Morning Must-Read: Nick Bunker: Income Inequality Over the Business Cycle

Posted on by Brad DeLong

I must say, Stephen Rose used to do very good work. But more and more I find that the stuff he puts out these days has a “gotcha” in it–a decision as to what to look at that is debatable, that shapes his conclusions massively, and that he does not warn me about his importance. Having to dig for what the “gotcha” is in each case is time consuming, boring, and annoying. I think he should stop.

Vir spectabilis Nick Bunker does the heavy lifting:

Nick Bunker: Income Inequality Over the Business Cycle: “Stephen Rose argues that income inequality…

…has not risen since the end of the Great Recession… takes aim at research by University of California-Berkeley economist Emmanuel Saez showing that 95 percent of the income gains from 2009 to 2012 were captured by the top 1 percent of earners… assert[s claims]… inequality has risen since the Great Recession… based upon a ‘statistical gimmick.’

Rose… look[s] at changes in incomes since 2007, the peak of the last business cycle…. Saez and… Piketty show… income excluding capital gains… [of] the top 1 percent dropped from 18.3 percent in 2007 to 16.7 percent in 2009…. During economic expansions, workers at the bottom of the income ladder see very large gains and those at the top see large gains as well. Those in the middle miss out. And during recessions, the incomes at both ends lose the most…. By starting his measurement from the peak of the last business cycle in 2007, Rose includes the years that have the most income reduction for those at the top. But the expansion beginning in 2009… is not over….

Yes, if 2007 is the benchmark year, incomes at the top have declined. And yes, if 2009 is the benchmark year, incomes at the top have increased dramatically…. What isn’t reasonable is using a peak as a benchmark to claim inequality hasn’t increased over an incomplete business cycle…

How does income inequality change over the business cycle?

Posted on by Nick Bunker

Has income inequality risen in recent years? The obvious rejoinder to that question is “well, over what time period?” This seemingly simple clarification can spark quite a bit of debate among economists and researchers. A new paper looking at the changes in income inequality shows how important the time periods we choose can be in understanding trends in inequality and the overall economy.

The paper, by George Washington University professor Stephen Rose, argues that income inequality has not risen since the end of the Great Recession in 2009. In particular, Rose takes aim at research by University of California-Berkeley economist Emmanuel Saez showing that 95 percent of the income gains from 2009 to 2012 were captured by the top 1 percent of earners. Rose claims that any assertion that inequality has risen since the Great Recession is based upon a “statistical gimmick.”

Rose says that Saez’s statistics overstate the increase in income inequality since 2009. He does so by looking at changes in incomes since 2007, the peak of the last business cycle, through what he calls the “bounce-back years” since 2009. In other words, Rose measures income trends since the beginning of the recession, not the beginning on a new economic expansion (as Saez does). Another major point that Rose makes is that fluctuations in the incomes of the top 1 percent, and therefore inequality, are driven primarily by changes in realized capital gains on the sale of stocks and bonds and other assets. Because this kind of income is the result of a decision to sell an asset, the gains are “clumpy” and not evenly distributed over years. And they are also very volatile as these kinds of assets take a hit during recessions, resulting in lower realized capital gains and thus less income

(Another major complaint by Rose of research that shows rising income inequality is about using pre-tax incomes versus post-tax incomes, but that’s a topic for another day.)

So what do Rose’s findings say about those of Saez? A look at the top income data gathered by Saez and Paris School of Economics professor Thomas Piketty shows that the share of income excluding capital gains going to the top 1 percent dropped from 18.3 percent in 2007 to 16.7 percent in 2009, the year the recession ended. So it seems unlikely that capital gains are responsible for all that volatility. Even when capital gains are stripped out of measures of income growth, incomes at the top are quite volatile during recessions. So labor income appears to jump around quite a bit as well. A paper by economists Fatih Guvenen at the University of Minnesota, Serdar Ozkan at the U.S. Federal Reserve Board, and Jae Song at the U.S. Social Security Administration shows that labor income actually is quite volatile across the business cycle .

The paper looks at how incomes change over the business cycle. They use data from the Social Security Administration that lets them track the incomes of specific workers over several years. (Note that the SSA data does not include capital gains.) What they find is that that there is a large variation in how the incomes of workers grow over the business cycle.

