Economic Misinformation

[Cutlass]

I certainly agree that GDP doesn't always correlate well with well-being. It's hard to find a decent alternative that doesn't have weighting problems, but the problem is there and economists should put more attention on it.

I recall having this discussion in a development econ seminar; the answer we came to was that (1) at least GDP is pretty easily measured, relative to alternatives and (2) GDP does correlate quite well with health/education/freedom/etc, things that people (presumably) do care about.

(n.b.: my previous remarks aside, the growing disparity between GDP statistics and household income surveys over the past 30 years is vexing and not a little distressing.)

So which side of the debate on the great growing income divide do you fall on? Have you studied it?

 

[BuckeyeJim]

Good point (the point of using median which hasn't moved much is to suggest that growth in household income has not been distributed equally in recent decades), but mean or median household income, either way, doesn't necessarily correlate with GDP growth or with well-being.

He's talking per capita income as though that's household income, when the income approach includes all the non-household income as well.

Household or non-household income, doesn't much matter to me. What matters to me is that I have a much greater opportunity at living the life I want than I would in Finland where I'd have an equal chance at being supported through college to earn a median income substantially lower than the one in America.

But I mean, at least they're more equal in Finland.

 

[Arwon]

Integral: Yeah, I work for our agency which produces the GDP figures, and we do actively try to discourage people from using it for a purpose for which it's not intended. It's fine for what it does (some methodological debates nonwithstanding) but it's a far more limited measure than ordinary people generally think.

It did correlate with well-being back decades ago when incomes and standard of living were lower but it seems that above a certain level (which the rich world is certainly above) it stops being that important a factor.

The problem of well-being is a pain - if there was an easy measure of well-being and quality of life it'd be being done already. I do quite like the OECD's new attempt, an indicator approach where people can choose their own weightings.

Household or non-household income, doesn't much matter to me. What matters to me is that I have a much greater opportunity at living the life I want than I would in Finland where I'd have an equal chance at being supported through college to earn a median income substantially lower than the one in America.

But I mean, at least they're more equal in Finland.

Lovely for you. Not true for many other Americans in more difficult circumstances.

 

[BuckeyeJim]

The poverty line for a family of four is the same as the median income in Finland. I'm not sayin', I'm just sayin'. And a lot of our folks living under that floating threshold predicated on national production are students who won't be there for very long.

 

[Arwon]

Hang on, are you claiming that one typical Finn can support a family of four to a level above the poverty line in the United States?

 

[BuckeyeJim]

Hang on, are you claiming that one typical Finn can support a family of four to a level above the poverty line in the United States?

Not something to be all that proud of considering an average American can support a family of 6 on our median wage.

 

[Arwon]

But it hardly supports the claim that Finns are poor now, does it?

Also what's your dollar worth these days? Reckon I could live like a king over there.

 

[Integral]

So which side of the debate on the great growing income divide do you fall on? Have you studied it?

I think that about one-third of the difference between the macro-GDP estimates and the micro-household income estimates can be explained through statistical discrepancy.

The remaining two-thirds of the difference is a real increase in income inequality.

Let's take this slowly.

Start with proximate causes, then dig deeper.

Proximate causes

Begin with a simple model: Y = wL + rK where y is household income, wL is wage * hours worked and r*K is the return on capital investments; i.e. capital income. One could split labor between first and second earner, but it's honestly not that huge of a factor, really, post-1980.

If income inequality is increasing, it should come from a combination of three sources: rising disparity in wage income between rich and poor, rising disparity in hours worked between rich and poor, or rising disparity in capital income.

The OECD did a report on this in 2002. They found that:
- 75% of the increase in income inequality was driven by wages rising faster for the top 10% than the bottom 10%
- The remainder is due to disparities in hours worked (higher-income households tend to work longer hours) and due to capital income (which disproportionately hits households that are already high-income)

One level deeper: from wages to...
So rising income inequality is basically being driven by rising wage inequality. So what drives that?

- The skill premium: higher-educated people go into higher-earning industries and make higher wages. The discrepancy between low-skill and high-skill wages has increased due to advances in technology on the high end, and due to competitive international alternatives to using low-skill labor stateside.

- Changes in household composition. Rich women marry rich men; hence rich households tend to be rich in both spouses. By contrast, poor housholds are more likely to be single-earner households or be poor in both spouses. I'm less familiar with this line of research, though it looks promising.

