Rising Inequality Has Not Been Offset by Mobility

July 13, 2008

Income inequality in the United States is typically measured with data from a survey that asks around 50,000 households what their income was in the previous year. According to these data, inequality has increased sharply since the 1970s (see the second chart here).

But this survey includes different households each year. It therefore misses any mobility — movement of households up and down in the distribution over time — that occurs. If mobility has increased, the conclusion that there is more inequality might be misleading. Even if the gap between the top and bottom increases over time, if households change places with greater frequency, the inequality of their average income — “true” inequality — may have stayed more or less the same. Rising mobility can offset rising single-point-in-time inequality.

The type of mobility at issue here is relative intragenerational income mobility. Has it increased in recent decades?

To find out, we need panel data — data for the same households (or individuals) over a number of years. There are three main sources of such data. Each suggests the same conclusion: relative intragenerational income mobility in the United States has not increased.

A standard way to assess mobility is to divide households into quintiles (five equally-sized groups) based on their income at the starting time point. Then we look at the share of each of these groups that moves up (or down) in the distribution between time 1 and time 2. More movement indicates more mobility.

One source of data is the Panel Study of Income Dynamics (PSID), a panel survey of nearly 8,000 households begun in 1969. The following chart shows the share in each of the bottom four quintiles that moved up over three successive decades beginning in 1969. (There’s no significance to the choice to show movement up; the graph could just as well show the share moving down. The point is whether the shares increase over time.) The shares were calculated by Katharine Bradbury and Jane Katz. (See also this earlier analysis by Peter Gottschalk and Sheldon Danziger.) There is no indication of an increase in mobility from the 1970s to the 1980s to the 1990s.

A second data source is income tax returns, which are analyzed in a U.S. Treasury Department report (see table A-5). The data are from a sample of returns filed by taxpayers age 25 or older in the initial year. Here too the period examined is roughly a decade. In this study there are two periods: 1987-96 and 1996-2005. The next chart shows the shares moving up in each of the two periods. Again the data do not indicate an increase in mobility.

A third data source is Social Security earnings records. These records are available since 1937. Wojciech Kopczuk, Emmanuel Saez, and Jae Song have used them to study changes in earnings mobility. They conclude that “short-term and long-term mobility among all workers has been quite stable since 1951.”

The fact that all three data sources suggest the same conclusion doesn’t necessarily mean it’s correct, but it offers good reason to favor that conclusion. Rising income and earnings inequality in the United States does not appear to have been offset by increased mobility.


Can Mobility Offset an Increase in Inequality?

July 6, 2008

Income inequality in the United States has increased since the 1970s. Has that increase been offset by mobility?

It could be. Half a century ago Milton Friedman (in Capitalism and Freedom) suggested sensibly that a proper understanding of inequality requires taking mobility into account:

“A major problem in interpreting evidence on the distribution of income is the need to distinguish two basically different kinds of inequality: temporary, short-run differences in income, and differences in long-run income status. Consider two societies that have the same distribution of annual income. In one there is great mobility and change so that the position of particular families in the income hierarchy varies widely from year to year. In the other, there is great rigidity so that each family stays in the same position year after year. Clearly, in any meaningful sense, the second would be the more unequal society.”

Some find the following metaphor (originally from Joseph Schumpeter) helpful. Think of an apartment building with units of varying size and quality. It has a few penthouse suites that are large and feature lots of amenities, a multitude of modest two-bedroom units, and a number of barebones single-room units. This is inequality. Suppose, however, that the residents regularly switch units. Most people live much of the time in the low- or mid-level units, but they go back and forth between these, and many occasionally get to live in a penthouse suite. This is mobility. (Specifically, it’s relative intragenerational mobility.) This mobility reduces the amount of inequality — true, genuine, long-run inequality — among the residents.

Income mobility does reduce income inequality. When inequality increases, however, mobility has to also increase if it is to offset that rise in inequality.

This is a simple, perhaps obvious point. But it’s an important one. The rest of this post illustrates it with the aid of some graphs.

To begin, imagine 100 households at two points in time. Suppose, for simplicity, that there are five different incomes in the society at time 1 and one fifth of the households have each of these incomes. (It’s not important for the illustration, but the incomes I use in these charts are the average after-tax incomes of the five quintiles of the U.S. income distribution in 1979 and 2005. The data are here.)

In one scenario, shown in the first chart, no household’s income changes from time 1 to time 2. Each household’s average income is therefore the same as its income at each point in time. “True” inequality — inequality when income is averaged over time 1 and time 2 — is the same as single-point-in-time inequality.

In another scenario, depicted in the second chart, the income levels stay the same at the second point in time. The level of single-point-in-time inequality is thus the same at time 2 as at time 1. But some of the households switch places. Some that start with the lowest income move up to the lower-middle, others to the middle, and a few to the top two incomes. Similarly, some that begin at the top stay there, while others move down.