During economic expansions, workers at the bottom of the income ladder see very large gains and those at the top see large gains as well. Those in the middle miss out. And during recessions, the incomes at both ends lose the most. In other words, incomes for those at the bottom and the top are very volatile. The chart below shows how this distinction held over the last full business cycle. (See Figure 1.)

Figure 1

021915-va-incomegrowth

What does this means for Rose’s paper? Well, by starting his measurement from the peak of the last business cycle in 2007, Rose includes the years that have the most income reduction for those at the top. But the expansion beginning in 2009, when incomes jump up, is not over yet. As the chart above shows, there are very different dynamics during expansions and recessions. The full dynamics of the most recent expansion have yet to play out. So Rose doesn’t have an adequate comparison for 2007 yet. The Piketty and Saez data only go up to 2013, though last year’s data are preliminary, which means they have captured more of the expansion in their data but their analysis also does not include the entire business cycle because it hasn’t happened yet.

So the level of incomes for the top 1 percent might not have reached their 2007 level peak because the economy hasn’t reached a similar point in its growth cycle yet. This comparison is a bit like comparing the heights of a 12 year old and an 18 year old. Yes, one is taller than the other. But it’s incomplete to compare them without considering age. One person is still growing.

So yes, if 2007 is the benchmark year, incomes at the top have declined. And yes, if 2009 is the benchmark year, incomes at the top have increased dramatically. Reasonable people can disagree about the best benchmark. But what isn’t reasonable is using a peak as a benchmark to claim inequality hasn’t increased over an incomplete business cycle.

The lesson: A more complete evaluation of the extent of the increase in income inequality since 2009 will have to wait until this business cycle has completed its course.

Things to Read at Night on February 18, 2015

Posted on by Brad DeLong

Must- and Shall-Reads:

 

  1. Stephen G Cecchetti and Enisse Kharroubi (2014): Why Does Financial Sector Growth Crowd Out Real Economic Growth? (Basel: BIS) http://www.bis.org/publ/work490.pdf “We… concluded that the level of financial development is good only up to a point, after which it becomes a drag on growth, and that a fast-growing financial sector is detrimental…. Financial sector growth benefits disproportionately high collateral/low productivity projects… the strong development in sectors like construction, where returns on projects are relatively easy to pledge as collateral but productivity (growth) is relatively low…. Where financiers employ the [most] skilled workers… productivity growth is lower than it would be had… entrepreneurs attract[ed] the [most] skilled labour…. [Thus] financial booms in which skilled labour work for the financial sector, are sub-optimal when the bargaining power of financiers is sufficiently large…. We focus on manufacturing industries and find that industries that are in competition for resources with finance are particularly damaged by financial booms… manufacturing sectors that are either R&D-intensive or dependent on external finance suffer disproportionate reductions in productivity growth when finance booms…”

  2. Ben Walsh: “Here’s a chart saying ‘the rich have gotten poorer since 2007’. Here’s a chart showing the wealth of the rich. They don’t seem to be getting poorer. @Adennisdillon: @BenDWalsh Other problem is picking a bubble year as a baseline.

  3. Simi Kedia and Thomas Philippon: The Economics of Fraudulent Accounting: “We argue that earnings management and fraudulent accounting have important economic consequences. In a model where the costs of earnings management are endogenous, we show that in equilibrium, low productivity firms hire and invest too much in order to pool with high productivity firms. This behavior distorts the allocation of economic resources in the economy. We test the predictions of the model using firm-level data. We show that during periods of suspicious accounting, firms hire and invest excessively, while managers exercise options. When the misreporting is detected, firms shed labor and capital and productivity improves. Our firm-level results hold both before and after the market crash of 2000. In the aggregate, our model provides a novel explanation for periods of jobless and investment-less growth.”

