Milanovic On Inequality Sources

Concern about the negative effects of inequality has led to many policy proposals. Most of our proposed policies do something like redistribute outcomes; so it’s very much looking at the end result and shifting things around to what we think is a better distribution.

On the other hand, we probably ought to be more concerned about inequality in inputs. The reason is that it’s probably less serious if two people get the same inputs and produce unequal outputs, than if we give them unequal inputs to start with.

So, what’s the source of inequality. In contemporary circles, we hear a lot of discussion about race, gender, and class as sources of inequality.

Milanovic* looks at the most important inequality: the global kind. It’s kind of morally repugnant to not focus on this aspect. Consider this: how do we justify looking at, say, some Americans, not having as much stuff as some other Americans do … when there are people in other countries who may not have enough food.

But what Milanovic shows is that most inequality globally is not determined by race and gender and class, but rather by location of your birth and who your parents are.

Specifically, about 60% of global poverty is simply bad luck: you were born into a poor region. The best short-term solution to alleviate this is to encourage people to move to richer areas. That will work, but is politically unpopular just about everywhere. But the effectiveness of this method is mind-boggling: Milanovic estimates that the typical resident of the Democratic Republic of Congo (the poorest country in his sample) can more than quadruple their income simply by moving to the U.S.

(Of course, the story all summer and fall has been refugees fleeing the Middle East and Africa into western Europe. Now you know why. Further, a dirty-little-secret of that mass migration is the extent to which it is otherwise middle class people from the Middle East — they have the money to flee, and the time is ripe.)

The longer term solution to that is economic growth. We do know that regions do converge relatively rapidly if the only differences are resources and high tech. But it is the low tech institutions that don’t transmit well across borders, so the long term solution is really go do into poor places and change their institutions. This is called nation-building, and it’s what got Bush II into trouble in Iraq (and on a lesser scale, Clinton into trouble in Somalia … you know … the backstory to the film Black Hawk Down). It’s not clear that this is a politically viable solution either.

The next fraction of inequality, about 20%, is explained by who your parents are. Roughly, if your parents are slackers, you’ll likely end up on the bad end of inequality. The best short-term solution to alleviate this is to take kids away from their parents. You can imagine how that goes over in most places.

The more heinous long-term solution is to encourage the problem parents to have fewer kids. In short, this is the policy of the Nazis, or else the softer forms of eugenics (usually involving forced sterilization) that were popular 75-100 years ago. This is not a politically viable or desirable solution either. Of course, education about family planning, and access to birth control methods is an alternative that works … but that runs into religious strictures in some locations. We can also try to “scare people straight” with more information about the scope and magnitude of the personal costs to being a parent; but it’s hard to get people to think clearly about those issues.

Here’s an interview with Milanovic. I find it interesting that the interviewer glosses over the above points, and pretty much goes straight to what can we do about race and gender. Those are hot topics, and I don’t want to dismiss people’s interest in them. But we need to be clear-eyed that they are tertiary: no matter what we do about the no-more-than-20% that is due to race and gender, it’s still going to be swamped by the 80%-that-isn’t-race-and-gender that we can’t do much about. By analogy, this is like coaching basketball by noting that there is inequality between the best and worst teams, then ignoring the dribbling, passing, and shooting, and trying to make your team better by increasing just rebounding and steals. That certainly won’t hurt, but it probably won’t win many games for you.

I love this chart drawn from Milanovic’s recent paper in the Review of Economics and Statistics.

The way to read this is to note that poorer people within a country are on the left, and the poorer people on the globe are at the bottom. So if we take the poorest people in the USA, we then go towards the right and find that they would be middle-class in China, and in the lower part of the upper class in India. But if we take those poorest people in America, we find by going downwards that they really don’t rate as poor at all on the global scale of things.

That raises a big moral question. Why is it OK to be concerned about the poor within the borders of the United States, when there are people outside our borders who are poorer? This doesn’t have good answers, But for another analogy, it’s like professors being concerned that their kids choose to eat ramen for lunch, and then go to school to teach college students who sometimes have to eat ramen for dinner. Is the professor’s concern for their own children reasonable? I’m not sure any of us know. But if we don’t know the answer to that question, why are we so sure that we need to help the not-that-poor people inside America’s borders more than the definitely poorer people on the other side?

* Milanovic, B. “Global Inequality of Opportunity: How Much of Our Income Is Determined by Where We Live?”, Review of Economics and Statistics, 2015, 97, 452-460.

