…as I used to tell my students, is that it takes for granted the players’ motives…. In the current deliberations between our European partners and Greece’s new government, the whole point is to forge new motives. To fashion a fresh mind-set that transcends national divides, dissolves the creditor-debtor distinction in favor of a pan-European perspective, and places the common European good above petty politics, dogma that proves toxic if universalized, and an us-versus-them mind-set….
I am convinced that we have one option only: to shun any temptation to treat this pivotal moment as an experiment in strategizing and, instead, to present honestly the facts concerning Greece’s social economy, table our proposals for regrowing Greece, explain why these are in Europe’s interest, and reveal the red lines beyond which logic and duty prevent us from going…
The story of income growth over a lifetime
Income growth, as we usually think about it, over the course of one year is an incomplete picture. Income growth, it turns out, varies quite a bit over the course of workers’ lives. Pay boosts that might be just adequate at one point in life could be a massive improvement at another point. So how exactly does income growth vary over the lives of workers? A new working paper sheds light on this issue in a variety of ways.
The new paper, by economists Fatih Guvenen of the University of Minnesota, Fatih Karahan of the Federal Reserve Bank of New York, Serdar Ozkan of the University of Toronto, and Jae Song of the U.S. Social Security Administration, looks at the income growth of male workers over the course of their working years. More specifically, they look at that growth from the age of 25 to 60. And the data they use is quite large. Using data from the Social Security Administration, their data covers10 percent of all male workers in the United States in every year from 1978 to 2010.
Guvenen, Karahan, Ozkan, and Song document a large number of facts about income growth over the bulk of these men’sworkers’ working lives. They find that a large chunk of income growth—pretty much all of it—happens in the first decade of workers’ careers. But this income growth varies substantially up and down the income ladder, as Danielle Paquette of The Washington Post points out in her write-up of the paper. A worker at the median of the income spectrum will have a growth rate of about 38 percent, while a worker at the 99th percentile will see his income grow by 1,450 percent.
The three economists also look at shocks to income growth in the first decade of workers’ careers. Take, for example, the variance (or range) of growth. The authors find that variance decreases as a worker moves up the income ladder. Income growth moves within a smaller band as a worker earns more. But once a worker starts earning over the 90th percentile, this relationship changes: Variance increases as incomes get close to the very top of the ladder.
Then the authors focus on the so-called “skewness” of income growth. Skewness is a measure of the symmetry of income growth—how often it is growth positive or negative. Guvenen, Karahan, Ozkan, and Song find that income growth is negatively skewed. This means negative shocks to income growth are more likely than positive shocks. And according to their results, the likelihood of negative shocks to income increases as workers earn more and as they become older. This result fits well with the idea that income gains come earlier in workers’ careers. As workers age, it appears income growth mostly has one place to go: down.
As a consequence, the economists explain that the distribution of income growth is quite different from what is usually suspected. Instead of an anticipated smooth bell curve, the distribution has a very high peak and long tails in addition to being negatively skewed. This means most income shocks are small and very close to zero. But there are a few workers who see very large positive and negative shocks to their incomes.
What’s the implication of this work? By documenting the dynamics of income growth, Guvenen, Karahan, Ozkan, and Song demonstrate that the common assumption that income growth is distributed normally, like a bell curve, is misplaced. And if we want accurate economic models of the U.S. economy then our models should match the facts, regardless of how abnormal and asymmetric they are. Today, alas, most economic models do not account for the actual state of income distribution among workers over their prime working years.
Evening Must-Read: John Podesta: Climate Change Progress Is Possible
The proponents of do-nothing on global warming have now fallen back to their third line of defense. The first line of defense was to claim that the science was unsettled. The second line was to claim that it would be too expensive and that future generations would be better able to fix than we are to do our share in helping to prevent and reduce. The third line of defense is that since it is a global problem the United States should sit back and let other countries deal with it and free-ride on their efforts.