- Changes in the tax and benefit structure. Put bluntly, there is less raw transfer of income now (1990-2005) than there was in the past (1960-1980).

Some reading

OECD, "Growing Income Inequality." 2011. (excellent survey) link


----


Okay, that was all factual. Rising income inequality is real even after correcting for statistical discrepancies between median income and average output measures.

So what do we do?

First, make college more affordable, particularly by expanding merit aid, is an obvious first step. I'm in favor of doing this at the national level; everyone that makes a 3.0 or better in high school gets a $X scholarship for any college in the country. The current state-level versions are excellent, but tend to restrict use to in-state purposes.

Encouraging non-college options for those who can't or won't be able to do a four-year degree. Not everyone needs to go to college, but virtually everyone needs some kind of postsecondary training to tap in to the high-skill, high-wage wedge of the market.

Those two help with the skill premium.

Second, I'm in favor of reforming the tax/ransfer system. Eliminating a lot of tax expenditures would close a bunch of loopholes and raise a good chunk of revenue, mostly target the top quintile, and would make money available if you are determined to redistribute it. I like EITC-esque approaches, i.e. those that subsidize work for low-income folks. I'm less thrilled with calls for more welfare, but that's a discussion for another time.

----

Austrian stuff
Since I'm here...

1) Austrian microeconomics is terrible. I'm sorry. The project to reform neoclassical price theory failed, get over it.
2) Austrian macroeconomics/business cycle theory has some merit, but overall just isn't compelling.

 

[knez]

Financial markets were created an innovated with new stuff in the last 50 years.

Think about it

True, but does not explain this
What does is uncertainty caused by continuous money printing
And recently prudent risk management, ie US banking system and US government despite all the AAA ratings are not perceived as safe by financial markets but somewhere in the lines of on the verge of bankruptcy (relatively good read on the subject link)

I think that about one-third of the difference between the macro-GDP estimates and the micro-household income estimates can be explained through statistical discrepancy.

The remaining two-thirds of the difference is a real increase in income inequality.

yes, income inequality is rising

Let's take this slowly.

Start with proximate causes, then dig deeper.

Proximate causes

Begin with a simple model: Y = wL + rK where y is household income, wL is wage * hours worked and r*K is the return on capital investments; i.e. capital income. One could split labor between first and second earner, but it's honestly not that huge of a factor, really, post-1980.

If income inequality is increasing, it should come from a combination of three sources: rising disparity in wage income between rich and poor, rising disparity in hours worked between rich and poor, or rising disparity in capital income.

The OECD did a report on this in 2002. They found that:
- 75% of the increase in income inequality was driven by wages rising faster for the top 10% than the bottom 10%
- The remainder is due to disparities in hours worked (higher-income households tend to work longer hours) and due to capital income (which disproportionately hits households that are already high-income)

One level deeper: from wages to...
So rising income inequality is basically being driven by rising wage inequality. So what drives that?

- The skill premium: higher-educated people go into higher-earning industries and make higher wages. The discrepancy between low-skill and high-skill wages has increased due to advances in technology on the high end, and due to competitive international alternatives to using low-skill labor stateside.

- Changes in household composition. Rich women marry rich men; hence rich households tend to be rich in both spouses. By contrast, poor housholds are more likely to be single-earner households or be poor in both spouses. I'm less familiar with this line of research, though it looks promising.

- Changes in the tax and benefit structure. Put bluntly, there is less raw transfer of income now (1990-2005) than there was in the past (1960-1980).

Some reading

OECD, "Growing Income Inequality." 2011. (excellent survey) link


----

damn, for a while it looked they were getting something

Okay, that was all factual. Rising income inequality is real even after correcting for statistical discrepancies between median income and average output measures.

So what do we do?

First, make college more affordable, particularly by expanding merit aid, is an obvious first step. I'm in favor of doing this at the national level; everyone that makes a 3.0 or better in high school gets a $X scholarship for any college in the country. The current state-level versions are excellent, but tend to restrict use to in-state purposes.

Encouraging non-college options for those who can't or won't be able to do a four-year degree. Not everyone needs to go to college, but virtually everyone needs some kind of postsecondary training to tap in to the high-skill, high-wage wedge of the market.

