Month: June 2015

U.S. income inequality persists amid overall growth in 2014

Posted on by Casey Schoeneberger

Income inequality in the United States grew more acute in 2014, yet the bottom 99 percent of income earners registered the best real income growth (after factoring in inflation) in 15 years. The latest data from the U.S. Internal Revenue Service show that incomes for the bottom 99 percent of families grew by 3.3 percent over 2013 levels, the best annual growth rate since 1999. But incomes for those families in the top 1 percent of earners grew even faster, by 10.8 percent, over the same period. (See Figure 1.)

Figure 1

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Overall, real average incomes per family in 2014 grew by a substantial 4.8 percent. For the bottom 99 percent of income earners, this marks the first year of real recovery from the income losses sparked by the Great Recession of 2007-2009. After a large decline of 11.6 percent from 2007 to 2009, those families saw a negligible 1.1 percent in real income gains from 2009 to 2013. But a full recovery in income growth for the bottom 99 percent is still not in sight. In 2014, these families recovered slightly less than 40 percent of their income losses due to the Great Recession.

Those at or near the top of the income ladder did substantially better in 2014. The share of income going to the top 10 percent of income earners—individuals making an average of $300,000 a year—increased to 49.9 percent in 2014 from 48.9 percent in 2013, the highest ever except for 2012. The share of income going to the top 1 percent of families—those earning on average about $1.3 million a year—increased to 21.2 percent in 2014 from 20.1 percent in 2013. Income inequality, then, remains extremely high, particularly at the very top of the income ladder. (See Figure 2.)

Figure 2

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More broadly, the top 1 percent of families captured 58 percent of total real income growth per family from 2009 to 2014, with the bottom 99 percent of families reaping only 42 percent.

The release time for this latest income data from the IRS usually lags behind other key indicators of U.S. economic performance. Aggregate economic growth statistics are typically available a month after the end of each quarter. In contrast, U.S. Census Bureau official income and poverty measures are not available until mid-September of the following year, or 8.5 months after the end of the year. Complete individual income tax statistics, the only statistics that can capture top incomes, are usually not available until 19 months after the end of the year.

This difference in timing explains why economic growth statistics are much more widely discussed than income inequality statistics in public debates about economic inequality and growth. But for the first time, this income data is now more readily available because the Statistics of Income division of the IRS now publishes filing-season statistics by size of income. These statistics can be used to project the distribution of incomes for the full year.

My colleagues and I used these new statistics to update our top income share series for 2014, which are part of our World Top Incomes Database. These statistics measure pre-tax cash market income excluding government transfers such as the disbursal of the earned income tax credit to low-income workers. For the first time, we can produce inequality statistics less than 6 months after the end of the year.

Timely statistics on economic inequality are central to informing the public policy debate about the connections between economic growth and inequality. One case in point: The higher tax rates for top U.S. income earners enacted in 2013 as part of the Obama Administration and Congress’ federal budget deal seem to have had only a fleeting impact on the outsized accumulation of pre-tax income by families in the top 1 percent and 0.1 percent of income earners.

To be sure, there was a shifting  of income among high-income earners from 2013 to 2012 as these wealthy families sought to avoid the higher rates enacted in 2013. This adjustment created a spike in the share of top incomes accumulated by the very wealthy in 2012 followed by a trough in 2013. By 2014, however, top incomes shares were back to their upward trajectory. This suggests that the higher tax rates starting in 2013, while not negligible, will not be sufficient by themselves to curb the enormous increase in pre-tax income concentration that has taken place in the United States since the 1970s.

—Emmanuel Saez in a professor of economics at the University of California-Berkeley and a member of the Washington Center for Equitable Growth’s steering committee

Patience is a virtue when it comes to U.S. interest rates

Posted on by Nick Bunker

The last time the U.S. Federal Reserve raised short-term interest rates was in early July 2006. To say a few things about the economy have changed since then is quite an understatement. Nine years later, the Federal Open Markets Committee is now deciding when to start the process of raising rates once again. After nearly a decade since the last rate increase, years of extraordinary monetary policy, and evidence that the current economic recovery has some forward momentum, the desire to return to normalcy is understandable. Yet this impulse should be ignored.

The Fed has announced, in line with its mandate to foster price stability, that it targets a rate of 2 percent annual inflation “over the medium term.” Essentially, the Fed is saying that while inflation might not always be exactly 2 percent, the central bank tries to hit that mark over the course over a number of years of a business cycle. Yet the Fed’s recent track record doesn’t seem to match this target. As Ben Leubsdorf shows at The Wall Street Journal, inflation over the past three years hasn’t once reached 2 percent, according to the Fed’s preferred measure.

Perhaps an argument could be made that the current recovery is self-sustaining enough to eventually spark higher inflation. But so far this year, core inflation, which ignores the volatile prices of food and energy–and is a good predictor of future inflation–appears to be on a downward trend. If the target were truly 2 percent, then we’d expect inflation to be over 2 percent at times. Yet that hasn’t happened since the middle of 2012. Raising rates now would be indicative of a 2 percent ceiling rather than a 2 percent target.

