8 percent, while market income of the middle actually fell a total of 3 percent. Over the same period, however, disposable income of the top and the median displayed more similar growth rates of 8 percent and 5 percent, respectively.
This all suggests that despite increasing inequality in market income since the early 1980s, substantial government redistribution beginning in the mid-1990s, through taxes and transfers, has kept inequality levels in disposable household income quite stable. Interestingly, a big part of this redistribution appears to have taken place exactly during the Great Recession. Figure 1 displays this in the gap between the blue and the red lines; the market-disposable gap begins to open up in 2007 and has stayed at historical highs ever since.
Moreover, the data suggest that although inequality at the top in market income is currently at its historical high, inequality in disposable income has actually been flat or slightly falling over the past 15 years. This is because government redistribution between the top and the middle (the distance between the blue and the red lines) is also at its historical high.
One way, perhaps, to look at this data is that government redistribution has been offsetting a failure by the US education system to more broadly prepare a workforce for a labor market demanding greater skills.
Lots of attention being given to a new World Bank study suggesting China may overtake the United States this year as the world’s largest economy, adjusted for living costs. But this other World Bank finding, noted by the Financial Times, is also interesting:
When looking at the actual consumption per head, the report found the new methodology as well as faster growth in poor countries have “greatly reduced” the gap between rich and poor, “suggesting that the world has become more equal”.
As the above chart shows, high-income countries in 2005 had 16.4% of global population and 60.4% of global GDP vs. 16.8% of population and 50.3% of GDP in 2011. Although income inequality within nations may be on the rise, global economic inequality between nations is collapsing.
But here’s what is really amazing: Back in 2005, low-income countries represented 7.1% of global GDP vs. 1.5% today. Now it’s not as if these nations became poorer. Rather they moved up the income ladder. In 2005, 35.4% of global population lived in “low-income countries.” Now that number is just 11.1% as more than 1 billion humans “moved” into middle-income nations which now represent 72.1% of global population vs. 48.2% in 2005.
What happened? Was it a global wealth tax? The same thing that’s been happening for a number of years in Asia. Let me again quote, as I did in the previous blog post, economist Deirdre McCloskey: “When a stable though tyrannical country like China or a turbulent though law-governed country like India started to revalue markets and innovation, and to give a partial liberty to commerce, the food and housing and education for the average person began doubling every 10 to 7 years.”
What happened? A bit more economic freedom happened. My boss, Arthur Brooks:
Since 1970, the percentage of the world’s population living on a dollar a day or less has decreased by 80 percent. Is this because of the fabulous success of the United Nations or US foreign aid? Of course not. It is because of globalization, free trade, and entrepreneurship. In short, it is because of free enterprise, which is truly America’s gift to the world’s poor.
Along these lines, the conclusion from “The world distribution of income and its inequality, 1970-2009″ by Paolo Liberati: ” … between [nation] inequality is experiencing an unprecedented decline in the last decade. Even though the bulk of this decline is due to the performance of China and other Asian countries, we have shown that a (weaker) declining trend survives even when these countries are excluded from the analysis.”
As regular readers know, I’m a huge fan of economist and historian Deirdre McCloskey. In this video, she concisely explains why two centuries ago, the world’s economy stood at the present level of Chad or Bangladesh — and now it doesn’t. A wonderful, entertaining primer on the wonder-working power of economic freedom.