Wednesday, November 30, 2011

What has happened to the distribution of wealth in recent years?

Here are a couple of links that look at this quesion.

Ponds and Streams: Wealth and Income in the U.S., 1989 to 2007 by Arthur B. Kennickell of the Federal Reserve.

Go to page 34, Table 3. The gini coefficient for net worth went from .7863 in 1989 to .8120 in 2007. As the gini coefficient gets closer to 1, the distribution gets less equal (the gini coefficient can go from 0 to 1).

This link from the Cato Institute shows different estimates of what the top 1% owns. The EPI actually shows the top 1% owning less of the wealth in 2007 than it did in 1989 or 1998.

Cato link.

Here is some related information.

Click here to see the data

At this link you can see the gini calculated after taxes and transfers and, it seems, is adjusted for household size. For all people in the mid 2000s, the US has .38 and the OECD average is .31.

Here are the mid-2000s Ginis for household income in selected countries After taxes and transfers and accounting for household size. The U.S. is not that much different.

Australia 0.3
Canada 0.32
France 0.28
Germany 0.3
Italy 0.35
Japan 0.32
Korea 0.31
OECD Total 0.31
United Kingdom 0.34
United States 0.38

Sunday, November 27, 2011

Is Willpower An Untapped Resource?

In economics we say that there are three resources: land, labor and capital. Maybe willpower should be added as a fourth resource. See Willpower: It’s in Your Head by GREG WALTON and CAROL DWECK. Greg Walton is an assistant professor of psychology at Stanford. Carol Dweck, a professor of psychology at Stanford, is the author of “Mindset: The New Psychology of Success.” Excerpts:
"...attributing failures of willpower to our fixed biological limits justifies our procrastination as well as our growing waistlines. But are these theories correct?

We don’t think so."

"...we confirmed that willpower can indeed be quite limited — but only if you believe it is. When people believe that willpower is fixed and limited, their willpower is easily depleted. But when people believe that willpower is self-renewing — that when you work hard, you’re energized to work more; that when you’ve resisted one temptation, you can better resist the next one — then people successfully exert more willpower. It turns out that willpower is in your head."

"...we found that people who believed that willpower was not limited continued to perform well on the second task, making few mistakes, even after facing the difficult initial task. They were not “depleted” and kept on doing well."

"...we found that anyone can be prompted to think that willpower is not so limited."

"During stressful times, like final-exam week, students who believed that willpower was not limited reported eating less junk food and procrastinating less than students who did not share that belief. They also showed more academic growth, earning better grades that term than their “pessimistic” counterparts.

Furthermore, when we taught college students that willpower was not so limited, they showed similar increases in willpower."

"People who think that willpower is limited are on the lookout for signs of fatigue. When they detect fatigue, they slack off. People who get the message that willpower is not so limited may feel tired, but for them this is no sign to give up — it’s a sign to dig deeper and find more resources."

"...when people believe in willpower they don’t need sugar..."

"It’s also a question of what kind of people we want to be. Do we want to be a people who dismiss our weaknesses as unchangeable? When a student struggles in math, should we tell that student, “Don’t worry, you’re just not a math person”? Do we want him to give up in the name of biology? Or do we want him to work harder in the spirit of what he wants to become?"

Friday, November 25, 2011

Economists debate issues at new online policy forum

See IGM Economic Experts Panel. Here is the description:
"This panel explores the extent to which economists agree or disagree on major public policy issues. To assess such beliefs we assembled this panel of expert economists. Statistics teaches that a sample of (say) 40 opinions will be adequate to reflect a broader population if the sample is representative of that population.

To that end, our panel was chosen to include distinguished experts with a keen interest in public policy from the major areas of economics, to be geographically diverse, and to include Democrats, Republicans and Independents as well as older and younger scholars. The panel members are all senior faculty at the most elite research universities in the United States. The panel includes Nobel Laureates, John Bates Clark Medalists, fellows of the Econometric society, past Presidents of both the American Economics Association and American Finance Association, past Democratic and Republican members of the President's Council of Economics, and past and current editors of the leading journals in the profession. This selection process has the advantage of not only providing a set of panelists whose names will be familiar to other economists and the media, but also delivers a group with impeccable qualifications to speak on public policy matters.