But what about wage growth? The growth in average hourly earnings measured on a year-to-year basis has yet to accelerate, even though that measure on monthly basis might be increasing slightly. Some observers point to the Employment Cost Index, which includes other forms of labor compensation. But while there are signs of acceleration there, the level of compensation growth is below the level we’d expect—bearing in mind a 2-percent inflation target and slow productivity growth.

But let’s say wage growth does accelerate significantly in the coming months before interest rates are raised. Given the fact that monetary policy has consistently failed to promote full employment leading to slow wage growth, letting wage growth run a bit hot might be exactly what’s called for. Recent research from Federal Reserve economists argues that wage growth won’t necessarily pass through to overall inflation like it did in the past.

The 0.2 percent contraction of U.S. gross domestic product in the first quarter is troubling, too, but looking at an alternate measure of output growth– gross domestic income–shows growth of 1.9 percent. Given the rate of employment growth during the same time period, it seems more likely that underlying growth is probably closer to this GDI estimate.

But what the GDP report did highlight was the extent to which the strength of the dollar is depressing economic growth. Jared Bernstein at the Center for Budget and Policy Priorities points out this trend for the last two quarters. The greenback’s appreciation has been fueled by expectations of a Federal Open Market Committee decision to hike interest rates as the European Central Bank eases its monetary policy. So perhaps hesitation on behalf of the Fed might temper this trend moving forward.

Despite all this evidence in favor of waiting to raise U.S. interest rates, news reports indicate that members of the FOMC are moving toward an increase this year. So if the committee is intent on starting a path to normalization, then let’s hope the path is a slowly rising one. A slow path upward would be the easiest path forward if at least some rate increases have to happen.

Must-Read: Barry Eichengreen: Path to Grexit Tragedy Paved by Political Incompetence

Posted on by Brad DeLong

Must-Read: Barry Eichengreen: Path to Grexit Tragedy Paved by Political Incompetence: “The country is seemingly on the slippery slope to exiting the euro….

…Nearly a decade ago, I analyzed scenarios for a country leaving the eurozone. I concluded that this was exceedingly unlikely to happen…. So where did this prediction go wrong?… The costs, I concluded, would be severe and heavily front-loaded… a bank run… shutter[ing] the financial system… losing access to not just their savings but also imported petrol, medicines and foodstuffs…. Not only would any subsequent benefits, by comparison, be delayed, but they would be disappointingly small…. Any improvement in export competitiveness due to depreciation of the newly reintroduced national currency would prove ephemeral…. Greece’s… leading export, refined petroleum, is priced in dollars and relies on imported oil…. Agricultural exports… will take several harvests to ramp up. And attracting more tourists won’t be easy against a drumbeat of political unrest….

I stand by the economic argument. Where I need to mark my views to market, however, is for underestimating the role of politics…. Syriza had run on a platform of no more spending cuts or tax increases but also of keeping the euro. It should have anticipated that some compromise would be needed to square this circle…. Prime Minister Alexis Tsipras and his government…. If it was unwilling to accept the creditors’ final offer, then it should have stated its refusal…. The decision to call a referendum in midstream only heightened uncertainty…. Still, this incompetence pales in comparison with that of the European Commission, the ECB and the IMF… [that] opposed debt restructuring in 2010 when the crisis still could have been resolved at low cost… continued to resist it in 2015… calculated the… primary budget surpluses that Greece would have to run… to hypothetically repay its debt… required the government to raise taxes and cut spending… ignored the fact that… they consigned the country to an even deeper depression. By privileging their own balance sheets, they got the Greek government and the outcome they deserved. The implication is clear. Never underestimate the ability of politicians to do the wrong thing. I will try to remember next time.

Must-Read: Matthew Yglesias: Jeb Bush’s 4% Growth Promise Is 104% Nonsense

Posted on by Brad DeLong

Matthew Yglesias: Jeb Bush’s 4% Growth Promise Is 104% Nonsense: “Asked by Reuters to describe his thought process…

…Jeb said:

It’s a nice round number. It’s double the growth that we are growing at. It’s not just an aspiration. It’s doable….

According to James Glassman, Bush originally selected this goal at random, backed by zero substantive analysis of any kind…. In that conference call, “we were looking for a niche and Jeb in that very laconic way said, ‘four percent growth.’ It was obvious to everybody that this was a very good idea.” Wait, there’s a George W. Bush Institute? Yes. Having presided over the only presidency since Herbert Hoover in which the country lost jobs, the worst terrorist attack in American history, and a costly invasion of Iraq whose purpose was to destroy a nuclear weapons program that didn’t exist, George W. Bush decided he could not deprive the world of his policy insights upon retirement. Among other programs, the institute runs a 4% Growth Project, which is led by Amity Shlaes, a former Wall Street Journal editorial writer. Shlaes is a believer in the absurd inflation conspiracy theories of John Williams’s website, Shadowstats, according to which, among other things, the American economy has been consistently shrinking since 2004….