Those two help with the skill premium.

you already have to many people getting their worthless college degrees and you want even more of that
even when colleges recently have only questionable distributive effects and provide their students with no knowledge and skills that would have actual positive effects on economic growth?
face it, everybody that can learn something in higher education (engineering and stuff) is in less that 10% of the population and would go to college anyway
why not just give everyone some liberals arts diploma as a gift? it would be a lot cheaper after all

Second, I'm in favor of reforming the tax/ransfer system. Eliminating a lot of tax expenditures would close a bunch of loopholes and raise a good chunk of revenue, mostly target the top quintile, and would make money available if you are determined to redistribute it. I like EITC-esque approaches, i.e. those that subsidize work for low-income folks. I'm less thrilled with calls for more welfare, but that's a discussion for another time.

----

aldo your tax system is close to ridiculous, you are basically arguing for raising taxes
yea, that will fix it

Austrian stuff
Since I'm here...

1) Austrian microeconomics is terrible. I'm sorry. The project to reform neoclassical price theory failed, get over it.

:

2) Austrian macroeconomics/business cycle theory has some merit, but overall just isn't compelling.

how can it be compelling when it claims monetary expansion causes bubbles? who the hell would cash 100 trillion dollars for zynga if that theory goes mainstream?

 

[Death Lord]

Well yes, but your definition of man seems to indicate that all of these things are man, and therefor are just as relevant to economics as anything certain men that don't happen to be lizard, dogs or what have you.

Yes, and I have heard of monkeys developing currency, but most animals are too stupid to develop advanced economies. I don't see what the issue is. you could use physics to work out how chewing gum works, but most people would rather investigate other things (like light and quarks and whatever).

So you are now disregarding your axiom that man acts? If man is anything with the potential to act, and some things with the potential to act, don't, it means (and look closely now because this is how logical entailment actually works) the by necessity, some men do not act.

...OK. While I am asleep, I am not acting. And if there is an omnipotent being, he does not act, he merely is.

You misunderstand me. I'm of the position that "drinking grass juice" like all changes in reality is a logical impossibility and does not really happen. Same with growing, brewing and distributing.
Without citing emperical evidence I'm asking for any sign of the possibility of change.

Fine, imagine that everyone believed in midi-chlorians, which came from certain 'mana nodes', and could be captured in invisible 'pixie glasses'. If people believed in them, an economy could grow around them.

2) Austrian macroeconomics/business cycle theory has some merit, but overall just isn't compelling.

They DID predict this crash. And what particularly isn't compelling?

 

[Integral]

you already have to many people getting their worthless college degrees and you want even more of that
even when colleges recently have only questionable distributive effects and provide their students with no knowledge and skills that would have actual positive effects on economic growth?
face it, everybody that can learn something in higher education (engineering and stuff) is in less that 10% of the population and would go to college anyway
why not just give everyone some liberals arts diploma as a gift? it would be a lot cheaper after all

Note that I specifically said that college is not for everyone; you may have missed that bit. Postsecondary education is essential; college per se is not.

aldo your tax system is close to ridiculous, you are basically arguing for raising taxes
yea, that will fix it

Not necessarily; broaden the base, reduce rates. I'm rather in favor of reducing many income tax rates and abolishing all taxes on saving and investment, but that's for another time. The core problem right now with the tax system is the mess of subsidies, credits, and deductions; simplifying that would do quite a bit to restore some of the pre-1980s equity in the tax code.

Mises and Rothbard attempted to restructure all of core price theory around preference orderings instead of utility functions; in particular, Mises and Rothbard deny the existence of indifference between bundles of goods. Aside from the rejection of indifference, there's nothing particularly wrong with Austrian micro, except that it's irrelevant. So where it's innovative, it's wrong; and where it's not innovative, it's irrelevant.

how can it be compelling when it claims monetary expansion causes bubbles? who the hell would cash 100 trillion dollars for zynga if that theory goes mainstream?

ABCT has bizarre implications for expectations. On that basis alone is ought to be discarded. There are numerous theoretical objections to it; see here, about halfway down, for an abstract. I am less familiar with empirical objections but doubtless someone else can help me out here.