And it is definitely progress that John Podesta now feels that he can take aim at line of defense number 3:
…but with obstruction, skepticism, and outright denial. This week, the Senate held a hearing on the EPA’s proposed Clean Power Plan rule, which would set the first-ever limits on how much carbon pollution power plants can put in our air and vastly improve public health as a result, averting up to 150,000 asthma attacks in children per year. Republicans criticized the proposal from every angle–including by claiming it doesn’t do enough. Since we in the United States cannot solve the complex, global challenge of climate change solely through actions taken within our own borders, their argument goes, we should do nothing. This is a fallacy. Failing to take steps today to curb carbon pollution and other greenhouse gas emissions in the U.S. would endanger our economy, our national security, and our children’s future…
Afternoon Must-Read: Raquel Fernández and Jonathan Portes: Argentina’s Lessons for Greece
If there was one lesson that should have been learned from the 1920s and 1930s–and relearned many times since–it is that the stubborn pursuit of destructive policies in the hope that if only they gain enough credibility they will cease to be destructive is, quite frankly, mad. No policy can be less credible than the repeated claim that you will sustain unsustainable policies:
…if the economics are on your side, you can and should ignore politicians prophesying disaster. The vast majority of economists (outside of Germany) agree that Greece’s debt should be written down and its fiscal policy relaxed. There is also little doubt that this is the view of senior economists within the IMF…. The second lesson of the Argentine crisis is that a short period of political turmoil can cost surprisingly little compared to a long period of mindless pursuit of misconceived policies…. Sacrificing Greek interests in the name of European or systemic financial stability may have once been the correct path for the IMF to pursue, but the crisis there is well past the point at which these policies ceased being justifiable. Now that Greece’s ineffectual and unpopular government has been swept away (another accurate prediction), it is time for the rest of Europe to clean up the financial mess…
Afternoon Must-Read: Yuriy Gorodnichenko , Gérard Roland and Edward W. Walker: Putin’s European Fifth Column
It is not just the macroeconomic health of the European Union that is at stake in the European Union’s failure to find a way to reflate and rebalance its economies. The political destiny of what Muscovy calls its “near abroad”–what happens in those former union republics of the Soviet Union with capitals different from Moscow–hinges on the European Union being a success and being seen to be a success. And perhaps the political destiny of Muscovy hinges on this as well…
…and the possibility of EU membership–has played in motivating the struggle in Ukraine and constraining his actions. The popular desire to join Europe’s community of democratic states was a key force behind the collapse of right-wing dictatorships in Greece, Spain, and Portugal in the 1970s. It also played a critical role in the collapse of communist regimes in Central and Eastern Europe after the fall of the Berlin Wall. And it certainly contributed to the ouster of Ukrainian President Viktor Yanukovych–a key Putin ally–in 2014. Indeed, the existence of a European model continues to guide and encourage those pursuing transparent, democratic governance in many post-communist countries…
Things to Read on the Afternoon of February 16, 2015
Must- and Shall-Reads:
- : Benefit of ECB’s Bond Buying: Fiscal Breathing Room | When Is It Time for Mindful Austerity?
- : Majority of Public Says Congress Should Act to Close Gaps if the Supreme Court Bars Financial Help for Purchasing Insurance in States Relying on healthcare.gov; Most in Potentially Affected States Want Their State To Set Up Its Own Marketplace if Needed
- : “What better way [for Sam Brownback] to distract the rubes than to engage in a bit of gay bashing? That’ll get everyone riled up, and maybe they won’t even notice just how much worse off they are than they used to be. It’s a time-honored strategy.”
- : “If it weren’t for the problems with the standing of the other three plaintiffs [in the King vs. Burwell case], I might be inclined to give Luck the benefit of the doubt. But I’m beginning to wonder how thoroughly the King lawyers vetted their clients…”
- : Well, that’s funny, because I happen to have Congressman Doggett right here, so….