Should Be Aware of:

The Intellectual War Over the Rise of the Machines Continues…: Focus

Posted on by Brad DeLong

I see that the vir illustris Lawrence Mishel, our neighbor here in the Great Center-Left Atrium Building at 1333 H St. N.W., has had his ire awakened by the femina clarissima Melissa Kearney and her forthcoming Hamilton Project event on robots tomorrow: http://www.hamiltonproject.org/papers/future_of_work_in_machine_age/…

Lawrence Mishel: Failed Theory Posed by Wall Street Dems Puts Hillary Clinton in a Bind: “There was a time where it was plausible to argue that more education and innovation were the primary solutions to our economic problems. But that time has passed…. You cannot tell that, however, to the… Hamilton Project…. The new framing paper… details how ‘advancing computer power and automation technology’ creates a challenge for:

how to educate more people for the jobs of the future, how to foster creation of high-paying jobs, and how to support those who struggle economically during the transition…

the same analysis we heard from the Clinton administration 20 years ago, when the discussion was of a ‘transition to the new information economy.’ Let them eat education. The education-only solution wasn’t appropriate when it was first put forward, and it is not even remotely plausible now….

According to Autor’s “The Polarization of Job Opportunities in the U.S. Labor Market”… technological change… was polarizing the job market… necessitating major changes in… education…. Over the last few years… researchers, including Autor, have documented that occupational job polarization has not been present in the 2000s…. My research with my then-colleague Heidi Shierholz, and with economist John Schmitt of the Center for Economic and Policy Research, was the first to document these trends…. [While] innovation may yield higher productivity and more growth… entire center-left field of economists… acknowledges that this will not necessarily lead to robust wage growth…. Hopefully they will soon embrace many of the recommendations of CAP’s Inclusive Prosperity report…

I note Larry Mishel’s invocation of both melior princeps Hillary Rodham Clinton and of “Wall Street Democrats”. I infer that the stakes appear not just to be attaining correct thought, but also involve shaping the policies and staffing of a potential Democratic administration come 2017…

Some more context:

Lawrence Mishel: Policies that Do and Do Not Address the Challenges of Raising Wages and Creating Jobs: “Policies that help to achieve full employment…

…are the following:

  1. The Federal Reserve Board needs to target full employment with wage growth matching productivity….
  2. Targeted employment programs… [for the] many communities that will still be suffering substantial unemployment….
  3. Public investment and infrastructure….
  4. Reducing our trade deficit….

It is a welcome development that policymakers and presidential candidates in both parties have now acknowledged that stagnant wages are a critical economic challenge…. Globalization has… served to suppress wage growth for non-college-educated workers…. Two sets of policies… have greatly contributed to wage stagnation that receive far too little attention….

Aggregate factors:

  1. Excessive unemployment….
  2. Unleashing the top 1 percent: finance and executive pay….

Labor standards, labor market institutions, and business practices….

  1. Raising the minimum wage….
  2. Updating overtime rules….
  3. Strengthening rights to collective bargaining….
  4. Regularizing undocumented workers….
  5. Ending forced arbitration….
  6. Modernizing labor standards: sick leave, paid family leave….
  7. Closing Race and gender inequities….
  8. Fair contracting….
  9. Tackling misclassification, wage theft, prevailing wages, and enforcement…

To summarize, Larry’s recommended policies are four:

  1. Correct, full-employment macro policy.
  2. Proper public spending–especially to boost our infrastructure capital.
  3. Reining-in our hypertrophied financial sector and the CEO-takeover-private-equity cycle that gives the CEO and his (almost always his) bucelarii the equivalent of a 25% equity stake in the company they run.
  4. Restoring worker bargaining power in the labor market.

As a card-carrying neoliberal and as a member of the Rubin wing of the Democratic Party, what do I think of all this?

Well, I think that Larry is largely right. A big push for more and better education will not solve our labor market problems.

Now it will alleviate some labor market problems. Increasing the number of people who finish college–both through figuring out how to use modern technologies to complement instructors and through more-generous college financing–is an investment that has a high societal rate of return on the order of 6%/year or so, plus it will do a lot to bring the wages and salaries of the 20%-60% and the 60%-95% slots of the income distribution together by changing relative supplies of workers qualified for the jobs associated with those slots.

Moreover, the Hamilton Project view and the Great 1333 H Center-Left Atrium Building view are, I think, in accord on the necessity for boosting public investment and on the necessity of macroeconomic policies that succeed in avoiding unnecessary unemployment–even if the Hamilton Project has not yet gotten to where I think it needs to be in terms of how the public sector ought to be financed in this era of the global savings glut.