My basic theoretical objection to ABCT is the same as my theoretical objection to NK business cycle theory: both rely on using the short-term interest rate as the barometer of monetary policy. That is, quite simply, untenable. Interest rates were low in the US in 1931, and high in Germany in 1923; would you argue that monetary policy loose in the US and tight in Germany? One cannot use nominal interest rates to judge the stance of monetary policy. One cannot even use real interest rates; though those are marginally better.

The best barometer of the stance of monetary policy is to look at aggregate demand (nominal GDP) relative to trend. Sliding into empirics for a bit: by that measure, monetary policy has been consistently tight since 2008, not loose.

 

[Cutlass]

They DID predict this crash. And what particularly isn't compelling?

So did a lot of other people. How many crashes did they predict that didn't happen?

 

[ParkCungHee]

Yes, and I have heard of monkeys developing currency, but most animals are too stupid to develop advanced economies.

Wait, you're claiming man is to stupid to develop advanced ecnomies? Because you have to remember your definition of man includes animals, plants, microbes and some inanimate objects.

...OK. While I am asleep, I am not acting.

According to your axiom then, you're not a man, if you're asleep, because you cannot act.

Fine, imagine that everyone believed in midi-chlorians, which came from certain 'mana nodes', and could be captured in invisible 'pixie glasses'. If people believed in them, an economy could grow around them.

You're still not understanding my objections. "Everyone" "growing" "capturing" all of these are changes and division between objects and so therefor are logically impossible. You still haven't proven by any logical means that reality can support changes.

 

[BuckeyeJim]

But it hardly supports the claim that Finns are poor now, does it?

Also what's your dollar worth these days? Reckon I could live like a king over there.

My numbers were adjusted for cost of living. And I never said that Finns were poor, I said they make less money on the whole.

 

[Cutlass]

But the bottom 3 quintiles of the population in the US have a lower share of national wealth than the bottom 3 quintiles in Finland. So most Americans are relatively worse off than most Fins.

 

[BuckeyeJim]

But the bottom 3 quintiles of the population in the US have a lower share of national wealth than the bottom 3 quintiles in Finland. So most Americans are relatively worse off than most Fins.

But 4 out of five, if not ALL of the economic brackets afford a better quality of life. Equal poverty is more desirable than an income distribution that sees billionaires and poor people that are still better than the equal countries poverty? That just strikes me as fundamentally morbid.

 

[Arwon]

Hmm. Maybe we should take a poll about whether people would rather be poor in the USA or Finland.

 

[Ajidica]

Poor in Finland. At least they have the advantage of being poor in a land populated by former Vikings and Pagans all while being wrapped up in sensible Scandinavian Modernism bought from IKEA.

 

[Cutlass]

But 4 out of five, if not ALL of the economic brackets afford a better quality of life. Equal poverty is more desirable than an income distribution that sees billionaires and poor people that are still better than the equal countries poverty? That just strikes me as fundamentally morbid.

No. The point is that the extreme inequality, and more to the point, growing inequality, is disruptive to home, family, schools, neighborhoods, cities, pretty much everything. Add that to a society that thinks it's OK to shortchange the poor, and you have far more effort required for the poor to succeed than, for example, you had to. From what you have said, you've had to work very hard for the success you have had. Kudos for that. But most people richer than you never had to work near as hard, and got much more for it. And most people poorer than you would have had to work far harder, to get less.

Equal ability and equal effort don't produce equal results because the situation that these things take place in does not have equal opportunity.

 

[Death Lord]

So did a lot of other people. How many crashes did they predict that didn't happen?

They didn't. Their theory looks at low interest rates and says "Hey, that will cause mal-investment, there will be a crash coming soon".

Wait, you're claiming man is to stupid to develop advanced ecnomies? Because you have to remember your definition of man includes animals, plants, microbes and some inanimate objects.

No, some men. Just like just because not all adults drink does not mean all adults do not drink.

According to your axiom then, you're not a man, if you're asleep, because you cannot act.

A blender can be defined as an object which can use blades to slice an object (using electricity) which is within it. If it is unplugged, ti does not cease to be a blender.

You're still not understanding my objections. "Everyone" "growing" "capturing" all of these are changes and division between objects and so therefor are logically impossible. You still haven't proven by any logical means that reality can support changes.

They don't exist but people still believe in them. An idea affecting action is not dependent on its actual existence nor clarification.