So now that I'm at Brookings this blog (for the forseeable future) will just point to my research on the Brookings site. In that regard, I'm happy to report that I've put out my first piece at Brookings--a brief post on our group blog that finds a longer-term problem with labor markets predating the recession. Enjoy, and thanks for your interest! http://www.brookings.edu/opinions/2011/0909_jobs_winship.aspx
Tyler was kind enough (or provocative enough!) to request a response to the latest Hamilton Project study showing that improving living standards are primarily about increases in hours worked. Sadly, I haven't had much time to blog lately, and I can't say much this time either. But this is a good opportunity for me to explain: I'm in a new position as a Fellow at the Brookings Institution, in the Center on Children and Families. In the medium-term, I'll actually be able to do more blogging than I have in the past (where blogging coexisted uneasily with my day job). But in the short-term, I have a big research project to manage that is going to keep me from blog debates. All I can say is thank you to everyone who has read and/or supported the blog. I couldn't have gotten my new gig without it, and I look forward to being able to re-engage in various economic debates soon.
OK, my short response to the living standards question is that everything hinges on three questions, none of which are as obviously answered as you think:
1. To what extent have the ever-growing cost of health insurance benefits eaten into wages, and have the increasing costs provided the utility to workers that they would have received if they'd just gotten extra pay?
2. How much do conventional ways of adjusting for cost of living overstate inflation, thereby understating the improvement in living standards?
3. To what extent have husbands voluntarily chosen to reduce the number of hours they work (or to work in less-highly-paid positions) as a reaction to not having to be the sole breadwinner (thanks to the revolution in women's labor force participation).
There's not really any debate about how downscale folks have fared the past few decades. The debate is about the median--typical--family. I'll dive back in this fall.
A Not-So-Beautiful Mind
Does anyone else ever turn over a paper lying around and see something like this?:
At least there aren't any Greek letters or integrals in there.
I'm never going to win a Nobel Prize. Maybe in literature. I don't know why Joseph Stiglitz's new Vanity Fair piece on inequality is so off-base. But it is. And it's incredibly frustrating (1) to see someone so intelligent be thwarted by ideology and (2) to watch as his views are propagated on the basis of his name recognition.
What's a lonely uninvited-to-Davos blogger to do? Blog. Herewith, my fact check of the VF article. Stiglitz writes (henceforth in italics),
The upper 1 percent of Americans are now taking in nearly a quarter of the nation's income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent.
Stiglitz doesn't cite any of his figures (possibly a limitation of the outlet), but the Piketty & Saez estimate of the top one percent's income share in the most recent year (2008) was 18 percent, which is just a hair closer to "nearly a quarter" than it is to "just over a tenth". Their data says that share was 9 percent in 1985, but that should be adjusted upwards to 13 percent. Similarly, CBO says the top one percent's share was 17 percent in 2007 for after-tax income, up from 11 percent in 1989. Saez's estimate of the top one percent's share of wealth is 21 percent for 2000, 21 percent for 1990, and 22 percent for 1985. Edward Wolff's is 35 percent for 2007, up from 34 in 1983 (which I doubt is statistically different from 35 in this case). The top appears to have experienced income and wealth losses from 2007 to 2009 while the bottom experienced gains. Taken together, the top one percent's income share rose from 11-13 percent twenty-five years ago to 17-18 percent according to the most recent data. The top one percent's wealth share basically hasn't risen.
[UPDATE: See MIT economist Erik Brynjolfsson's comment below, which led me to add this paragraph. Brynjolfsson raises an important point (though I wouldn't call it a mistake) in noting that Stiglitz may have been referring to the Piketty and Saez numbers that include realized capital gains in "income". I chose the series excluding capital gains because the timing of when capital gains are realized has everything to do with tax law, the strength of the economy, and when people retire. The P&S series including capital gains still doesn't account for all the unrealized gains accruing to people (most importantly, those accruing to people in their retirement accounts). Capital gains realization is "lumpy" in a way that makes trends problematic.
But I will concede that the level of the top's income share (including realized capital gains) is closer to 25 percent than the P&S numbers I cite above suggest. Now whether their share of income including unrealized capital gains is closer to 25 percent or 17 or 18 percent is an open question. And I still say the series excluding capital gains is the way to go for trend estimation. But look, all this aside, the CBO series includes realized capital gains (but also considers taxes and other things the P&S series leaves out). And it shows the same basic trend and level as my conclusion above.]
While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone.