- : “Financial stability is apparently the new hot reason to tighten monetary policy, and in this article for Quartz I go in on some reasons for why this is a horrible idea…”
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: Foreshadowing the Three Fraud Epidemics that Drove the Crisis: “[Piskkorski, Seru, and Witkin] were not aware, however, of the answers to these fundamental questions [about mortgage fraud]…. ‘These misrepresentations are not instances of the classic asymmetric information problem in which the buyers know less than the seller. Rather, we contend that they are instances where, in the process of contractual disclosure by the sellers, buyers received false information on the characteristics of assets.’ The use of the word ‘classic’ indicates an important (retrograde) movement in economics. The ‘classic’ treatment of asymmetry… George Akerlof’s 1970 article on a market for ‘lemons’… all about ‘buyers receiv[ing] false information on the characteristics of assets’ in the process of ‘contractual disclosure by the sellers.’ Akerlof presented a dynamic process in which the seller makes false disclosures… to maximize the asymmetry of information…. Indeed, Akerlof emphasized the propagation of that fraudulent asymmetry through the industry as a result of what he dubbed a ‘Gresham’s’ dynamic. ‘[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence‘ (Akerlof 1970). The fact that top economists, 40 years later, claimed that fraud does not represent a ‘classic’ pathology of asymmetrical information demonstrates how far economics has fallen…” -
: Thoughts on a post-King market: “I alternate between being sure that there are five votes on the Supreme Court to throw out a couple of generations of agreed-upon administrative law precedents in order to keep people from getting subsidized health insurance in most states, and being reasonably confident that there are only three…. I see the four liberal judges writing a fairly brief and caustic opinion…. The other two judges in the positive scenario will write a paen to the majesty of cooperative federalism where the law clearly states that subsidies only go to state run exchanges BUT the threat was not clearly communicated therefore, the subsidies have to flow to all states…. But what happens if the Supremes have five sadists?… Quite a few insurers would pull most if not all of their On-Exchange products…. The remaining individual insurance market now looks like the pre-PPACA New York State insurance market…. We get a death spiral where average premiums for a 30 year old would almost double… [and] reasonably-healthy people who otherwise would have qualified for subsidies now sit out of the market because they can’t afford the coverage…” -
: Why Politicians Are so Boring (and the MSM Is so Bad): “Gaffe-coverage… signif[ies] nothing and leav[es] nothing behind… distracts from more consequential, but complicated, debates…. In an internet world of limited time but unlimited newshole the ‘gaffe’ story offers easy content…. Last… the old-time division between ‘news’ and ‘opinion’ continues to saddle much mainstream political coverage with a perverse bias toward tactics and process… that a politician gaffed is a fact… while the fact that a politician’s agenda might be bad for the world is opinion…” -
: Triumph of the Chart: “The Vox interview with President Obama… reactions… not just from the right, but from centrists are remarkable. Jack Shafer compares it to a Scientology recruitment film; Rich Lowry compares it to Leni Riefenstahl…. What seems to offend the critics is the very idea of covering a politician’s policies…. Back in 2004… you could watch all the network and major cable coverage for two months, and learn literally nothing about, say, the candidates’ health care plans…. That’s the kind of thing the people at Vox are trying to fix–and the response is to accuse them of acting like cultists if not Nazis.”
Should Be Aware of:
- : “The misremembering [Brian] Williams claims to have suffered is easy to reproduce in our own lives…”
- : “The feedback… on management fees… grumble[d]… on incentive fees… vociferous and frequently inseparable from complaints about performance… broadly summarised as follows: paying 20% for ‘alpha’ is apparently fine, paying that for ‘beta’ is definitely not…”
- : “This is the Journal of Brief Ideas–citable ideas in fewer than 200 words”
- : Greg Ip Returns to Wall Street Journal as Chief Economics Commentator
- : “[David Carr’s] Colombo strategy… start casual, drop hints & then as the suspect (or reader) relaxes, push the inescapable conclusion…. If I was teaching a J-school class, I’d have students think about those last paragraphs Carr built towards, why they came as surprises. Of course, the type of writing Carr did depended on trust…”
- : “[Ezra] Klein… has 732k Twitter followers and a history of success…. Blogs are not dead, but Klein’s is, and while I don’t begrudge him his choice, I question the degree to which he knows he made one…”
- : “The entire history of social media… is a story of unbundling…. Twitter has replaced link-posts and comments, Instagram… pictures… Facebook… albums and blogrolls… [in] contrast to a blog’s ability to do anything and everything relatively poorly…. [But] the blog has not and will not die: it is the only communications tool… owned by the author; to say someone follows a blog is to say someone follows a person…”
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: “Most existing efforts to find associations between genetic variation and economic behavior are based on samples that are too small to ensure adequate statistical power. This has led to many false positives in the literature…”
Lunchtime Must-Read: Paul Krugman: Triumph of the Chart
…reactions… not just from the right, but from centrists are remarkable. Jack Shafer compares it to a Scientology recruitment film; Rich Lowry compares it to Leni Riefenstahl…. What seems to offend the critics is the very idea of covering a politician’s policies…. Back in 2004… you could watch all the network and major cable coverage for two months, and learn literally nothing about, say, the candidates’ health care plans…. That’s the kind of thing the people at Vox are trying to fix–and the response is to accuse them of acting like cultists if not Nazis.
