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Posts:
Income Inequality Does Matter And It Makes Us Worse Off includes Wilkinson TED talk

Update on Current Situation – October Jobs Report and 3rd Qtr GDP  – two graphs

  • unemployment graph

Student Loans and the Building Crisis –

  • graph on increase in student loan debt vs. decline in others
  • graph on young college grad earnings vs. college costs

The Atlantic article:

Here’s a chart based on New York Federal Reserve data for household debt. The red line shows the cumulative growth in student loans since 1999. The blue line shows the growth of all other household debt except for student loans over the same period.

crazy student loans 2011-q2.png

This chart looks like a mistake, but it’s correct. Student loan debt has grown by 511% over this period. In the first quarter of 1999, just $90 billion in student loans were outstanding. As of the second quarter of 2011, that balance had ballooned to $550 billion.

Some Other Interesting Perspectives on OccupyWallStreet

  • graph on household income distribution of income 99% vs. 1%

What a Liquidity Trap Looks Like in Pictures

  • graph on GDP gap since recession

The Mean and the Median Tell Two Different Stories

  • graph of average GDP vs. median income since 1975

Quickie – Some Graphs

I’ll be talking tomorrow to a bunch of students about income distribution, student loans, and other things of interest to the #OWS crowd.  These are some graphs I’ve collected from other sources that I’ll use.  No time to write much analysis today. It’s mostly just the graphs.

From Paul Krugman:

The true age of spectacular growth in the United States and other advanced economies was the generation after World War II, with post-Reagan growth nowhere near comparable. So why do these people imagine otherwise?

And the answer, once you think about it, is obvious: growth for whom? There’s only one way in which the post-deregulation boom was exceptional, and that’s in terms of the growth in incomes at the top of the scale.

Here’s a comparison of the postwar boom with the deregulation alleged boom, using real average family income from the Census and real average income for the top 1 percent from Piketty and Saez:

If you’re looking at the average, the last generation is a poor shadow of the postwar boom. But if you’re talking about the 1 percent, wonderful things have happened.

From CBO via Krugman again:

Inequality Trends In One Picture

Just an addendum on the role of the top 1 percent versus the college-noncollege differential. Here, from the CBO report, are the changes, in percentage points, of the shares of income going to three groups. The top quintile excluding the top 1 percent – which is basically the abode of the well-educated who aren’t among the very lucky few – has only kept pace with the overall growth in incomes. Just about all of the redistribution has taken place from the bottom 80 to the top 1 (and we know that most of that has actually gone to the top 0.1).

It’s a tiny minority, not a broad class of well-educated Americans, who have been winning here.

Again from CBO via Krugman:

A Mind Is A Terrible Thing To Lose

OK, I see that some people are doubling down on the claim that rising inequality is all about education — when what the CBO report drives home is that this is all wrong, the big increase has come from gains at the very top. I have to admit that I have a sneaking suspicion that this is in part driven by KDS (DS for derangement syndrome): some people will rush to take a position precisely because I have debunked it. But anyway, it’s really, really wrong.

Here’s the CBO result:

Notice that the 81-99 percentiles have seen only modest gains; it’s really the top 1 percent that drives the story.

For comparison, here’s some data on wages of men by education from EPI:

Again from CBO via Krugman:

Graduates Versus Oligarchs

Dean Baker raises an important point here: it’s really awfully late in the game to be saying that the important inequality issue is college graduates versus non-graduates. It’s not clear that this was ever true, and it certainly hasn’t been true for a while.

wrote about this years ago, using Ben Bernanke’s maiden testimony as Fed chair as an entry point. As I said then, Bernanke — like many others — had made

a fundamental misreading of what’s happening to American society. What we’re seeing isn’t the rise of a fairly broad class of knowledge workers. Instead, we’re seeing the rise of a narrow oligarchy: income and wealth are becoming increasingly concentrated in the hands of a small, privileged elite.

I think of Mr. Bernanke’s position, which one hears all the time, as the 80-20 fallacy. It’s the notion that the winners in our increasingly unequal society are a fairly large group — that the 20 percent or so of American workers who have the skills to take advantage of new technology and globalization are pulling away from the 80 percent who don’t have these skills.