For each household, the plus (+) and hollow circle (o) indicate its income at time 1 and time 2, respectively, while the solid marker (♦) is its average income. The pattern of the solid markers makes it clear that inequality of average income is lower in this scenario than in the first chart; lots of households’ average income is in between the five levels of the first chart. The Gini coefficient confirms this. The Gini is a standard measure of inequality; it ranges from zero to one, with larger numbers indicating greater inequality. The Gini for average income in the mobility scenario is .286 (second chart), compared to .320 in the no-mobility scenario (first chart).

Now consider what happens when single-point-in-time inequality increases from time 1 to time 2, as has happened in the United States since the 1970s.

The third chart shows a society in which inequality increases from time 1 to time 2 and there is no relative mobility. With the rise in single-point-in-time inequality, inequality of average income is greater than in the first chart. The Gini is .373 in the third chart, compared to .320 in the first chart.

Can mobility offset this rise in inequality? The fourth (and last) chart shows a scenario in which single-point-in-time inequality increases exactly as it did in the third chart but there is relative mobility. The amount of mobility is the same as in the second chart; the same number of households move up or down among the quintiles and by the same (relative) amount.

Mobility does reduce “true” inequality compared to the no-mobility scenario depicted in the third chart. But the Gini coefficient for the fourth chart is much larger than for the second chart. These two scenarios have the same amount of relative mobility. But with single-point-in-time inequality having risen in the fourth scenario between time 1 and time 2, the same degree of relative mobility does not produce the same amount of “true” inequality (inequality of average income).

The bottom line: Income mobility helps to reduce income inequality. But if single-point-in-time inequality rises, mobility can only offset that rise if it too increases.

Single-point-in-time income inequality has risen sharply in the United States since the 1970s. Has mobility increased too? Stay tuned.


Types of Mobility

July 4, 2008

Has income inequality increased? Is inequality greater in the United States than in other affluent countries? Answering these questions requires taking mobility into account. Over the next few weeks I’ll put up several posts on this.

When social scientists or policy makers talk about mobility, they often mean different things. Here are a few key distinctions:

1. Income or occupation?

Traditionally, sociologists have tended to examine occupational mobility while economists have been more interested in mobility of earnings and income. In recent years this distinction has faded somewhat, with scholars in both disciplines concentrating mainly on income and earnings.

2. Intergenerational or intragenerational?

Intergenerational mobility refers to movement between generations. The question is typically something like: How does a person’s income compare to that of her/his parents? Intragenerational mobility, in contrast, refers to movement up or down within generations — over the life course. Research on intragenerational mobility examines how people fare during their working career compared to how they were doing at, say, age 18 or 25 or 30.

3. Absolute or relative?

Absolute intragenerational mobility refers to changes in income compared to the income one started with. Suppose a person begins her working career with an income of $25,000. If a decade later her income is $30,000 (adjusting for inflation), she has experienced upward absolute intragenerational income mobility.

Relative intragenerational mobility refers to the degree to which individuals move up or down compared to others in their cohort. Suppose a person’s income increases from $25,000 at the start of his working career to $30,000 a decade later, but most people who began their work life around the same time experience a larger increase. The person has experienced upward absolute mobility but downward relative mobility.

For intergenerational mobility, the distinction between absolute and relative is analogous. If a person’s inflation-adjusted income is $30,000 and her parents’ was $25,000 at a comparable point in life, she has experienced upward absolute intergenerational income mobility. Because of economic growth, we expect that such upward mobility will be the norm. The interesting question concerns the degree of upward absolute mobility and how it changes over time.

Relative intergenerational mobility depends on one’s place in the distribution. If a person’s income puts him at the 75th percentile of the distribution and his parents were at the 50th at a comparable point in their lives, he has experienced upward relative intergenerational mobility.

Relative mobility is a zero-sum phenomenon. If one person moves up in relative terms, another by definition must have moved down. Absolute mobility is not zero-sum. Both are of interest.


Links: June 2008

June 30, 2008

U.S. economy

Why it’s worse than you think, by Daniel Gross

Embedded vs. non-embedded inflation, by Paul Krugman

Why central banking is no longer boring, by Guido Tabellini

Living standards, poverty , inequality, well-being

What if Adam Smith was right about poverty?, by Don Arthur

A financial transactions tax, by Dean Baker

Should the government make us happy?, by Ryan Blitstein

The rise in American inequality, by Ian Dew-Becker and Robert Gordon

Social mobility: the nasty arithmetic, by Chris Dillow

Upward intergenerational mobility in the United States, by the Economic Mobility Project