But such education-promoting policies will do little or nothing to redistribute back to the 20%-95% slots of the income distribution any of the immense wealth that has been grabbed by the top 5% and 1% and 0.1% and 0.01% slots of the income distribution. Take a look at http://eml.berkeley.edu/~saez/TabFig2013prel.xls. See the rise of the top 5% from 15% to 25% of total incomes, of the top 1% from 5% to 12%, of the top 0.1% from 2.5% to 9%, and of the top 0.01% from 0.7% to 4% are not driven by processes over which even successful pro-education policies as our educational system is currently structured have any purchase.

Larry’s non-education policies include two that are all-boat-lifting policies–the top 0.01% as well as the 20%-60%–in the form of full-employment and infrastructure, and two that are bargaining power related: the cutting-back of the pretensions of finance and its associates in the CEO suites and a restoration of labor’s power to bargain for a share of the joint product in situations where everyone is already locked-into the employer-employee relationship. He thinks that that is what we need to do, and should do, and should focus on.

Kearney, Hirshbein, and Body are not so sure as they look at the “proliferation of smart machines, networked communication, and digitization… [and their] potential to transform the economy in groundbreaking ways…” They see three things going on:

  1. Job Polarization: Even though it has not been apparent in the data in the 2000s, it was clearly there in the 1990s, and–in their view, and mine–may well reemerge in the data in 2010s and 2020s. As they put it: “work involving visual and language recognition and in-person interaction has… proved mostly elusive for computers to master…. Robots will have a hard time… in food service, cleaning, and caregiving… [as] dexterity, eyesight, and communication give humans a comparative advantage…. [Moreover,] computers are very far from being able to use creativity, intuition, persuasion, and imaginative problem-solving…” The problem in the face of the potential for an additional wave of polarization is then: how do we make being a janitor, a home health aide, an exercise-class leader, a hairdresser, or a cafeteria line worker not what they are now but rather middle-class jobs? People using their brains in very basic and easy ways from a brainwork perspective got middle-class blue-collar and white-collar jobs on assembly line and in cubicles in the second half of the twentieth century. Can we recapture that for service-sector jobs analogous to those that did not have middle-class status a generation ago? That is a hard and interesting question–and I think the answer, if there is an answer, is much harder and more complicated than “tweak the labor-relations system so they can form a union…”

  2. The New Technostructure: In a world in which rapidly-progressing information technology is obsoleting human brains as blue-collar cybernetic complements to manufacturing machines and white-collar substitutes for software ‘bots shuffling data, labor will be abundant. If that world also sees a global savings glut pushing down interest rates, capital will also be abundant. The scarce and valuable factor of production will then be access to the nexuses of processes that put the robots to work making things that the brands entice consumers to buy–membership in what we might, adapting Galbraith, call the New Technostructure. Kearney et al. (and Brynjolfsson and McAfee) seem to see a focus on “entrepreneurship” as a way both to maximize the number of people with access to this New Technostructure and also to put some downward pressure on its income share to the benefit of other factors of production. I find myself very skeptical indeed…

The danger of tomorrow’s Hamilton Project event, I think, is that the people there will take their “advances in artificial intelligence and broad technological development will create employment possibilities that we cannot yet begin to imagine…”, “major commitment to increasing education and skill levels…”, and “fostering business and organization innovation…” to be things we know how to do. I do not think we know what we need. I don’t think making community college and four-year college free will do it. I don’t think tax credits for small businesses, cheerleading incubators, and entrepreneurial mentorship coaches will do it. At this stage “increasing education” and “fostering innovation” are simply placeholders for policies we will not be able to imagine until we see more of the shape of our future.

So I find myself reminded of John Maynard Keynes on, of all people, Leon Trotsky:

We lack more than usual a coherent scheme of progress…. No one has a gospel. The next move is with the head…

Note: As Larry Mishel says, “The Inclusive Prosperity Report”:

co-chaired by Lawrence H. Summers… calls for full employment (a ‘high pressure economy,’ as Summers calls it), a more welcoming environment for collective bargaining, higher labor standards (overtime, minimum wage, earned sick and paid family leave), changes in corporate governance, and large scale public investment to address middle-class wage stagnation…

See https://www.americanprogress.org/issues/economy/report/2015/01/15/104266/report-of-the-commission-on-inclusive-prosperity/

Evening Must-Read: Stephen G Cecchetti and Enisse Kharroubi: Why Does Financial Sector Growth Crowd Out Real Economic Growth?