Productivity In the Obama Expansion

Being more productive collectively is how well-being is improved at the individual level.

The thing is, productivity is hard to measure. What we usually do is measure it as a residual (what’s left over). We start with output growth, subtract out how much of that was due to input growth, and what’s left must be productivity growth … at least approximately.

Productivity flagged a little bit this past winter. But compared to the last 4 expansions (the ones associated with Obama, Bush, Clinton, and Reagan), productivity in this expansion looks pretty normal.

Increased productivity is also why workers get raises. The flip side of that is that owners and managers want unit labor costs to increase. This is the amount of money they get from their outputs for each dollar of inputs (labor, capital or technology).

Again, the Obama expansion looks normal. What’s abnormal is the Reagan expansion. How did unit labor costs go up so quickly when productivity didn’t go up that fast? No doubt this has a lot to do with improved efficiency during that period (why, I don’t know).

Read all about it in the article entitled “U.S. Productivity Falls 1.9% in First Quarter” in the May 6 issue of The Wall Street Journal.

Angus Deaton Wins the 2015 Nobel Prize

The 2015 Nobel Prize in Economic Science was awarded to Angus Deaton this morning.

As always, the best source about this amongst economists is Tyler Cowen and Alex Tabarrok who write Marginal Revolution. Here is Alex:

... When you read that world poverty has fallen below 10% for the first time ever and you want to know how we know— the answer is Deaton’s work on household surveys, data collection and welfare measurement. I see Deaton’s major contribution as understanding and measuring world poverty.

Measuring welfare sounds simple but doing it right isn’t easy. How do you compare the standard of living in two different countries? Suppose you simply convert incomes using exchange rates. Sorry, that doesn’t work. Not all goods are traded so exchange rates tend to reflect the prices of tradable goods but a large share of consumption is on hard-to-trade services. ... A second problem is the cheese problem. Americans consume a lot of cheese, the Chinese don’t. Is this because the Chinese are too poor to consume cheese or because tastes differ? ... A third problem is the warring supermarkets problem. Two supermarkets each claim that they have the lowest prices and they are both right! How is this possible? Consumers at supermarket A buy more of what is cheap at A and less of what is expensive at A and vice-versa for B. Thus, it would cost more to buy the A basket at store B and it would also cost more to buy the B basket at store A! So which supermarket is better? ...

Deaton’s book, The Great Escape, on growth, health and inequality is accessible and a good read. A controversial aspect of this work is that Deaton falls squarely into the Easterly camp (Deaton’s review of Tyranny of Experts is here) in thinking that foreign aid has probably done more harm than good.

Here is Deaton on foreign aid:

Unfortunately, the world’s rich countries currently are making things worse. Foreign aid – transfers from rich countries to poor countries – has much to its credit, particularly in terms of health care, with many people alive today who would otherwise be dead. But foreign aid also undermines the development of local state capacity.

This is most obvious in countries – mostly in Africa – where the government receives aid directly and aid flows are large relative to fiscal expenditure (often more than half the total). Such governments need no contract with their citizens, no parliament, and no tax-collection system. If they are accountable to anyone, it is to the donors; but even this fails in practice, because the donors, under pressure from their own citizens (who rightly want to help the poor), need to disburse money just as much as poor-country governments need to receive it, if not more so.

What about bypassing governments and giving aid directly to the poor? Certainly, the immediate effects are likely to be better, especially in countries where little government-to-government aid actually reaches the poor. And it would take an astonishingly small sum of money – about 15 US cents a day from each adult in the rich world – to bring everyone up to at least the destitution line of a dollar a day.

Yet this is no solution. Poor people need government to lead better lives; taking government out of the loop might improve things in the short run, but it would leave unsolved the underlying problem. Poor countries cannot forever have their health services run from abroad. Aid undermines what poor people need most: an effective government that works with them for today and tomorrow.

One thing that we can do is to agitate for our own governments to stop doing those things that make it harder for poor countries to stop being poor. Reducing aid is one, but so is limiting the arms trade, improving rich-country trade and subsidy policies, providing technical advice that is not tied to aid, and developing better drugs for diseases that do not affect rich people. We cannot help the poor by making their already-weak governments even weaker. 

Eating In and Eating Out

Weird things resonate with students. Professors are always looking for ideas that are “sticky” (to use the terminology popularized by Malcom Gladwell in The Tipping Point).

