Income Distribution Does Matter. It’s Wrong Now and Stopping Growth.

When people think about “income distribution” there’s a tendency to think of it only in terms of what different people or households have available to spend.  In other words, we focus on the fairness or equity of whether some households should only have a small amount of money to live off of vs. others who get a large amount of money to live off of.  The debates then often deteriorate into whether or not the households put forth effort (“worked”) for their income and therefore “earned” it.

But there’s more to the issue of income distribution.  A household’s income is not just determined by how much “effort” it’s willing to make or how much “investment” it’s made in the past.  So a household’s income isn’t just how much you work and what education/qualifications you have.  The general level of wages matters too.  And that’s determined at the macro level by institutional arrangements in society.

The nature of production is that it requires both capital and labor.  The joint product is then sold.  This is called productivity.  Part of the income distribution question is “how is the value from joint productivity split up between payments to capital and payments to workers”.

In the U.S. during the Golden Era, the period of World War II until the mid-1970’s, the social contract and institutional arrangements were that the benefits of increased productivity were split evenly between both capital and labor.  Both benefitted.  Starting around 1980 that deal was cancelled.  The social contract has increasingly moved to all gains from improved productivity going to capital and none to labor.  As a result, labor’s share of national income has consistently declined.  The Great Recession was a major blow.  It’s this change in the social contract that is the root source of the frustration and pain felt by so many households.

Garth Brazelton at Economics Revival explains why this matters now.  He explains why we are still in a recession, or at least why the 90% or so of us that work for  a living as opposed to living off of interest and profits are still in recession:

Who cares about double-dip. We never left. Why? because you can’t get out of a recession without consumers/labor income growth. While productivity has grown over the last few years, labor’s share of national income continues to plummet. This implies that others (capitalists / profit-makers) are ‘out of their recession’ but consumers and laborers are not.

The BLS has a nice publication here.

Ordinarily a low cyclical labor share isn’t necessarily a problem because firms can use profits to invest in new business ventures a eventually lower the unemployment rate and provide more compensation in a recovery. The problem here of course is that firms are too busy paying off past debts from poor decisions made a decade ago, or two skittish to do anything substantial with their profits at the moment. So that, in combination with the low labor share of income is like a double-whammy for consumers and laborers who see the haves continue to have and the have-nots continuing to have nothing.

A Contagion of Bad Ideas. Not Only Slaves to Defunct Economists, but Slaves to Bad Ideas.

I’m still away on the road (which is why comments and questions in the last week have gone unanswered).  However, while I’m away, here’s a point made by Joseph Stiglitz at Project-Syndicate.org.  John Maynard Keynes famously said that today’s policy-makers are the slaves of defunct economists.  Joseph says, and I agree, that today’s policy makers are really the slaves of not only defunct economists, but some very bad and discredited ideas from those economists.  It’s these bad ideas that are hurting us the most.

Stiglitz observes the urgency with policymakers on both sides of the Atlantic are eagerly pursuing contractionary policies at a time when growth is negligible and unemployment persists at a very high level. In the U.S., the Republicans threatened a government shutdown and/or default if the government didn’t significantly cut spending while refusing to raise taxes even on the very rich who have benefitted so much in the last decade. President Obama surrendered to the Republicans’ desire for contractionary policy, taking the Democrats with him.  All of this in a mistaken belief that somehow cutting spending, balancing the government budget, and reducing government debt (which leads to increased private debt) would somehow help the economy.  The problem is that while there are economic theories and economists who argue that such policy will work, these policies were discredited a long, long time ago.  Further these failed theories have never shown that they would work.  The historical evidence refutes the austerity position.

In Europe, it’s worse.  European leaders, having set  up a currency union (Eurozone) that stripped member nations of valuable fiscal policy tools, are convinced that cutting spending (which slows an economy) will balance their budgets and calm bond markets.  Unlike the U.S., which has it’s own central bank and therefore ends up paying very low interest rates on government debt (there’s no risk of default), Greece, Italy, Ireland, Spain, and the others are all paying significant and rising interest rates on government debt.  Without their own central bank and wearing the Eurozone-imposed fiscal strait jackets, these countries continue to cut, their economies weaken and shrink, and their deficits just get bigger.  Why?  Because you can’t cut spending faster than tax revenues drop from the slower economy that the spending cut produced.  Nonetheless, the European leaders persist.