Nighttime Must-Read: Richard Mayhew: Thoughts on a Post-King Market
…on the Supreme Court to throw out a couple of generations of agreed-upon administrative law precedents in order to keep people from getting subsidized health insurance in most states, and being reasonably confident that there are only three…. I see the four liberal judges writing a fairly brief and caustic opinion…. The other two judges in the positive scenario will write a paen to the majesty of cooperative federalism where the law clearly states that subsidies only go to state run exchanges BUT the threat was not clearly communicated therefore, the subsidies have to flow to all states…. But what happens if the Supremes have five sadists?… Quite a few insurers would pull most if not all of their On-Exchange products…. The remaining individual insurance market now looks like the pre-PPACA New York State insurance market…. We get a death spiral where average premiums for a 30 year old would almost double… [and] reasonably-healthy people who otherwise would have qualified for subsidies now sit out of the market because they can’t afford the coverage…
Dynamic Scoring Considered Harmful: Focus
I had always thought that dynamic scoring was a bad idea because it leads to a ratchet–Democrats when they are in power claim deficit reduction from a stronger economy if their policies are enacted , and then Republicans when they are in power claim deficit reduction from a stronger economy if they undo what the Democrats did. You have no chance of getting policy-effect forecasts that are unbiased on average if you allow the party in power to shape CBO’s estimates of macroeconomic impacts.
The vir clarissimus Robert Lynch has a good look at all the other issues in this can of worms:
The new will apply almost exclusively to tax bills and rarely, if ever, to spending bills. The rule does not apply to spending bills that are ‘discretionary’ as opposed to ‘mandatory’ even if discretionary spending proposals exceed the 0.25 percent-of-GDP threshold. Thus, it does not apply to… regular appropriations… almost all spending or investment in infrastructure, education, health, research, science, national defense…. The House Committee on the Budget has noted that the rule would have applied to only 3 bills in the last Congress, all of which were primarily tax bills….
The theoretical advantages of dynamic scoring… run into an array of serious practical hurdles…. Dynamic scoring relies on less-than-accurate, theory-based macro models… controversial and unproven…. There are numerous studies that have tried to quantify these incentive effects in the real world and have come to contradictory conclusions about whether there are incentive or disincentive effects…. We do not know today how legislation will be financed over time, but the financing method we input into a macro model will affect the model’s prediction for future economic growth. If JCT guesses incorrectly how the tax cut will be financed in the future, then their dynamic score will necessarily be wrong even if the macro models they use are accurately constructed…. So, if we insist on dynamic scoring, which macro model, with which assumptions, will we use?…
If we are going to use dynamic scoring, at minimum it should be done in an appropriate and balanced manner…. [But] CBO and JCT do not have the time or resources to dynamically score all proposals…
Nighttime Must-Read: Matthew Yglesias: Why Politicians Are so Boring (and the MSM Is so Bad)
: Why Politicians Are so Boring (and the MSM Is so Bad): “Gaffe-coverage… signif[ies] nothing and leav[es] nothing behind…
…distracts from more consequential, but complicated, debates…. In an internet world of limited time but unlimited newshole the ‘gaffe’ story offers easy content…. Last… the old-time division between ‘news’ and ‘opinion’ continues to saddle much mainstream political coverage with a perverse bias toward tactics and process… that a politician gaffed is a fact… while the fact that a politician’s agenda might be bad for the world is opinion…