How big government got its groove back, by William Galston

The end of summer vacation, by Steven Greenhouse

Shaky economic times are shakier for women, by Heidi Hartmann

Schools, skills, and synapses, by James Heckman

A new social contract, by Michael Kazin and Julian Zelizer

Surging wage growth for topmost sliver, by Lawrence Mishel

Inconspicuous consumption, by Virginia Postrel

Trends in men’s earnings volatility, by Donggyen Shin and Gary Solon

Is income inequality really rising? For whom?, by Justin Wolfers

Taxes

Tax evasion, 2008, by Clive Crook

What the Obama and McCain tax plans would mean for real taxpayers, by Howard Gleckman

Fiscal poison pill, by Paul Krugman

Three questions for McCain, by David Leonhardt

A preliminary analysis of the 2008 presidential candidates’ tax plans, by the Tax Policy Center

Obama and McCain: Who would pay taxes?, by Bernard Wasow

Health care

A fresh look at health care reform, part I and part II, by Maggie Mahar

Health care in the Netherlands, by Maggie Mahar and Niko Karvounis

The Emanuel-Fuchs voucher system proposal, three parts (here, here, and here), by Ezra Klein

Financing the U.S. health system: issues and options for change, by Meena Seshamani, Jeanne Lambrew, and Joseph Antos

Housing

Housing slump rivals deepest slowdowns in 60-plus years, by Amy Hoak

What can the US government do to put you in a new home tomorrow?, by Ezra Klein

Home not-so-sweet home, by Paul Krugman

Education

A broader, bolder approach to education, by Helen Ladd, Pedro Noguera, Tom Payzant, and others

Does education really make you smarter?, by Norman Nie and Saar Golde

Summer learning, summer losses, by Christina Satkowski

Cities

A league table of liveable cities, by Tyler Brûlé

The urbanist party, by Felix Salmon

Density and intercity rail, by Matthew Yglesias

Trade

This global show must go on, by Tyler Cowen

Migration

World’s refugee count in 2007 exceeded 11 million, U.N. says, New York Times

Labor’s ambivalence on immigration, by Roger Waldinger

Milton Friedman’s argument for illegal immigration, by Will Wilkinson

Environment

The European Union’s emissions trading system in perspective, by Denny Ellerman and Paul Joskow

Carbon clincher, Financial Times

U.S. politics

The general election map, by Marc Ambinder

Rumors the Obama campaign shouldn’t try to correct, by Christopher Beam

Obama rides the wave, by Thomas Edsall

Ranking states by the liberalism/conservatism of their voters, by Andrew Gelman

Democrats in Congress, by Ezra Klein

Democratic primary fight is like no other, ever, New York Times

The fall of conservatism, by George Packer

True campaign reform: bring people into politics, by Theda Skocpol

Jason Furman, Social Security, and Wal-Mart, by Mark Thoma and others

Abroad

Turkey turns away from the future, by Cengiz Aktar

Let us now praise coups, by Paul Collier

Norway’s wealth: not just oil, by Thorvaldur Gylfason

Exodus of the Polish plumber, by Andrew Leonard

Italy gives cultural diversity a lukewarm embrace, New York Times




Making Ends Meet on $300,000 a Year

June 24, 2008

BusinessWeek’s June 16 issue has a story on the “not-so-rich” rich. It asks “Just what does it mean to be wealthy these days? … Many facing higher taxes [if Barack Obama is elected president] don’t consider themselves part of the exalted crowd. They have good incomes, to be sure, particularly compared with the median household income of $48,200. Of the 149 million households filing federal income taxes for 2006, some 3% reported income between $200,000 and $500,000; fewer than 1% claimed income above half a million dollars.” The article goes on to cite comments by a few others in this income range who say they feel “stretched” and “middle class at best.”

It would help to have a sense of what a household budget at this income level might look like. Here’s an attempt at one. I assume two employed adults and two preschool-age children. I use a pretax income of $300,000, which comes to $25,000 a month.

A lot of this — loan payments, property taxes, savings, child care expenses, and others — will vary depending on household circumstances. But are there any significant errors or omissions here?

Calculations by the Tax Policy Center suggest that Obama’s plan would increase taxes for this type of family by perhaps $6,000 a year, or $500 per month (about 2% of pretax income). Is that too much to ask? You be the judge.


The Obama and McCain Tax Plans

June 24, 2008

Bernard Wasow at the Century Foundation has a nice post on Obama’s and McCain’s tax proposals. He uses estimates by the Tax Policy Center to try to answer two key questions:

  1. What will happen to total tax collections under the two candidates’ proposals?
  2. How will taxes and after-tax income change for households at various points in the income distribution under the proposals?

Euro 2008

June 19, 2008

Game on! Quarterfinal matchups:

Germany vs. Portugal (Thursday)

Croatia vs. Turkey (Friday)

Netherlands vs. Russia (Saturday)

Italy vs. Spain (Sunday)

Hope: based on their first-round form coupled with history of disappointment, I’ll root for Portugal, the Netherlands, and Spain, and perhaps for a Portugal-Spain final.

Expectation: a final that includes Germany or Italy, quite possibly both.