The 18 percent figure looks to be from Piketty and Saez (the change from 1998 to 2008). The claim about median incomes falling is incorrect if one takes into account the value of employer- and government-provided health insurance. (Majorities of workers with employer coverage say they prefer more generous coverage to higher wages, so it turns out employers aren't crazy in substituting ever-more-costly insurance for wages over time.) The decline in earnings (not income) for men with just a high school diploma is probably less than 12 percent. Based on some analyses I've been working on using the Current Population Survey, I find that men with a high school diploma but no four-year college degree saw a 12 percent decline in earnings over the roughly 33-year period from 1971-73 to 2003-2007, but that doesn't take into account the caveats I mention in this post. And earnings among women with the same level of education rose by over 50 percent, so that's inconvenient for Stiglitz.
The change in household or family income among men with just a high school diploma was, I'd wager, positive even before factoring in the caveats. And while I can't cite the paper yet, research I've seen using the PSID rejects the conclusion that wives have been forced to work more due to stagnant husband earnings—the biggest increases in work were among wives with the best-educated husbands, and while the hours of married men declined, those of single men did not (suggesting that the decline among married men was a reaction to increased work among their wives). I'll update this post when I can cite the paper (though that won't be for a couple months anyway). But think about it--did all these women increase their college-going simply in anticipation of marrying men with stagnant earnings, or did they prefer the fulfilling professional options that a college degree afforded them? Or consider--is declining fertility, delayed marriage, and increased college-going among women in developed countries around the world all somehow related to rising American inequality? You can get the basic trend on work by sex by marital status from Table 1 of this paper while you anxiously await my update.
All the growth in recent decades—and more—has gone to those at the top.
Nope, not if "the top" refers to "the top 1 percent" cited two sentences earlier. According to the Piketty and Saez data, depending on whether one uses the share of nominal or real (inflation-adjusted) gains and whether one includes or excludes capital gains in "income", the share of income growth going to the top one percent from 1998 to 2008 was between 22 and 33 percent. If you go back to 1988, the range is from 19 to 32 percent of gains since then. And keep in mind that when you start from an unequal distribution, if everyone experiences the same rate of income growth, a disproportionate share of gains will go to the top.
In terms of income inequality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran.
Compared to nearly all of the major nations of western and central Europe, the U.S. does have higher inequality (but it may not be that far off from the U.K. or Canada). The only numbers I could find for Russia and Iran are from the CIA World Factbook (the quality of which I can't speak to). Out of 136 countries, the U.S. is ranked 40th worst. Iran is ranked 43rd and Russia 52nd. So that sounds bad, right? Meh. Hong Kong and Singapore rank worse than the U.S., and Indonesia, India, and Ethiopia rank much better than Russia. Stiglitz will have to do better than this if he wants to argue that American inequality is a big deal.
First, growing inequality is the flip side of something else; shrinking opportunity....Second, many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy.
OK, so now Stiglitz is trying to tell us why we should care about the inequality that he exaggerates. But these are just assertions. The best evidence suggests that opportunity for men to move from the bottom to the top over the course of a career hasn't changed much over the past 35 to 40 years, and it has unambiguously increased for women (see Figures 15A and 15B). Across generations, the evidence is extremely thin, but it doesn't point to an unambiguous increase or decrease in opportunity over the past few decades. As for inequality and efficiency, my dissertation advisor, Christopher Jencks, has found that there is little correlation between economic growth and inequality levels, which doesn't exactly help those who believe inequality promotes growth but is equally problematic for Stiglitz and others who believe that inequality is inefficient.
When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it's tempting to see our growing inequality as a quintessentially American achievement...
Here Stiglitz is conflating income inequality (growing) with wealth inequality (basically flat and at a historic low in the U.S.). Whatevs.
America's inequality distorts out society in every conceivable way. There is, for one thing, a well-documented lifestyle effect—people outside the top 1 percent increasingly live beyond their means.
So document it! The share of families with any debt rose from 72 percent in 1989 to 77 percent in 2007, though note that the share with assets also grew. Median net worth (assets minus debt) rose from $75,500 to $120,600. In the wake of the housing bust, it fell, but it was still around $92,000 in 2009. Among people with debt, median debt payments rose from 15.3 percent of family income in 1989 to 18.6 in 2007. These are pretty small changes in indebtedness, and I'm not sure how Stiglitz could empirically link them to inequality.
Inequality massively distorts our foreign policy.
Ummm...going for the Peace Prize next?
[T]he chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe.
What little evidence there is suggests that upward mobility is lower in the U.S. only for men and only for those who start out poor. [UPDATE: Just to clarify, I'm talking about only men who start out poor, not men plus all people who start out poor. See the linked paper for details, but we're talking about 12 to 13 percent of the population, roughly.]