Stiglitz concludes in A Contagion of Bad Ideas:

The end of the stimulus itself is contractionary. And, with housing prices continuing to fall, GDP growth faltering, and unemployment remaining stubbornly high (one of six Americans who would like a full-time job still cannot get one), more stimulus, not austerity, is needed – for the sake of balancing the budget as well. The single most important driver of deficit growth is weak tax revenues, owing to poor economic performance; the single best remedy would be to put America back to work. The recent debt deal is a move in the wrong direction.

There has been much concern about financial contagion between Europe and America. After all, America’s financial mismanagement played an important role in triggering Europe’s problems, and financial turmoil in Europe would not be good for the US – especially given the fragility of the US banking system and the continuing role it plays in non-transparent CDSs.

But the real problem stems from another form of contagion: bad ideas move easily across borders, and misguided economic notions on both sides of the Atlantic have been reinforcing each other. The same will be true of the stagnation that those policies bring.

Joseph E. Stiglitz is University Professor at Columbia University, a Nobel laureate in economics, and the author of Freefall: Free Markets and the Sinking of the Global Economy.

Copyright: Project Syndicate, 2011.  Excerpts republished with permission.

 

You might also like to read more from  or go to Project-Syndicate  home page.

China’s Challenge

A decent article in the LA Times about the challenges facing the Chinese:

China tries to put brakes on overheated economy – How well China succeeds in slowing its economy without triggering a slump holds enormous consequences for the rest of the world economy.

 

The essence is that the Chinese economy, which has been growing at 8-9% per year for nearly two decades has based it’s growth on heavy investment spending and strong exports. In particular, to help China overcome the global recession in 2008-09, the Chinese government launched a huge Keynesian-style stimulus program of government spending and support for bank lending.  It worked.  In fact, it worked better than the weaker attempts made in most other nations.  But now, China faces a challenge.  It’s been growing so fast for so long, that the really attractive investment opportunities are gone.  Now the bank lending craze and investment craze is going after very dubious and low-return projects.    The nation is starting to push up against it’s limits.  When that happens, when the economy’s resources are already fully occupied (particularly labor), then you get inflation.  Indeed China is now experiencing some moderate and rising inflation.   They already have what appears to be a real-estate price bubble.  What they have to do is to  gradually switch over to more consumption than investment, but that’s a hard transition to make smoothly.  If they fail and their economy goes into a crash or even a moderately bad recession, it’s bad news for everybody because right now, China’s one of the strongest economies on the global scene. The U.S. needs China to keep growing if the U.S. hopes to expand it’s exports.

Solar Power Looking Brighter Economically

John Quiggin of Crooked Timber sends us to Grist.org for “Solar Gets Cheap Fast” for good news about solar power.  The cost of producing solar photovoltaic cells (the silicon-based cells that convert sunlight to electricity) has been declining consistently at 20% per year since the early 1980’s.  Solar power is now close to the point where it is cost-competitive with fossil-fuel (coal, natural gas) and nuclear.  When we consider that any new coal-fired power plants will take 5 years or more to build (nuke even longer), then solar is now in the competitive horizon.  This is great news.

It really shouldn’t be news though.  We should have expected it.  Anytime a new product/technology goes into production, per-unit costs generally decline.  And, they generally decline at a predictable rate.  Two micro-economic phenomena combine to produce this predictable declining cost curve.  The first is often described in principles textbooks (although often over-stated):  economies of scale.  As production volumes get larger, often (not always) per unit costs decline because cheaper production technologies become feasible – it’s the phenomenon of mass production.  But another curve is involved.  It’s called an experience curve. Basically an experience curve summarizes how, even with using the same scale technology, as producers get more cumulative experience with producing the item, they produce it more efficiently.  In plain talk it’s called learning-by-doing.  It’s a staple of many business strategies, particularly in electronics.  While the specific improvements aren’t foreseeable ahead of time, the fact that costs will decline is predictable.  In other words, it’s predictable that we will learn.