Why would someone as smart and well informed as Mr. Bernanke get the nature of growing inequality wrong? Because the fallacy he fell into tends to dominate polite discussion about income trends, not because it’s true, but because it’s comforting. The notion that it’s all about returns to education suggests that nobody is to blame for rising inequality, that it’s just a case of supply and demand at work. And it also suggests that the way to mitigate inequality is to improve our educational system — and better education is a value to which just about every politician in America pays at least lip service.

The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of inequality may have as much to do with power relations as it does with market forces. Unfortunately, that’s the real story.

Let me illustrate this point with some CBO data. First, from the new report, here are the income shares of the top 1 percent and the rest of the top quintile:

There has been no rise in the share of the 81-99 group! It’s all about the top 1 percent.

Second, even within the top 1 percent the gains are going mainly to a small minority. An earlier CBO report, using slightly different methods, looked inside the top 1 percent up through 2005. Here’s some of that data:

The big gains have gone to the top 0.1 percent.

From Menzie Chinn:

CBO on Income Inequality, and Interpreting OWS

by Menzie Chinn

Tabulating Inequality Trends

The CBO released a report on income inequality earlier this week. This means that the “inequality deniers” are having a more difficult time arguing that widening spreads an wages, compensation, or overall income are merely statistical artifacts dreamt up by liberals (see e.g. here). What is of most interest is (i) real after-tax income of the top 1 percentile has risen about 275%, and (ii) the pre-transfers/pre-tax income share of the top 1% has increased most profoundly.

SummaryFigure1.png
Summary Figure 1, Growth in Real After-Tax Income from 1979 to 2007, from “Trends in Income Distribution,” CBO Director’s Blog, 25 October 2011. SummaryFigure2.png
Summary Figure 2, Shares of Market Income, 1979 and 2007, from “Trends in Income Distribution,” CBO Director’s Blog, 25 October 2011.The CBO Director’s Blog observes:

The rapid growth in average real household market income for the 1 percent of the population with the highest income was a major factor contributing to the growing dispersion of income. Average real household market income for the highest income group tripled over the period, whereas such income increased by about 19 percent for a household at the midpoint of the income distribution. As a result, the share of total market income received by the top 1 percent of the population more than doubled between 1979 and 2007, growing from about 10 percent to more than 20 percent.

The foregoing is completely consistent with the views laid out in Lost Decades (by me and Jeffry Frieden), Add-Figure 6-1 highlighted in this post, as well as this post.

Interpreting the OWS Protests

Against this backdrop, powerful forces have been deployed against raising tax rates at all on the top one percentile (and instead want to raise taxes on the lower quintiles).[1] [2]. The OWS protests can be interpreted in ths context. From TPM:

…Harvard Government Professor Jeffry Frieden said…

“Every debt crisis leads to major political conflicts over who will pay the price of dealing with the debt burden,” Frieden wrote. “One way or another, the accumulated debts will have to be addressed — either by writing some of them off, or by paying them off. Will the burden be borne by taxpayers? Government employees? Financial institutions? … I think that, in the context of our financial difficulties, OWS may reflect the fact that many Americans feel that too much sacrifice has been demanded of working people and the middle class, and too little of the financial community and the wealthy.”

Diane Lim Rogers, Chief Economist at the fiscally hawkish Concord Coalition, made similar points about the more reckless economic policies of the past decade: Much of the distaste with both Washington and Wall Street comes back to fact that DC is simply unwilling to change course.

“The difference is that during the Clinton years the rising tide was lifting all boats,” Lim Rogers said in an interview with TPM. “Low-income households were still doing better. Even then, the rich did really well, despite their taxes being raised.”

But what’s different now is that income inequality isn’t a political tenet of the left: it’s truly hurting people. Lim Rogers said the poverty rate is actually of more concern than the rich doing better given the circumstances.

“The outrage is not that the rich are richer,” she said. “It’s that the poor have gotten poorer — the inequality has become bipolar.”

Interestingly, Lost Decades, which makes many of these points, has been cited approvingly in at least one OWS document.

This is of course in contrast to views such as that of Econbrowser reader Brian who commented:

I honestly fail to see why some on the left are so concerned about how much money those at the top of the income distribution earn. Why not focus instead on why poor people are poor? And please, blaming that on the rich is a non-starter. People make bad choices in life. They get pregnant before they finish school and have a career started. They use drugs. They get tattoos and body piercings all over themselves and then wonder why no one will hire them for an entry-level job. They do not take school seriously. They have parents who never should have bred in the first place. I really, honestly and truly feel for the poor people and hope they can lift themselves out of poverty. But throwing more money at the problem, and taking it from the “rich”, is not the solution.