All of this is having the predictable effect of creating alienation—voter turnout among those in their 20s in the last election stood at 21 percent, comparable to the unemployment rate.
Oh boy, the shift to political science by economist pundits is always fraught with danger. The 2010 election is a single data point (and an off-year election, when voting rates are much lower). I'll just quote from a fact sheet from a Tufts research center that studies civic engagement among youth: "The 2008 election marked the third highest turnout rate among young people since the voting age was lowered to 18." What any of this has to do with inequality is anybody's guess.
In recent weeks we have watched people taking to the streets by the millions to protest political, economic, and social conditions in the oppressive societies that they inhabit....The ruling families elsewhere in the region look on nervously from their air-conditioned penthouses—will they be next?...As we gaze out at the popular fervor in the streets, one question to ask ourselves it this: When will it come to America?
My guess is never. By the way, Joe, be honest--were you using a pseudonym here?
Tyler Cowen, of whom I'm generally a big fan, summarizes an interesting post by Michael Mandel on recent productivity growth (the lack thereof). But he ends by trumpeting Hamilton Project analyses claiming to show that men's earnings declined by 28 percent between 1969 and 2009. This claim, like the Mandel analyses, reinforces Cowen's argument that we are in a Great Stagnation, but it's not true! Stop this meme!
I've not had much time to blog recently, so I submitted a brief critique in the comments to the Leonhardt post that introduced the world to this unfortunate study (co-authored, unfortunately, by a fellow classmate of mine from Harvard's inequality program) and in the comments to the Hamilton post. Here's the basic problem: the analyses assign all nonworking men annual earnings of $0, and since labor force participation among men has declined, the result is a big drop in median earnings over time. But a lot of that decline in labor force participation is attributable to earlier retirement (they include men as old as 64), later and longer school enrollment (they include men as young as 25), rising "disability" rates (which do not correspond in any obvious way with changes in health or job demands but which do correspond with increasing generosity in disability benefits), and other factors having nothing to do with the strength of labor markets.
I re-crunched the numbers as follows. I included all men age 20 to 59 except for those who said they worked only part of the year or not at all because they were retired, going to school, in the Armed Forces, sick or disabled, or taking care of home and family. Using the inflation adjustment that the Hamilton guys likely used, I find a decline in median earnings of 9 percent, not 28.
Note, however, that comparing 1969 and 2009 holds up a likely peak year (when the business cycle was at a high) to a trough year (when it was at a low). Comparing 1969 to 2007 is apples-to-apples, and when I did that, the median was EXACTLY the same in both years (to the dollar, which is a pretty crazy coincidence). Finally, if I use the Bureau of Economic Analysis "personal consumption expenditures" deflator, which I think overstates inflation somewhat less than other commonly-used deflators, median earnings among men rose 7 percent from 1969 to 2007.
Seven percent is no great shakes, but this figure is also too small for assessing how men's economic fortunes have changed over time. None of these analyses account for the fact that as a group, husbands reduced their hours over time in response to rising work and wages among wives. Nor do they account for the rising share of non-wage benefits in total compensation (health and retirement benefits have eaten into wages, presumably following the preferences of the median worker). Nor do they include the impact of taxes (which have declined) and tax credits (which have increased). In addition, even my figures may overstate inflation, thereby understating the earnings increase over time--inflation measurement is much more tricky when choices within categories of goods and services and retail outlets explodes and when so much of what we consume is (thanks to the inter-web) free. Finally, the analyses do not account for changes in the composition of the population. For instance, the fact that more men today are nonwhite and foreign-born pushes the 2009 median down, but it is likely that the typical white, nonwhite, native-born, and foreign-born men are all doing better than the trend in the overall median implies. Someday I'll get to a full analysis.
Subject for discussion (and a future post): how are we as a nation supposed to clearly understand the state of the economy and our living standards when even moderate think tanks and researchers are so eager to hype negativity? As I've said before, policymakers aren't the only people who--individually or collectively--can talk down the economy.
Hope you find the blog interesting. Much like the Strokes, it will change your life (Correction: should be the Shins of course, who are not nearly as good as the Strokes. Correction 2: this blog will not really change your life.). And if you read The Empiricist Strikes Back more than the Times and just don't know, I have a piece in the current Room For Debate forum on Americans' views toward wealth inequality. Enjoy!