Socially and economically, the arrival of wide-scale solar electricity generation is a good thing.  Solar electricity generation doesn’t create green house gases or other pollutants. It can be more effectively decentralized, relying less on huge power plants. The systems involved aren’t dependent on the kind of complex safety systems that make nuke power and coal dangerous. It doesn’t require a huge distribution and logistics network to mine/drill and transport a scarce natural resource like coal or gas.  And, solar installations can do double duty.  Unlike growing plants for bio-fuel or strip mining for coal, solar can be generated on top of existing buildings.   Critics often claim that solar is unreliable because “the sun doesn’t always shine”.  But solar system fit well with the demand for electricity.  Demand for electricity peaks in summer when the sun shines the most (think air conditioning). So the condition that creates peak demand for electricity is exactly the condition that generates solar power.  Further, newer solar systems are increasingly capable of generating electricity (albeit not as much) from just daylight even when bright sunlight is not present (does your solar-powered calculator stop indoors?).  Personally I’d rather trust the sun to rise each  day and provide daylight than to trust that engineers have perfect control of the safety of an inherently dangerous and polluting power plant (Fukushima anyone?).

The arrival of cost-effective solar power is also an object lesson in why government subsidies are often justified for new technologies.  Often, when new technologies are invented, the costs (“business case”) are too high to be practical or competitive with existing alternatives, despite the conceptual attractiveness.  We have a “new technology chicken-and-egg”.  Private investors and private firms won’t touch the new technology because it will take too long for costs to decline to a point where they can make the kind of high returns they want.  It’s too risky for them and too-long range.  Private investors and corporations really don’t think very long term.  But, until somebody actually begins producing the item we don’t gain the benefits of economies of scale or learning experience.  It’s at times like this that governments can play a great role.  Governments, by borrowing at the lowest interest rates, can take the long-run view.  They can invest because the benefits will be social and benefit the larger economy later.  Governments have, in fact, been key to creating new technologies and economic growth throughout the last several hundred years.  The telegraph, the telephone, electrical generation/distribution, canals, railroads, improved ocean navigation, computers, networks (including the Internet and World Wide Web that brings you this story), automobiles, aircraft and airlines — all these were dependent upon government early on and would not have happened had it not been for government.

That’s not to say government should always own, operate, and scale up the businesses that do it.  There’s a variety of mechanisms for government to seed and feed new technologies.  But that’s a different discussion.

U.S. Life Expectancy Falling In Some Parts

I learned long ago when working in applied economics that averages (means or median data) often hide as much information as they impart.  To really understand an issue, we need to look at the variation or distribution.  Therein always lies a tale.  Yves Smith at Naked Capitalism (also the author of Econned), brings our attention to one such disturbing long-run indicator: life expectancy.  Despite the overall average life expectancy in the U.S. having risen significantly over the last decades, this longer lifespan is not evenly distributed.  In some counties in the U.S., life expectancy has been declining – and that was before the Great Recession/Workers Depression/Financial Unpleasantness.  (italic emphasis is mine; bold is from original):

Life Expectancy Fell in Many Counties in the US BEFORE the Crisis

A rising tide did not lift all boats even when the economy looked a lot better than it does now. As Francois T, an MD and medical researcher, wrote:

If you need ONE Indicator of how a nation is doing, it ought to be female life expectancy at birth. It is a tell tale sign that a lot of good things, (or bad things) are happening in the nation under study. … people severely underestimate the real repercussions and total costs of a decrease in female life expectancy at birth.

He pointed to a just-released study, Falling behind: life expectancy in US counties from 2000 to 2007 in an international context. Some of its major findings:

Large swaths of the United States are showing decreasing or stagnating life expectancy even as the nation’s overall longevity trend has continued upwards, according to a county-by-county study of life expectancy over two decades.

In one-quarter of the country, girls born today may live shorter lives than their mothers, and the country as a whole is falling behind other industrialized nations in the march toward longer life…

Some US counties have a life expectancy today that nations with the best health outcomes had in 1957 … Five counties in Mississippi have the lowest life expectancies for women, all below 74.5 years, putting them behind nations such as Honduras, El Salvador, and Peru. Four of those counties, along with Humphreys County, MS, have the lowest life expectancies for men, all below 67 years, meaning they are behind Brazil, Latvia, and the Philippines.

And get a load of this:

Despite the fact that the US spends more per capita than any other nation on health, eight out of every 10 counties are not keeping pace in terms of health outcomes. That’s a staggering statistic.