In Spring 2015, one of the sticky ideas was that spending on eating out has grown faster than spending on eating in, basically forever, so that now the amount we spend on either category is about the same.

Oops. That result was premature. So let me backtrack.

There is a comparison for which eating in and eating out are equal. Except that “eating in” has a pretty tight definition, and “eating out” has a pretty expansive one.

The figure quoted as “eating in” was for grocery store sales only. It did not include food bought at warehouse clubs, supercenters, or pharmacies. It doesn’t even include standalone retailers like bakers and butchers. Face palm.

The figure for “eating out” is more reasonable. But it’s not just restaurants. It’s caterers too. And bars (presumably it is counting just the food sold at bars, but it isn’t just Applebees). And it also counts contractors … like food service for SUU students (who may not really be able to cook much in their dorm rooms).

Anyway, yes, “eating out” is growing, but it’s more than just restaurants. And “eating in” is growing more slowly, but a lot of that is because we don’t go to Lin’s and Smith’s as much as we used to (or the Albertson’s, or Safeway’s that used to be located in Cedar City).

Read more about this in the article entitled “Don’t Believe the Hype: Eating In Still Tops Eating Out” in the May 15 issue of the The Wall Street Journal.

Disability Trust Fund to Run Out

This issue wears a black hat. Bwoo-ah-hah-hah-hah.

There’s likely to be some panic about this in 2016. Don’t let it bother you.

First off, there’s no trust fund. At least not in the sense that most people think of: a pile of money in an investment somewhere that can be used at any time.

Our federal government isn’t allowed to make investments for the future like you and I do, so there isn’t a sense in which it can have a trust fund for anything.

So why do we say trust fund, and what do we mean?

We say trust fund because Congress tells us that’s the name for it. But it’s a lie, and there’s no law that says they can’t lie about that.

What they mean is that they made projections way back in the past about where the money was going to come from (mostly FICA taxes withdrawn from our paychecks), said that some percentage of that was going to go to disability payments, called what they didn’t allocate a trust fund and then spent it on something else (and not necessarily something bad, they just can’t legally save it), and now they’re going to spend it (by not spending it on something else) except they expect to spend more than they pretended to save.

This isn’t as horrible as it sounds, but it isn’t good. Let me give you an analogy from my life. The family goes on vacation. My daughter brings her own money. But since she was young we haven’t trusted her with a lot of cash. So she asks me to hold it for her. And I put it in my wallet with all my other cash, and keep a mental note of how much is hers. Then I spend the cash wherever we need it. And sometimes when she finds something she wants to buy, I have to say that I have to go the ATM first because I don’t have “her” cash in my wallet any more. (I confess: it’s a tiny little bit immoral, but parents do stuff like this all the time). Oh, and she wants all her cash back right now because she wants to buy something that costs more than all the cash she gave to me in the first place, so she needs a little loan too. In the analogy, the ATM is taxpayers, I’m Congress, my daughter is the Social Security Administration, and the retailer is disability recipients.

Second off, there’s no disability crisis either. I’ve debunked this topic many times on this blog over the last several years. Instead, what we have is this big demographic hump in the labor market called the baby boomers. The economy thrived in the 80’s because they were young and healthy. The economy isn’t thriving in the teens because they’re old … and at the age where they get disabled a lot.

Americans today are about as likely as those in the past to report that they have a work-limiting disability, according to Census Bureau data. For instance, 5.6% of Americans ages 35-44 reported having a work-limiting disability in 1984, while in 2014 that figure was 5.4%. …

Yet the percentage of the working-age population collecting disability insurance benefits has more than doubled to 5.7% in 2014 from 2.7% in 1984. These increases were not anticipated …

Demographic factors have played a major role. Older workers are more likely to become disabled, and as more women entered the labor force in the 1970s and 1980s, they began receiving benefits alongside men.

And third, Congress has made it easier for some people to collect disability. But most of this happened a generation ago. It’s just catching up to us now. And don’t forget that it’s totally natural to be good-hearted and take care of more people, but also natural to blow off figuring out how to pay for that.

Congress loosened eligibility standards in 1984, allowing multiple non-disabling ailments to be combined to qualify for disability benefits. The legislature also ordered the Social Security Administration to favor evidence provided by an applicant’s medical representatives over the judgments of SSA medical professionals.

Anyway, the coming crisis is that we haven’t allocated a big enough fraction of incoming revenue to cover this. So we’ll either have to allocate more to disability (and less to other stuff), or increase taxes.