What would it mean for theories of U.S. income inequality growth if the U.S experience has been similar to that everywhere else? (Updated)
Yet again and again [economists and other researchers not named Hacker or Pierson] have found themselves at dead ends or have missed crucial evidence. After countless arrests and interrogations, the demise of broad-based prosperity remains a frustratingly open case, unresolved even as the list of victims grows longer.
All this, we are convinced, is because a crucial suspect has largely escaped careful scrutiny: American politics.
– Jacob Hacker and Paul Pierson, Winner Take All Politics
Here's a chart showing trends in the share of income received by the top one percent for all the modern industrialized nations for which data is available going back to the early twentieth century:
The data is from a new website created by several of the leading scholars studying inequality with tax data. The American trend, the thick black line, is from the much cited work of Thomas Piketty and Emmanuel Saez, which is part of this new database.
From 1910 to 1970, American inequality trends follow the broad international pattern, and inequality levels are in the middle of the pack. That's basically still true from 1970 to 1986:
It's rising a bit over the period, but only by a percentage point. Note I'm keeping the scale of the charts the same for each one. Here's the chart for 1988 to 2006:
Uh-oh. Now we look like our inequality levels are higher than everywhere else. What happened? 1986 to 1988 happened, as is evident from the 1970-2006 trend:
Wow, that's a four percentage point increase in two years—three times the increase over the 16 years from 1970 to 1986, and bigger than the 12-year increase from 1988 to 2000. Huh. There are two possibilities here. One is that the data is right. You can see where I'm going here.
It helps to know that the 1986 tax reform created big incentives for people who had previously reported income on corporate returns (where it is invisible to the datasets above) to report on individual income tax returns (where it appears as an out-of-the-blue increase). And if this may be considered a permanent change in the tax regime, then the effect is for more income to show up on individual returns after 1986 than before, artificially lifting the top income share in every subsequent year.
Hmmm...which possibility is more likely? Let's look at another chart showing the trends just for the northern hemisphere Anglophone countries, to which I'll add a new line:
OK, from about 1940 to 1986, these trends line up strikingly, then the U.S. trend goes AWOL. However, let's instead assume the post-1986 U.S. trend is an artifact of the 1986 tax reform. First, let's increase the top one percent share from 1986 to 1988 by the same rate that it increased in the U.K. Then let's let the top share in the U.S. increase by the same rate that it actually did from 1988 to 2006, but from the new, lower 1988 level. The result is the revised line above. This makes the U.S. trend and level consistent with not just the U.K., but Canada.
Of course, if the 1988 to 2006 top share levels are more accurate in the U.S. after 1988 than before 1986, then rather than lowering the post-1986 trend, we should raise the pre-1988 trend. That would make U.S. levels uniformly higher than in the U.K. and Canada. But of course, the measured U.K. and Canadian top share levels may also be artificially low due to tax avoidance. And of course, the common trend over the three countries would remain.
So, to review, when the post-1986 U.S. trend is corrected, the U.S. experience with inequality over the past 100 years is broadly consistent with the rest of the modern world. Here's the summary chart for 1910-2006, with the revised U.S. trend.
Comparing levels is more difficult, but many recent cross-national comparisons related to inequality are about why trends differ. What these five charts clarify is that explanations for the recent rise in American inequality that focus on uniquely American causes—such as greater political muscle-flexing among corporations and the mega-rich—are insufficient (and unnecessary).
Update: I've received several responses offline that it's going to far to say the experience of the U.S. is like that "everywhere else" and that it is really only like the other Anglophone countries. To some extent, that's a fair criticism. But of 15 countries shown here, only Germany, the Netherlands, and Switzerland haven't experienced an increase in inequality since 1980. And the increases in Norway and Finland are as big or bigger than in the U.S., U.K., and Canada. Sweden's increase is also nearly as great in relative terms (starting from a much lower level of course). But even if this is a story about the U.S., U.K., and Canada or the Anglophone countries versus the rest of the world, that's still a problem for Hacker's and Pierson's U.S.-centric theory.
I thought the chart below that Tyler Cowen highlighted yesterday was fascinating, precisely because it begs Tyler's question, "What happened in 1980?" Unfortunately, the discussion got immediately sidetracked. The Incidental Economist guys argued that the chart was somehow wrong and there was no big jump in health care inflation in 1980. But as Kevin Drum points out in a comment to the post, their trend basically looks just like in the chart they are criticizing. Then Tyler posted an email excerpt from Austin Frakt of Incidental Economist that focused on why things flattened out in the late 1980s.