Yet looking at this map (click to enlarge), …

And remember, the data in this study goes through 2007. It will take a few years to find out what impact the crisis has had on the health of America’s citizens.

Life expectancy is strongly correlated with real income and socio-economic status within society.   Yes, from a medical standpoint, it’s smoking, type 2 diabetes, obesity, and hypertension that are what limit life expectancy (once child mortality is defeated).  But the incidence of smoking, obesity, etc. is all highly correlated with real income, status, and quality of health care.   Rich people generally don’t smoke, can afford to eat high-quality nutritious food, and get quality health care.  Poor people tend to smoke, get high-fructose corn syrup instead of nutrition, and get lousy health care, if any.

The U.S. simply doesn’t get value for money for all the money it spends on healthcare.  It’s the healthcare system that’s broken.

Can We Afford to Raise Taxes On High Incomes? Can We Afford Not To?


Another tax related post.  It appears that taxes, in particular, taxes on the top income bracket will be a major topic of debate propaganda for the next year and  a half until the next presidential election.  Part of the reason is because the tax deal done last December (2010) between Republicans and Obama last December (2010) perpetuated the Bush-era tax cuts until Dec. 31, 2012, just after the election.  Another reason is because the Republicans in Congress, led by Congressman Paul Ryan have passed a proposed budget that will cut the top individual federal marginal income tax rate to 25%, ten points below the even the Bush-era 35%!  (source: Reuters)

The Republicans and Tea Partiers basically offer three arguments for cutting the top tax rates on high-income folks. None of the arguments hold up under examination.  First, they argue that the U.S. is too heavily taxed already. So, let’s compare the U.S. to other countries in the graph at the right from CBPP.  The U.S. is in fact, a relatively low tax country compared with other developed, industrialized nations.  (although to be fair, we should note that the other countries on the graph pay for healthcare for all their citizens and most of it comes from the government budgets).

So let’s move onto the second argument.  Republicans like to argue that cutting taxes for the top end, for the rich and high income brackets will create jobs.  They repeatedly call these high-end income folks the “job creators”.  Apparently out of some pique, these people refuse to “create jobs” for us lesser people whenever their tax rates exceed some number around 35%.  Unfortunately, this concept has been tried before and found wanting.  Simply put, there’s no empirical support for the idea that cutting tax rates primarily on the top end bracket will create jobs.  See here and here for more details. George Bush and the Republican Congress cut taxes and tax rates in 2001. At the end of the decade, in December 2010, the net increase in jobs (employment) in the U.S. was zero. That’s right. Not a single net new job.  No more people were employed in Dec 2010 than were employed before the tax cuts.  As I’ve discussed before, this doesn’t mean that Keynesian theory that cutting total taxes collected on from the nation has been disproven. Rather it means that how the taxes are cut matters.  Tax cuts only work to stimulate the economy and create jobs when they create new spending.  Tax cuts on the top brackets don’t create new spending, though.  They create a boom market in fixed luxury assets such as mansions in the Hamptons, Vail, or outside the country.  Tax cuts on the top brackets help fuel investments in off-shore funds and overseas entities, but they don’t really drive much spending here at home, at least not the kind of spending that drives good jobs and middle-class incomes.  Let us not make a mistake, while the Bush-era tax cuts included some minor cuts for lower income brackets, the overwhelming benefit accrued to the top bracket, as shown below (again from CBPP).  For more details and to see the real empirical record of tax rates vs job creation/economic growth, see Presimetrics, a site and book well worth the read.

Now let’s consider the third argument often provided as to why we need to cut tax rates for the top bracket.  Strange as it may sound, but the argument is offered that it’s the fair thing to do.  I know when you look at comparable average tax rates by income bracket like I did here and here, that it seems like the tax code is already quite fair to people earning a million dollars or more.  Yet their argument goes that it’s the richest people who pay for most of the government’s total taxes paid.  They cite the fact that the top income bracket people pay the majority of all tax dollars collected by the government.  That’s true.  But they neglect to say that it’s because the top bracket gets the dominant share of income in the U.S, not because the tax rate is too high.  Indeed, the top bracket payers are the only ones who have really benefitted in the last 30 years and seen their incomes grow substantially.  See the accompanying CBPP chart to see how the top 1% has seen it’s income rise 281% since 1979 (as it’s tax rates have been on a long down-hill slide), while the lower 80% barely grew 25% income.  The reality is that the top bracket pays the majority of tax dollars because they get the majority of the nation’s income.  Yes, the income distribution numbers are that out of whack.  The top 1% of households by income get a whopping 17.9% of all national income.  That’s just the top 1%!  Their share was only 7.5% 30 years ago.  (source: CBPP)So, actually the fair thing would be for the top bracket to pay a little more since they’ve benefitted the most from the current tax regime.