This worldview is apparently not rare; see this quote:

I don’t have facts to back this up, but I happen to believe that these demonstrations (Occupy Together) are planned and orchestrated to distract from the failed policies of the Obama administration. Don’t blame Wall Street. Don’t blame the big banks. If you don’t have a job and you’re not rich, blame yourself! …

I think the defenders of the interests of the top income percentile will continue to harp on these arguments: The unemployed are deservedly unemployed; the poor are deservedly poor. This will help distract the electorate from the issue of whom will bear the burden of adjustment to the aftermath of the financial crisis(including stabilizing the debt-to-GDP ratio), and the response to secular trends in income inequality.See more on tax policyhere.

 

 

Brief History of Macroeconomics and The Origins of Freshwater vs. Saltwater Economics

I and others, particularly Paul Krugman, occasionally make reference to “freshwater” vs. “saltwater” economics.  Here’s a little background to explain the terms and, I hope, shed a little light on current disputes in macroeconomic theory.

First, let’s go back in time.  The stuff that economists study, namely the economy, economic behavior, and markets, really emerged as it’s own discipline in the 1700’s with Adam Smith.  It had always been a topic for philosophers to discuss. Even Aristotle writes about the topics.  But it didn’t really emerge from “moral philosophy” into it’s own field of study until Smith.  Originally Smith and the subsequent economists such as Ricardo focused on markets and what we now  call microeconomics with a nod towards questions of political economy (public policy and the whole economic system).  The industrial revolution was in full swing.  The economic system wasn’t really “capitalist” because nobody knew what that was yet.  It wasn’t until the mid-1800’s that the word capitalism becomes commonly used.   Note:  Adam Smith was not a capitalist.  According to the Oxford English Dictionary, the earliest recorded usage of “capitalist” comes in 1792 in France, well after Smith wrote the Wealth of Nations.  

Then in the years just after the Napoleonic wars, England suffered some very severe financial crises and depressions involving the collapse of canal-building businesses.  At the time, Smith’s famous treatise was now 40-55 years old.  The authors now called economists argued about it’s causes and the policies needed to right the economy and restore full-employment.  The center of the debate revolved around questions of “whether there could ever be such a thing as a general glut of commodities”.  In other words, was it possible that the now industrialized economy with it’s newly enlarged banking sector and wide circulation of paper money could be too efficient?  Would such an economy always produce willing buyers for all the goods that sellers wanted to supply?

Two views emerged. One of them, later called “Classical” becomes the dominant thinking in economic circles.  The Classical view denies that long-term high unemployment is even possible as long as the government balances it’s budget and follows a laissez-faire policy of not interfering in markets.  A very mechanistic view of the economy as being constructed of self-adjusting markets that always return to equilibrium evolves.  The Classical view supports a very liberal (old sense) and anti-regulation view of government policy.

Critics existed but they failed to dominate the debate.  Karl Marx in the mid-1800’s writes some scathing critiques of Classical economics focusing on how the mechanism of market equilibrium cannot and does not work as described in labor markets.  Yet despite the critique, the Classical economists continue to dominate policy making and academic circles.  The debate, however, becomes more polarized with the Classicals of the late 1800’s and early 1900’s pushing even more extreme anti-government, pro-market policy positions and models than their Classical predecessors advocated. Many of the critics of capitalism and Classical economics move to the opposite end of the spectrum and embrace socialist, communist, or fascist/syndical economics, in effect taking a position that market capitalism is so fatally flawed that it must be completely replaced by a system of planning by the government.

Despite the dominance of the Classicals, there were always some economists laboring, researching, and writing about the cycles of business and the workings of money and banks.  They just didn’t get much attention or have a comprehensive framework to distinquish themselves from either the Classicals or the planned economy types.

Then came Keynes and the Great Depression.  Classical economics denied The Great Depression could happen – much like University of Chicago economists in 2010 who claimed that today’s high unemployment is the result of workers suddenly choosing to voluntarily have leisure instead of a job.  Keynes writes a powerful book called The General Theory of Employment, Interest, and Money.  Macroeconomics is born.