Let's dial this conversation back. The fascinating thing about the original chart is how the U.S. pulls away from all the other countries starting in 1980. So, fine, maybe there's not a dramatic change in trajectory in the U.S. beginning in 1980, but American health care inflation departs from the relatively tight pack of countries that it was part of prior to 1980 in a dramatic way. I'd love to hear the IE guys and other health care experts hypothesize why that is.
My main interest in the chart is related to my (on-going, but much delayed) research into inequality trends. Richard Burkhauser and Kosali Simon have shown that the rising cost of health insurance basically explains the (small) increase in income inequality that occurred in the late 1990s and 2000s.* The exceptionalism of the American health care inflation trend in the 1980s mirrors the sharp increase in measured income inequality in that decade. Might the two be related somehow? Perhaps accounting for health insurance would reduce the apparent rise in inequality. Alternatively, perhaps the rise in income inequality might explain the American exceptionalism. Inquiring minds want to know! (mine anyway...)
Sorry for the light posting, by the way--there is a very cute 7-month-old to blame.
*Disclosure: my employer funded the research they conducted, and I played a primary role in the decision, but rest assured that my employer wants a big distance between this blog and its own work!
Following the Data on Inequality Trends
My continually interrupted consideration of the new Jacob Hacker/Paul Pierson book Winner-Take-All Politics has led me to go back to the original inequality estimates of Emmanuel Saez and Thomas Piketty to understand better what they did. And what they did involves making a lot of assumptions about the size of their baseline populations (from which the top 1 percent is identified) and about the size of total income in each year (to which the top 1 percent's income is compared in order to get the top 1 percent's share of income).
I get really nervous about these kinds of assumptions, so I went looking for some alternative data sources. I remembered that the Federal Reserve Board's Survey of Consumer Finances explicitly samples very rich families separately from its primary survey efforts, drawing names of rich folk from IRS data and then tracking them down to interview them. This data is not perfect either--the response rates among the very rich are very low, and comparable data only go back to 1988--but the SCF has a number of features that are preferable to the Piketty-Saez dataset. For one, it provides direct estimates of the baseline population's size and of the population's total income. No need for worrisome assumptions to compute the top-share estimates. Second, a more comprehensive income measure may be used, including public transfer income, such as unemployment insurance benefits and worker's compensation, and retirement income from Social Security and drawn down from private pensions.
The Fed's main SCF analyst, Arthur Kennickell, put out a paper last year that provides top income shares for 1988 to 2006 (see Table 4). I plotted those against part of the Piketty-Saez series that includes realized capital gains, and here's what I found:
Awfully consistent....What this tells me is that the concern I expressed in my Hacker-mania post that the Piketty-Saez series inflates the top income groups is probably not that big a deal. On the other hand, since the SCF data only go back to 1988, changes in the extent to which the P-S series inflate the top income groups may still create the exaggeration of the increase in inequality since the 1970s. But certainly the SCF estimates should be viewed as making that less likely.
So do I now think the Piketty-Saez estimates are correct? No--there is still the potentially very important issue of how people receive compensation and report their incomes on tax returns in response to changes in tax law. And that issue still affects the SCF data too because it affects what gets reported to SCF surveyors when they ask about specific types of personal income.
Just as importantly (maybe more), is the fact that neither data series accounts for employer and employee contributions to benefits like health insurance, and neither accounts for unrealized capital gains that investors accrue or the returns accruing to pension benefits pre-retirement. But I feel more confident that the assumptions Piketty and Saez make in measuring the quantity they claim to measure are solid (save that hugely important assumption that tax law changes don't meaningfully affect their series).
I will return to Hacker-mania soon (I hope), but allow me a brief side-trip on inequality. Steve Waldman writes a long post attempting to refute Will Wilkinson's assertion that different price indices should be used for rich and poor:
"As the price difference between caviar and hot dogs expands, Rich will shift his consumption basket, foregoing some caviar for hot dogs. Doing so will make Rich strictly better off than he was in 2000: he could have maintained his old consumption basket, but the opportunity presented by cheap hot dogs gave him a better deal. Poor, on the other hand, will not shift any of his consumption towards caviar and opera, and he cannot shift away, since he was already consuming none of the now more expensive luxuries. Poor’s consumption basket will have gone nowhere over the aughts, while Rich’s will have improved. If we use multiple price indices to claim that the two groups’ “real incomes” stayed the same over the period, we will have missed this change. It is an error of elementary microeconomics."
This can be refuted thusly:
(1) What the Broda et al. research shows is that Rich tends not to forgo caviar for hot dogs in response to the price changes. The size of substitution effects is an empirical question.
(2) You can't measure freedom with a price index.
That is all.