Nixonland: One, Two, or Many Americas?

June 17, 2008

Rick Perlstein’s Nixonland is a terrific book. It’s a fascinating history of American society and politics from 1965 to 1972, nicely woven together in a compelling and exceptionally well-written narrative. I had such a hard time putting the book down that it nearly spoiled my recent family vacation.

Nixonland aims at more than a historical recounting. Perlstein suggests that during these years Americans increasingly divided into two political groups, and these groups’ opposition to one another grew more intense and passionate. Here’s how he puts it on the book’s penultimate page (p. 747): “I have written of the rise, between the years 1965 and 1972, of a nation that had believed itself to be at consensus instead becoming one of incommensurate visions of apocalypse: two loosely defined congeries of Americans, each convinced that should the other triumph, everything decent and true and worth preserving would end.”

It’s difficult to read the book and not be at least somewhat convinced. The 1960s brought enhanced government support for economic security and opportunity via Lyndon Johnson’s “Great Society” programs, civil rights legislation that opened economic and social doors for racial minorities and women, and massive cultural liberalization among young Americans. Yet it also brought a backlash. Hence the remarkable contrast between the 1964 and 1972 presidential elections — two of the most lopsided in American history, the former yielding an activist-government Democratic president, the latter a law-and-order Republican. And stunningly, given the seemingly inexorable liberalization of the mid-to-late 1960s, Republicans have won seven of the ten presidential elections since 1964.

Perlstein is at his best in providing insight into the motivations behind the backlash: the overwhelming sense of chaos, disorder, violence, insecurity, change — urban riots by frustrated African Americans, widespread drug use, disintegration of authority on college campuses and in public spaces, the seeming impotence of the American military in a poor Asian nation, unruly protesters at the Democrats’ 1968 political convention, exploding crime rates, horrific murders in once-calm suburban neighborhoods. The changes were fast, furious, and, to many ordinary Americans, frightening.

It isn’t only the historical facts that persuade. It’s also Perlstein’s telling of them. He steps quickly from one aspect of change to another, digs deeply into a particular event, such as the Newark riots or an antiwar rally, and then jumps abruptly to another and another. The prose is vivid and punchy. Without going overboard, it conveys the feel of growing chaos.

Is Perlstein right about what happened during these years? Did America harden into two warring camps? I think an argument can be made that something very different occurred: the developments of the 1960s coupled with (and accentuated by) Nixon’s political tactics opened up new fissures that left the political landscape not more crystallized, but more clouded. Instead of shifting from (more or less) one America to two, the shift was, arguably, toward a greater multiplicity of political identities that the two political parties had to struggle mightily to try to shape into manageable coalitions.

After the New Deal, economic policy was the chief fault line between Democrats and Republicans. The political legacy of the 1960s is the diminution of one incongruous aspect of American party politics, the Democrats’ dominance in the conservative south, but simultaneously the growing importance of issues that cut across the economic divide:

Race. With the 1964 Civil Rights Act, Democrats became not only the party representing the economic interests of the lower and middle classes, but the champions of economic opportunity for black Americans — and soon of integration of neighborhoods and schools.

Cultural norms about authority, sex, drugs, appearance, and public behavior

Crime

Gender relations in the home and at work

Foreign policy

Separation of church and state

The environment

Socio-political status. One of Nixon’s chief contributions to altering the fault lines in American politics, according to Perlstein, had to do with social and political status. Nixon always felt himself an outsider. In college he formed a club, the “Orthogonians,” composed of self-perceived commoners, hard-working strivers excluded from the well-bred, elitist, condescending “Franklins.” Beginning with his 1952 “Checkers Speech,” in which he invoked his family’s humble financial circumstances and his wife’s “respectable Republican cloth [as opposed to mink] coat,” Nixon played up seeming incongruity of rich Ivy-league-educated Democratic politicians claiming to speak and govern on behalf of working- and middle-class Americans.

It’s widely recognized that these issues increasingly fractured the Democratic coalition. But they also, if perhaps less dramatically, created new rifts among Republicans.

Despite the recent popularity of the “two Americas” imagery, recent research (such as this, this, and this) suggests that the views of Americans are not especially polarized. Was it different in 1972?

This isn’t much explored by Perlstein, in part because the second half of the book, covering the period from 1969 to 1972, focuses heavily on Nixon and Vietnam. In the book’s Preface, Perlstein writes (p. xiii) “The main character in Nixonland is not Richard Nixon. Its protagonist, in fact, has no name — but lives on every page. It is the voter who, in 1964, pulled the lever for the Democrat for president because to do anything else, at least that particular Tuesday in November, seemed to court civilizational chaos, and who, eight years later, pulled the lever for the Republican for exactly the same reason.” I think that’s accurate for the first half of the book. But in the second half the story is much more about Nixon himself than about those voters.