Read all about it in the article entitled “Averting the Disability-Insurance Meltdown” in the February 23 issue of The Wall Street Journal.

Bernie Sanders

As I write this in late September, the Democratic presidential campaign is in a state of flux. Hillary Clinton is still the favorite, but the train-wreck-in-slow-motion of her ethics problems has created a lot of doubters. Those folks are flocking to Bernie Sanders, the I’m-too-left-to-be-a-Democrat Senator from Vermont. Sanders has historically called himself a Socialist, but he really doesn’t have much choice to run for president other than as a Democrat.

What Sanders has proposed is to make the U.S. more like our urban myth of how western Europe is run: with a much bigger government, providing many more social services, all on the backs of the rich.

First a digression on the urban myth part. There are three aspects to this. First, the central governments of western European countries are a larger share of their economies than ours is … but … our regional governments (states, cities, counties, and especially school districts) are much larger. If you lump them all together, you’d find that government in America is a tad less than the middle of the pack for western Europe. Second, America gets knocked because we pay for much of our healthcare, and some of our higher education, with private funding. Except we also get more for what we pay for: that’s why foreigners come here for medical care and college educations. This spending is often used to beat up America about its priorities, but that’s probably misplaced since American’s don’t seem to think it’s a bad enough deal to go elsewhere for medical treatment or college educations. Third, there aren’t that many rich people to tax to pay for this. The dirty little secret of all these discussions is that total income of “the rich” is already smaller than what the government spends: if we took it all, we’d still end up short. Way short. In order to afford big increases in government spending, we can’t define “the rich” as the top 1%, or even the top 10%, instead it has to be more like top 50%. Some people are OK with that, but many of them are in denial that this includes themselves.

Anyway, let’s take Sanders proposals at face value, since they are gaining in popularity. What does Sanders propose: 1) expanding Medicare into a single payer healthcare system that covers everyone for everything (that’s 75% of it right there), 2) shoring up predicted shortfalls in social security, 3) infrastructure improvements and repairs, 4) making college more affordable, and 5) government funded family leave.

The Sanders program amounts to increasing total federal spending by about one-third—to a projected $68 trillion or so over 10 years.

For many years, government spending has equaled about 20% of gross domestic product annually; his proposals would increase that to about 30% in their first year. As a share of the economy, that would represent a bigger increase in government spending than the New Deal or Great Society and is surpassed in modern history only by the World War II military buildup.

So this is a huge deal. What I wonder is if you asked people, did Roosevelt expand government enough, or did Johnson further expand government enough, I wonder how many would say “yes” to one of those, but would still be in favor of Sanders’ proposal? Those people definitely have a cognitive dissonance issue that they need to resolve, particularly since any rollbacks in those programs by Republicans are mostly reductions in positive growth rates rather than reductions in size and scope. For the true believers who answered “no” to both, then Sanders is probably their guy.

How would he pay for this?

[Sanders] has so far detailed tax increases that could bring in as much as $6.5 trillion over 10 years, according to his staff.

This reality check is problematic.

Having said that, if Sanders does push through conversion of our healthcare system to Medicare, then everything we now spend on healthcare would be up for grabs to be taxed away. That would more than cover the cost, so we shouldn’t really argue that his Medicare proposal creates a funding problem. Of course, it creates a huge political problem because people are not going to want that stuff taxed away, but that’s another story.

What’s interesting to me about this has two parts.

First, he’s proposing the healthcare spending, without the healthcare financing. This is financially dishonest in the small ways that we’re used to from members of Congress. The thing we need to keep our eye on as macroeconomists is that the money will come from somewhere.

Second, if my assertion is correct that there’s enough healthcare spending already out there to cover his proposal, so that we’re just moving money between different accounts … then why does he need the other $6.5 billion in proposed taxes? That’s twice the remaining spending proposals.To the extent that we buy into the Keynesian view (and I’m sure Sanders does) that spending pushes the economy forward, and taxes pull it back … then Sanders proposal to have excess taxes is a plan to hit the brakes on the economy. Who does that make sense to?

You can read about Sanders’ proposals in this piece entitled “Price Tag of Bernie Sanders’ Proposals: $18 Billion” in the September 14 issue of The Wall Street Journal.

“A Career In Economics”, from the AEA

The American Economics Association (AEA) has a new video out entitled “A Career In Economics”. In it, four economics majors talk about how useful their major was for their career as someone who uses economics without being an economist.

A career in Economics...it's much more than you think from American Economic Association on Vimeo.

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