Keynesian macro focuses on a total systems approach to the economy instead of just assuming that whatever works in a micro perspective in each market will make the total system work.  Keynes attempts to avoid the fallacy of composition. Keynes’s analysis shows that an industrialized, capitalist market economy with a financial/banking sector is inherently unstable.  It tends to have cycles – business cycles.  It’s beyond the intent of this post to explain the reasons, but the bottom-line was that Keynes identified a role for active government and central bank policy to maintain full employment  and stable prices.  Keynes rapidly gained converts in economics and soon the field was split into microeconomics and macroeconomics.

The success of Keynesian economists and Keynesian policies in the 1940’s, 1950’s and 1960’s led to dominance of Keynesian viewpoints.  But there were two subversive trends underway that would eventually reverse the Keynesian dominance and return the Classical viewpoint to dominance.  One was an attempt to build a comprehensive mathematics framework for all economics built on the math of Newton’s physics.  This effort, called the neo-classical synthesis, originally focused on microeconomics.  But eventually it turned it’s attention to putting Keynes’s ideas into the same optimizing-behavior mathematics.  Unfortunately, Keynes himself was long dead by now and unable to clarify what he “meant”.  Some ideas are forced onto him that weren’t necessarily there in the original (such as insisting on static equilibrium).  The second trend was a small group of economists who never agreed.  They were in effect Classicals in exile.  Led by Milton Friedman at University of Chicago and Friedrich Hayek, they launched a two-prong attack.  Hayek’s attack led to what we call Austrian economics today and is often embraced by extreme libertarians.  I won’t get into that here, there’s not enough time.

Friedman’s initial attack focused on re-writing our understand of The Great Depression.  Friedman works to show that monetary policy by the central bank was at fault for the Depression, implying that a laissez-faire government fiscal policy would be best.  Friedman’s disciples at Chicago and elsewhere expanded the attack by insisting on “micro-foundations” in all macro-economic theories and models.  By micro-foundations, they mean that the only acceptable basis for a macroeconomic model is one that is based only on the micro ideas of perfectly rational individuals acting on perfect information with perfectly rational expectations about the future and the nature of the economy.  By the mid-1970’s the Friedman posse was clearly winning the academic wars, in part because their position lent itself easily to using neo-classical synthesis  mathematics and because it was consistent with “micro-foundations”.

Friedman originally took a modified Classical position.  Classicals denied that either fiscal or monetary policy could affect or correct the performance of the whole economy.  Friedman pushed the idea that fiscal policy wouldn’t work but that monetary policy would.  Eventually the next generation of Friedman students and disciples went further and returned to the Classical position that neither fiscal nor monetary policy would work.

As it turns out, these newly re-ascendant Classicals, now being called New Classicals, inspired by Friedman, often taught at universities located inland near some kind of “freshwater”.  The remaining supporters of Keynesian viewpoints, now under severe attack, taught at schools nearer the ocean.  Then in 1976 R.E. Hall pens a paper called Notes on the Current State of Empirical Macroeconomics and identifies this split and associates freshwater and saltwater with the split.

As I see it, the major distinguishing feature of macroeconomics is its concern with fluctuations in real output and unemployment. The two burning questions of macroeconomics are: Why does the economy undergo recessions and booms? What effect does conscious government policy have in offsetting these fluctuations? These questions define the issues considered here. I will further restrict my attention to structural approaches, and will avoid discussion of the reduced-form approach, including its recent sophisticated manifestation (7).

As a gross oversimplification, current thought can be divided into two schools. The fresh water view holds that fluctuations are largely attributable to supply shifts and that the government is essentially incapable of affecting the level of economic activity. The salt water view holds shifts in demand responsible for fluctuations and thinks government policies (at least monetary policy) is capable of affecting demand. Needless to say, individual contributors vary across a spectrum of salinity). The old division between monetarists and Keynesians is no longer relevant, as an important element of fresh-water doctrine is the proposition that monetary policy has no real effect. What used to be the standard monetarist view is now middle-of-the-road, and is widely represented, for example, in Cambridge, Massachusetts.

1To take a few examples, Sargent corresponds to distilled water, Lucas to Lake Michigan, Feldstein to the Charles River above the dam, Modigliani to the Charles below the dam, and Okun to the Salton Sea.