Throughout this latter part of the book I wanted to hear less about what Nixon was thinking and what he and Abbie Hoffman and the Weathermen were doing (though that’s plenty interesting) and more about what those voters were thinking. For instance, were they still, in 1970 and 1972, concerned about the urban riots that are front and center in Perlstein’s discussion of 1965 and 1966? His description of post-1968 developments is focused almost entirely on Vietnam and the counterculture, with very occasional and brief mentions of crime and busing. Notwithstanding the book’s considerable virtues, I finished it feeling just as uncertain as before about the political sensibilities of the “switchers” that Perlstein sees as his protagonist.

Were they, by 1972, committed Republicans? Or was their vote for Nixon largely a function of the perceived extremism and stumbling campaign of the Democratic presidential nominee? After all, as Perlstein notes, in the same 1972 election in which McGovern was pummeled, the Democrats lost only twelve seats in the House, maintaining a majority of more than fifty, and gained two in the Senate.

Were there really two Americas in 1972, or had political views and allegiances instead become, like the events of the preceding years, increasingly chaotic and confused?


Measuring Living Standards: The Family Road Trip

June 6, 2008

For many American households, incomes have been stagnant over the past generation. But (lack of) change in incomes isn’t necessarily a good indicator of change in living standards.

On the one hand, as Elizabeth Warren and others have pointed out, the cost of some key middle-class consumption items — housing, health care, and college — has increased much more rapidly than the consumer price index. And inflation-adjusted income data don’t capture important aspects of quality of life such as commuting time, work stress, and crime, which have gotten worse for some people over the past several decades.

On the other hand, income data also fail to capture many ways in which living standards have improved. Consider the quintessential American middle-class summer ritual: the family road trip. In 1974 my parents drove us from Atlanta, where I grew up, to Phoenix, where one set of grandparents lived. My wife and kids and I have just done the reverse, driving from our home in Tucson to Atlanta to visit my parents and siblings.

Some things haven’t changed: You still get in an automobile and drive 1800 miles over three(ish) days. Food at most freeway exits isn’t much different than it was a generation ago; Subways have replaced Stuckeys, but McDonalds, Burger King, and Dairy Queen are still the chief options, and their menus still feature mainly burger-fries-soda. It’s a far cry from the Italian Autogrill.

One thing has gotten worse: Gas is, at the moment, almost twice as expensive as in 1974.

Yet there are a host of ways in which the family road trip has gotten better:

In 1974 my parents drove a Chevy station wagon. We now drive a Toyota minivan. Toyotas, largely unknown to Americans prior to the late 1970s, are comparatively reliable. And the minivan gets better gas mileage. Also, the fact that it’s a minivan means an adult can walk (sort of) to the back to separate quarreling kids, something my parents were unable to do as my brothers and I bickered our way across 800-plus miles of Texas.

Freeway speed limit: 55 in 1974, it’s now 70 or 80 on much of the I-10 and I-20 stretch that takes you from Arizona to Georgia.

Cruise control.

Cell phones. What a convenience to be able to chat with friends and relatives during the seemingly endless drive, or to get a listing of hotels in the next town and make a reservation at the last minute.

Portable DVD players. On our 1974 trip we listened to Robin Hood on a portable tape player. My kids now watch the video version. Both are fun, but videos are more entertaining and hold kids’ attention for longer stretches.

Music. In 1974 there were no CDs, iPods, or satellite radio.

Laptop computers.

The internet, and wireless access to it.

MapQuest (we don’t yet have GPS).

A number of fast-food restaurants now have enclosed play areas, helpful for letting kids blow off some steam.

Hotel breakfast. Each night one of my parents would drive to a grocery store to buy milk and cereal, then put the milk on ice, so that we could eat a quick inexpensive breakfast before heading out the next morning. Now we walk to the hotel lobby for breakfast and choose from a half-dozen cereals, pancakes, eggs, orange juice, coffee, and so on.

More public rest stops across the south seem to have shaded areas and clean restrooms.

It appears to me there’s less litter on highways these days.

Starbucks. A decade from now minivans may come equipped with an espresso maker in the dashboard. For now the availability of decent coffee at semi-regular intervals is a big help to those of us for whom conversation and music and breaking up kids’ squabbling isn’t quite sufficient to ensure constant alertness at the wheel.

For more on changes in quality of life, this book is a good place to start.


Links: May 2008

May 30, 2008

U.S. economy

A feeble recovery, by Josh Bivens and John Irons

Success breeds failure, by Paul Krugman

Living standards, poverty, inequality, well-being

Inequality and prices: does China benefit the poor in America?, by Christian Broda and John Romalis

Time in our hands, by Steven Cave

Black America: nearer to overcoming, The Economist

Do the right things, Financial Times

Income inequality seen as the great divide, Financial Times

Working families and economic insecurity in the states, by Shawn Fremsted, Rebecca Ray, and Hye Jin Rho

Pain and inequality, by Kathy G.