Has anyone actually read the Bush Institute’s book The 4% Solution? There is no clear and convincing evidence that anyone has read this book. But the introduction can be read for free on Amazon, and it contains the surprising admission that the goal is bullshit:

The United States is much more likely to achieve the average growth rate it maintained from the end of World War II to the most recent economic downturn — a rate of about 3% — than it is to accelerate to a new long-term economic growth rate of 4%…. The Bush Institute has set an intentionally provocative target in part because one way to find out what is actually attainable is to stretch for a goal that is seemingly just beyond one’s reach….

Why would Jeb propose it?… One, if you help yourself to an unrealistic presumption that the economy will grow at 4 percent per year…. Budget problems… melt away…. Suddenly gigantic tax cuts are affordable…. The other is that if you’re up on a debate stage, you’d much rather be the guy offering upbeat assessments of America’s potential to grow than the guy droning on about shifting demographics and Total Factor Productivity trends…

Must-Read: Francesco Saraceno: It’s the Politics, Stupid!

Posted on by Brad DeLong

Must-Read: Francesco Saraceno: It’s the Politics, Stupid!: “Contrary to what is heard in European circles…

…most of the concessions came from the Greek government. On retirement age, on the size of budget surplus… on VAT, on privatizations, we are today much closer to the Troika initial positions than to the initial Greek position…. The point that the Greek government made repeatedly is that some reforms, like improving the tax collection capacity, actually demanded an increase of resources, and hence of public spending. Reforms need to be disconnected from austerity…. Syriza, precisely like the Papandreou government in 2010 asked for time and possibly money. It got neither….

This has been since the beginning about politics. Creditors cannot afford that an alternative to policies followed since 2010 in Greece and in the rest of the Eurozone materializes. Austerity and structural reforms need to be the only way to go. Otherwise people could start asking questions; a risk you don’t want to run a few months before Spanish elections. Syriza needed to be made an example. You cannot  survive in Europe, if you don’t embrace the Brussels-Berlin Consensus…. Those of us who were discussing pros and cons of the different options on the table, well, we were wasting our time. And if Greece needs to go down to prove it, so be it. If we transform the euro in a club in which countries come and go, so be it. The darkest moment for the EU.

Things to Read on the Afternoon of June 27, 2015

Posted on by Brad DeLong
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Must- and Should-Reads:

Might Like to Be Aware of:

Must-Read: Dominick Bartelme and Yuriy Gorodnichenko: Linkages and Economic Development

Posted on by Brad DeLong

Must-Read: Dominick Bartelme and Yuriy Gorodnichenko: Linkages and Economic Development: “Linkages across firms and industries….

Countries with stronger linkages have indeed higher productivity. A single Honda automobile is made of 20,000 to 30,000 parts produced by hundreds of different plants and firms… relie[s] on an extensive division of labour across plants which trade specialised inputs with one another in convoluted networks…. Hirschman (1958) reasoned these industry linkages were essential for economic development, and focused on how to promote the formation of robust input markets in poor countries and target investment to the industries with the strongest linkages…. Recent work by Ciccone (2002), Acemoglu et al. (2007), Jones (2011) and others has shown that distortions in input markets can in principle explain a large fraction of productivity differences between countries, but this literature has remained largely theoretical…. We show that the strength of linkages – measured as the average output multiplier (AOM) from an input-output table – is strongly and positive related to measured output per worker and total factor productivity…. A one standard deviation increase in the average output multiplier is associated with a 15-35% increase in output per worker…

Must-Read: Erik Loomis: A Glimpse Into the Black, Shriveled Hearts of the Class Warriors

Posted on by Brad DeLong

Must-Read: Erik Loomis: A Glimpse Into the Black, Shriveled Hearts of the Class Warriors: “When you think that maybe the hearts… aren’t actually that closed to compassion…

…you are always proven wrong:

[John] Kasich’s temper has made it harder to endear himself to the GOP’s wealthy benefactors. Last year, he traveled to Southern California to appear on a panel… sponsored by… Charles and David Koch…. Randy Kendrick, a major contributor and the wife of Ken Kendrick, the owner of the Arizona Diamondbacks, rose to say she disagreed with Kasich’s decision to expand Medicaid coverage, and questioned why he’d expressed the view it was what God wanted.

The governor’s response was fiery. ‘I don’t know about you, lady,’ he said as he pointed at Kendrick, his voice rising. ‘But when I get to the pearly gates, I’m going to have an answer for what I’ve done for the poor.’

The exchange left many stunned. About 20 audience members walked out of the room, and two governors also on the panel, Nikki Haley of South Carolina and Bobby Jindal of Louisiana, told Kasich they disagreed with him. The Ohio governor has not been invited back to a Koch seminar…

A Kasich spokesman, Chris Schrimpf, declined to comment on the episode.

Like in the first Gilded Age, the poor are seen with total contempt and hostility, as is even the mildest suggestion that we should do something for them. This is the open position of the Republican Party, a position they are able to take with a combination with appeals to racism and a well-funded propaganda machine about the values of the free market and self-reliance.

However, do remember, in office in Washington, as a legislator and as a technocrat John Kasich was no prize…