During the 30 year time frame that the top bracket has been raking in a larger and larger share of the national income while seeing their income tax rates decline, the lower brackets, the ones with incomes below $100,000 have seen their payroll tax rates double to build a giant Social Security trust fund.

Overall, I think we can afford to raise tax rates on the high income tax bracket.  In fact, if anything, there are good reasons to raise tax rates on the high end. First, since our government persists in it’s belief that it must borrow to finance a deficit (an unnecessary self-imposed constraint) and since many politicians, including those Republicans, think it’s a good thing to reduce the deficit (opinion I do not share), then we should.  As I observed with the post on the do-nothing plan, letting the Bush-era tax cuts expire and letting the existing law take force in January 2013 to raise the top tax bracket to 39%, which it was during the Clinton low unemployment years is a good plan. Let’s see what happens when if we allow the Bush tax cuts to expire and let the top rate go back to the 90’s era 39% vs. keeping the present 35% rate.  Again, CBPP obliges.

A strong argument can be made that the top bracket benefits disproportionately from the work of the government.  It’s not the poorest households that have investments in the middle east and around the world that are protected by the U.S. global military presence. It’s the richest. Time to pay the bill.

Libya, Tunisia, Egypt – One of These Is Not Like The Other

Lately I’ve been puzzled about why NATO and the U.S. have intervened militarily in Libya, but stayed out of popular rebellions in Tunisia, Egypt, Yemen, Bahrain, and other middle east countries.  Human rights concerns doesn’t seem to fully explain it.  After all governments in Yemen and Bahrain in particular have violated human rights without so much as peep from the U.S.  Yes, there’s the oil explanation, but Libya doesn’t have that much oil (less than 2% of world exports) and besides Western firms (BP and Marathon) were involved in the production anyway.

Now comes a very interesting piece from Ellen Brown at Web Of Debt.  It’s the kind of thing that makes you go “hmmmm”:

If the Gaddafi government goes down, it will be interesting to watch whether the new central bank joins the BIS, whether the nationalized oil industry gets sold off to investors, and whether education and health care continue to be free.

Several writers have noted the odd fact that the Libyan rebels took time out from their rebellion in March to create their own central bank – this before they even had a government. Robert Wenzel wrote in the Economic Policy Journal:

I have never before heard of a central bank being created in just a matter of weeks out of a popular uprising. This suggests we have a bit more than a rag tag bunch of rebels running around and that there are some pretty sophisticated influences.

Alex Newman wrote in the New American:

In a statement released last week, the rebels reported on the results of a meeting held on March 19. Among other things, the supposed rag-tag revolutionaries announced the “[d]esignation of the Central Bank of Benghazi as a monetary authority competent in monetary policies in Libya and appointment of a Governor to the Central Bank of Libya, with a temporary headquarters in Benghazi.”

Newman quoted CNBC senior editor John Carney, who asked, “Is this the first time a revolutionary group has created a central bank while it is still in the midst of fighting the entrenched political power? It certainly seems to indicate how extraordinarily powerful central bankers have become in our era.”

Libya’s national central bank is not only not part of the BIS, the Bank of International Settlements in Switzerland, that regulates and coordinates international banking, but Gaddafi’s government has been actively promoting an alternative international currency and banking structure for African and Arab nations. The alternative currency and banking structure would greatly weaken the power of large, private international banks (largely U.S, British, and European) and facilitate popular policies in those countries.  Libya’s status as a non-member of the BIS is a status it shares with Iraq, Iran, Somalia, Sudan, and Syria.  Again, it just makes you go “hmmmm”.  I recommend following the link and reading the entire article here.