Was it easier being a mother in 1908?, by Marilyn Gardner

Controversies about the rise of American inequality: a survey, by Robert Gordon and Ian Dew-Becker

The rising instability of American family incomes, 1969-2004, by Jacob Hacker and Elizabeth Jacobs

The minimum wage merry-go-round, by Ezra Klein

Graduates versus oligarchs, by Paul Krugman (via Mark Thoma)

Seeing inflation only in the prices that go up, by David Leonhardt

People aren’t losing their jobs as much as they’re losing hours, by Matt Lewis

Nation’s poorest 1% now controls two-thirds of U.S. soda can wealth, The Onion (via Alex Hicks)

A land where CEOs have stopped smiling, by Sam Pizzigati

Do employees care about their relative position?, by Benno Togler, Markus Schaffner, Sascha Schmidt, and Bruno Frey (via Chris Dillow)

Taxes

A wake-up call for global tax cheats, BusinessWeek

President Bush has made tax day easier for the rich, at the expense of everyone else, Citizens for Tax Justice

The official word on whether capital gains tax cuts increase revenue (it’s no), by Justin Fox

The invisible hand is shaking, by Robert Frank

Forget death and taxes; how about health and taxes?, by Howard Gleckman

Lessons from Massachusetts for states considering a property tax cap, by Phil Oliff and Iris Lav

Tax policy and the house price bubble, by Thomas Palley

Taxes, Warren Buffett, and paying my fair share, by Justin Wolfers

Trade

Trade, jobs, and wages, by Josh Bivens

Free-trader fear mongering, by Dani Rodrik

Larry Summers commentary

The free-trade paradox, by James Surowiecki

How to preserve the open economy at a time of stress, by Martin Wolf

Housing

Stranded in suburbia, by Paul Krugman

Mortgage holders find it hard to walk away from their homes, New York Times

The scars of losing a home, by Robert Shiller

Keeping families above water, by David Wessel

Health care

Even the insured feel strain of health costs, New York Times

Education

The politics of human capital, by Don Arthur, Will Wilkinson, Mark Thoma

In the basement of the ivory tower, by “Professor X”

U.S. politics

What would Buddha do?, by Jared Bernstein

Skirting Appalachia, by Charles Blow

White voters, Obama, and Appalachia, by DHinMI

Vote like thy neighbor, by William Galston and Pietro Nivola

The white working class: forgotten voters no more, New York Times

Will Obama unify the Democratic party?, by John Sides

Abroad

How much does it cost to combat world hunger?, by Dean Baker

$1.25 a day, by Chris Blattman

Should Canada, Australia, and Sweden ignore most of the world?, by Chris Blattman

No wonder Iceland has the happiest people on earth, by John Carlin (via Tyler Cowen)

Paul Collier on the food crisis

Does military intervention work?, by Paul Collier and Bjørn Lomborg

New Labour and the strategy of insecurity, by Chris Dillow

On the poverty line, The Economist

The Copenhagen consensus, by Robert Kuttner

For Europe’s middle class, stagnant wages stunt lifestyle, New York Times

The new development economics, by Dani Rodrik

The rich get hungrier, by Amartya Sen

Rising wages are the least of Europe’s worries, by Andrew Watt

The growth report, World Bank Commission on Growth and Development

Miscellaneous

People are changing their minds about homosexuality, by Tina Fetner

Gay marriage support and opposition, by Charles Franklin

Top ten reasons to go vegetarian, by Bruce Friedrich

Time for Harvard to move?, by Greg Mankiw

America needs the United Nations, by Mark Mazower

In economic terms, recycling almost pays, New York Times

On the relationship between journalism and social science, by John Sides

Humor for graduate students, by Lee Sigelman


Sweden: Image and Reality

May 26, 2008

Sweden is often viewed as either social democratic paradise or lefty hell, depending on one’s political and economic orientation.

Parts of the popular image are true. Sweden has a strong political left; the Social Democratic party was in power continuously for more than four decades in the middle of the 20th century and has alternated in the government since then (it’s out at the moment). Around 80% of employed Swedes are union members, and 30% are employed by the government. More than half of the country’s GDP passes through the government in taxes, and government spending on redistributive transfers and public services is among the highest in the world. Income inequality is among the lowest. Female employment is high, and the gender pay gap is low. A 2008 Newsweek index of environmental performance put Sweden at the top. It is ranked as one of the world’s most peaceful nations.

Like all countries, though, Sweden is more complex than the stereotype suggests. Here are a few things that may surprise.

Surprises for the left

1. The country has a strong work ethos. The welfare state is generous, but most able-bodied Swedes of working age are expected to be employed. During the 2000s the Swedish employment rate has averaged about 74% of the working-age population, two percentage points higher than in the United States. The share of working-age Swedish households with no employed adult is 5%, the same as in the U.S.