Posted on by Brad DeLong

Stephen G Cecchetti and Enisse Kharroubi (2014): Why Does Financial Sector Growth Crowd Out Real Economic Growth? (Basel: BIS) http://www.bis.org/publ/work490.pdf “We… concluded that the level of financial development is good only up to a point…

…after which it becomes a drag on growth, and that a fast-growing financial sector is detrimental…. Financial sector growth benefits disproportionately high collateral/low productivity projects… the strong development in sectors like construction, where returns on projects are relatively easy to pledge as collateral but productivity (growth) is relatively low…. Where financiers employ the [most] skilled workers… productivity growth is lower than it would be had… entrepreneurs attract[ed] the [most] skilled labour…. [Thus] financial booms in which skilled labour work for the financial sector, are sub-optimal when the bargaining power of financiers is sufficiently large…. We focus on manufacturing industries and find that industries that are in competition for resources with finance are particularly damaged by financial booms… manufacturing sectors that are either R&D-intensive or dependent on external finance suffer disproportionate reductions in productivity growth when finance booms…

Lunchtime Must-Read: Simi Kedia and Thomas Philippon: The Economics of Fraudulent Accounting

Posted on by Brad DeLong

Simi Kedia and Thomas Philippon: The Economics of Fraudulent Accounting: “We argue that earnings management and fraudulent accounting…

…have important economic consequences. In a model where the costs of earnings management are endogenous, we show that in equilibrium, low productivity firms hire and invest too much in order to pool with high productivity firms. This behavior distorts the allocation of economic resources in the economy. We test the predictions of the model using firm-level data. We show that during periods of suspicious accounting, firms hire and invest excessively, while managers exercise options. When the misreporting is detected, firms shed labor and capital and productivity improves. Our firm-level results hold both before and after the market crash of 2000. In the aggregate, our model provides a novel explanation for periods of jobless and investment-less growth.

Things to Read at Lunchtime on February 17, 2015

Posted on by Brad DeLong

Must- and Shall-Reads:

Should Be Aware of:

Morning Must-Read: Matthew Klein: Crush the Financial Sector, End the Great Stagnation?

Posted on by Brad DeLong

Matthew Klein: Crush the Financial Sector, End the Great Stagnation?: “Productivity growth in the rich world started slowing…

…down around the same time that the financial sector’s share of economic activity started rising rapidly…. The interesting question, then, is whether this process can be put into reverse. Maybe there is a deeper wisdom behind financial regulations that appear to be (at best) pointless. Harassment that encourages an unproductive, resource-hoarding industry to get smaller might be exactly what’s needed in economies plagued by chronically slow growth.

Morning Must-Read: Nicholas Bagley: Cleaning Up the Standing Mess in King

Posted on by Brad DeLong

Nicholas Bagley: Cleaning up the standing mess in King: “Difficult questions about standing and the viability of the lawsuit…

…The King lawyers have an ethical obligation[:]… ‘[w]hen a development after this Court grants certiorari… could have the effect of depriving the Court of jurisdiction due to the absence of a continuing case or controversy, that development should be called to the attention of the Court without delay.’… Without standing, the federal courts lack jurisdiction…. When standing problems become apparent after full briefing, the Court sometimes chooses to dismiss cases as improvidently granted–to ‘DIG’ them….

There’s a better way… call for… plaintiffs’ lawyers to explain the factual basis for their clients’ standing. Ordering such briefing wouldn’t be unprecedented: in a case decided in 2000, for example, the Court ordered supplemental briefing on standing the day after oral argument. And such briefs often address questions pertaining to mootness…. Doing nothing in the face of continued silence from the plaintiffs is no longer a tenable approach.

http://theincidentaleconomist.com/wordpress/cleaning-up-the-standing-mess-in-king/