2. Embrace of globalization. Exports and imports total around 45% of Swedish GDP, compared to 15% in the United States. Swedish policy aims to encourage trade and to cushion the adverse impact this inevitably has on some, ensuring their incomes remain at a decent level while they’re unemployed and facilitating transition to a different firm and/or occupation.

3. School choice. Since the early 1990s government funds have been provided not only to public elementary and secondary schools but also private ones, and parents are permitted to choose which school their children attend. This comes with strings attached: private schools wishing to receive the funding cannot base admission on ability, religion, or ethnicity. But in other relevant respects the public schools are forced to compete with private ones.

4. Partially privatized pensions. In the late 1990s a social democratic government introduced a “privatized” element into the Swedish pension system. 2.5% of employee earnings are put into a defined-contribution component. The employee has a variety of choices about how the money is invested. (A key difference between this reform and the one proposed by President Bush several years ago for the U.S.: Swedish payroll taxes were increased so that this added to the existing system, rather than replacing part of it.)

Surprises for the right

1. Sweden has a competitive economy. In the World Economic Forum’s 2007-08 “competitiveness index,” Sweden placed 4th out of 131 nations. It has been in the top ten, often among the top five, throughout this decade. Like the other Nordic countries (Denmark, Finland, Iceland, and Norway), Sweden has been successful at adapting to the shift from manufacturing to services and to a more globalized and competitive economic environment. These economies have done particularly well in high-tech industries. This owes to, among other things, high-quality educational systems, excellent public infrastructure, heavy R&D investment, and commitment to adaptation.

2. High mobility. For a long time the consensus view among researchers was that egalitarian countries such as Sweden have low inequality but also little mobility, whereas the United States has more inequality but also greater opportunity for upward and downward movement. Recent findings suggest this is wrong. Mobility in Sweden, both between generations and over the life course, is at least is great as in the United States and likely greater.

3. The poor are well-off absolutely, not just relatively. Critics of high taxes and generous government benefits sometimes imagine that these destroy economic growth, so that countries like Sweden have low inequality but also low absolute living standards. In fact, the incomes of those at the bottom of the distribution in Sweden are similar to those of their American counterparts. And Swedes work far fewer days and hours to get those incomes. They also enjoy more plentiful and higher-quality public services, from schools to child care to health care to public transportation to roads and parks.

4. Sweden is heterogeneous. Those skeptical about the applicability of Swedish policies and institutions often argue that to the extent Sweden “works,” it’s because it has an extremely homogeneous population. That was likely true half a century ago, but these days Sweden’s immigrant (foreign-born) share is virtually identical to America’s, at about 13% of the population. What effects this may have over the long run are hard to anticipate, but it’s been that way for more than a decade now.


More on Inequality and Prices

May 21, 2008

Will Wilkinson defends the notion of separate price indexes for the poor and the rich. I don’t have a problem with that per se. The point I tried to make in my previous post concerns its relevance for our assessment of how much inequality has increased.

In his original post on this, Wilkinson writes “If you think economic inequality matters, that’s because you think relative economic well-being matters. If you think economic well-being matters, then what you care about is consumption, not income.” I disagree. We should care about inequality of income not simply because it contributes to inequality of well-being, but also because it contributes to inequality of capability.

Even if consumption inequality has increased only a little, the rise in income inequality has produced a noteworthy increase in inequality of capability. The rich aren’t forced to purchase goods and services whose prices have increased more rapidly; they could switch to the same consumption bundle as the poor if they wished.

In my view the Broda and Romalis analysis is important for our understanding of (absolute) poverty, rather than inequality. They find that the prices of goods poor Americans tend to purchase have risen less rapidly than the overall inflation rate. I can’t assess whether they’ve accurately analyzed the data and how much measurement error the data contain. But if the finding is correct, it suggests that the trend in living standards for America’s poor was more favorable (or less unfavorable) between 1994 and 2005 than income data imply.


Inequality and Prices

May 20, 2008

Steven Levitt and Will Wilkinson point to a new paper that Levitt says “shatters the conventional wisdom on growing inequality” in the United States. The paper is by Christian Broda and John Romalis, economists at the University of Chicago.

Here’s their argument: Income inequality has increased over time. But analysis of consumption data indicates that people with low incomes are more likely than those with high incomes to buy inexpensive, low-quality goods. In part because those goods increasingly are produced in China, their prices rose less between 1994 and 2005 than did the prices of goods the rich tend to consume. Hence the standard measure of inequality, which is based on income rather than consumption, greatly overstates the degree to which inequality increased. The incomes of the rich rose more than those of the poor, but because the cost of living increased more for the rich than for the poor, things more or less evened out.

Their point that the prices of some goods have risen less than the overall inflation rate, and that this is due in large part to imports from China, seems perfectly valid and worth making. It has important implications for our understanding of how absolute living standards for America’s poor have changed over time.

But I’m not sure why Broda and Romalis, or Levitt and Wilkinson, think this should alter our assessment of the trend in inequality. Do they mean to suggest that the revealed preference of the poor for cheap goods is exogenous to their income? In other words, people with low incomes simply like buying inexpensive lower-quality goods, and they would continue to do so even if they had the same income as the rich. Likewise, the rich simply have a taste for better-quality but pricier goods, and they would continue to purchase them even if they suddenly became income-poor. If this is the assumption, I guess the conclusion follows. But I can’t imagine the authors, or anyone else, really believe that.

Actually, Levitt may believe it. “How rich you are,” he says, “depends on two things: how much money you have, and how much the stuff you want to buy costs” (my emphasis).

Consumption is worth paying attention to. But income is important in its own right because it confers capabilities to make choices. What matters, in this view, is what you are able to buy rather than what you want to buy. If a rich person with expensive tastes gets an extra $100,000, she can continue buying high-end clothes and gadgets. Or she can choose to purchase low-end Chinese-made products and save the difference. Suggesting that if she opts for the former there has been no rise in inequality is not very compelling.


Has Ireland’s Rising Tide Benefited Its Poor?

May 18, 2008

I’ve just returned from a week in Ireland. Since the mid-1980s the Irish economy has achieved rates of growth not seen in a rich nation since Japan in the 1960s. Ireland’s GDP per capita grew at more than 6% per year from 1987 to 2000, and at better than 3% per year in the 2000s so far.

Has this rising tide lifted all Irish boats?

One way to judge is by examining how the incomes of those at the bottom of the distribution have changed. The standard way to do this is via the poverty rate — the share of persons living in households with an income below the poverty line. The following chart shows poverty rates in 1987 and 2000 in Ireland and two comparison countries — Sweden and the United States. The data are from the Luxembourg Income Study database.

While the poverty rate in Sweden and the U.S. fell slightly over this period, it increased in Ireland. Really? Can it be that despite massive economic growth, things got worse for Ireland’s poor?

Well, it’s true that a large chunk of the economic growth during this period was due to multinational companies. Maybe most the proceeds of the growth went to their foreign owners. Yet even if that were the case, it’s hard to imagine how the Irish poor could have been left worse off than before. Lots more people were working; the employment rate jumped from 52% in 1987 to 66% in 2000. And this didn’t just consist of adding second earners in already-high-earning households; the share of working-age households with no employed member dropped by more than half. Moreover, wage levels among low-end workers rose (the statutory minimum wage is now €8.65 per hour).

The problem here lies in the poverty measure. In cross-country comparisons, poverty typically is measured in a “relative” manner: the poverty line used for each country is 50% of that country’s median income. That’s the mesure I’ve used here. Although this type of measure has some value, I don’t think it should be the headline indicator of poverty (more here and here). It depends too heavily on the distribution of income and too little on the absolute level of income. The reason Ireland’s relative poverty rate increased between 1987 and 2000 is not that households at the bottom became worse off in an absolute sense, but rather that the incomes of those households increased less rapidly than the incomes of households in the middle of the distribution.

The following chart offers a more useful way of gauging trends in poverty. It shows incomes at the tenth percentile of the distribution in the three countries. They’re adjusted for inflation and converted into U.S. dollars. (The incomes also are adjusted for household size. They represent those for a single adult; for a household of four, multiply by two.) These data indicate a sharp improvement in the incomes of Irish households at this low point in the distribution. In 1987 they were well below their Swedish and American counterparts, but by 2000 the gap had narrowed considerably.

The rising tide does appear to have lifted most Irish boats. One might, perhaps, complain that the degree of improvement has been disappointing given all that economic growth. But that’s quite different from suggesting, as the relative poverty measure does, that things have gotten worse.

This very helpful book has more discussion and analysis.


Top Incomes in the U.S. and Abroad

May 11, 2008

A key aspect of the rise in income inequality in the United States since the 1970s is the soaring incomes of the top 1%. Is this development unique to the U.S.?

Tony Atkinson, Andrew Leigh, Thomas Piketty, Emmanuel Saez, and others have used tax records to estimate the top 1%’s share of total income in a number of countries. Leigh has made a few adjustments to enhance comparability across the countries and posted the data on his website. He has a nice paper on the issue, which includes a version of the two charts shown below. (For more data and analysis see here, here, here, here, and here.) The data are for pretax incomes excluding capital gains.

It turns out that other English-speaking countries have experienced a similar trend:

Is this, then, simply the norm? No. In other affluent nations, the top 1%’s income share has increased only slightly or not at all during this period:

What accounts for these differing developments? We don’t know. Hypotheses abound, including differences in market competition, norms, labor power, government partisanship, tax systems, corporate governance practices, and demand for entertainment, athletic, and English-speaking executive talent. Because the data are relatively new, however, there has been limited systematic analysis as of yet.