Finally, it is important to explain one aspect of our voting process. In some instances a panelist may neither agree nor disagree with a statement, and there can be two very different reasons for this. One case occurs when an economist is an expert on a topic and yet sees the evidence on the exact claim at hand as ambiguous; although we try to word the statements carefully to avoid this, it will no doubt happen at times, and in such cases our panelists vote "uncertain". A second case relates to statements on topics so far removed from the economist's expertise that he or she feels unqualified to vote. In this case, our panelists vote "no opinion".

The panel data are copyrighted by the Initiative on Global Markets and are being analyzed for an article to appear in a leading peer-reviewed journal."

Wednesday, November 23, 2011

Did The Recession Help Lower The Birth Rate?

See Birth Rate Continues to Slide Among Teens by TIMOTHY W. MARTIN in the 11-18 WSJ.
"The birth rate among American teens fell to its lowest recorded level last year, according to a government report, a decline that experts attributed to more-effective sex education and the effects of a tough economy.

There were 34.3 births per 1,000 people 15 to 19 years old in 2010, a 9% drop from 37.9 births the previous year, the Centers for Disease Control and Prevention said Thursday. The rate has fallen in 17 of the past 19 years.

"We haven't seen a one-year decline like this since the mid-1940s," said Stephanie Ventura, a demographer for the CDC and a co-author of the study.

The nation's total number of births fell 3% last year, to four million from 4.1 million in 2009, the third straight year of declines.

The drop was steepest among teens, however. Teenage birth rates peaked in 1991, when there were 61.8 births per 1,000 teens. Over the past two decades, the rate has gradually declined. Fewer teenagers now report having had sexual intercourse than in previous decades. And those who are sexually experienced are more likely to have used contraception than teens in the past, according to CDC data.

In recent years, the federal government has invested millions of dollars in more than 30 sex-education programs that research has shown to lower teen birth rates, according to teen-pregnancy experts. In previous decades, it was unclear which approaches would work and which wouldn't, said Bill Albert, chief program officer at the National Campaign to Prevent Teen and Unplanned Pregnancy, a nonprofit, nonpartisan group.

The programs now have "become less of a body-parts conversation and more talking about relationships," he said.

The rough economy may also dissuade teens from wanting children, because they see their parents or older relatives struggling financially, Mr. Albert said.

Birth rates fell for most ages and all races, a sign that the sluggish economy is leading more women to delay having children. Birth rates fell during previous economic downturns, Ms. Ventura of the CDC said.

Women in their 20s and 30s reported declines, and only women aged 40 to 44 years old saw a rise, increasing 2% to 10.2 births per 1,000 women.

The nation's total fertility rate—the number of children any woman is expected to have in her lifetime—dropped to 1.9, slipping under the 2.1 rate that demographers agree is required for a population to replace itself.

The rate of caesarean deliveries dropped for the first time in 1996. Ms. Ventura said that was an encouraging sign, as the surgery carries more risks than conventional birthing and is costlier."

Sunday, November 20, 2011

Did The Housing Crisis Bring Benefits To College Students?

See Animal McMansion: Students Trade Dorm for Suburban Luxury from the 11-12-11 NY Times. Excerpts:
"While students at other colleges cram into shoebox-size dorm rooms, Ms. Alarab, a management major, and Ms. Foster, who is studying applied math, come home from midterms to chill out under the stars in a curvaceous swimming pool and an adjoining Jacuzzi behind the rapidly depreciating McMansion that they have rented for a song.

Here in Merced, a city in the heart of the San Joaquin Valley and one of the country’s hardest hit by home foreclosures, the downturn in the real estate market has presented an unusual housing opportunity for thousands of college students. Facing a shortage of dorm space, they are moving into hundreds of luxurious homes in overbuilt planned communities."

"The finances of subdivision life are compelling: the university estimates yearly on-campus room and board at $13,720 a year, compared with roughly $7,000 off-campus. Sprawl rats sharing a McMansion — with each getting a bedroom and often a private bath — pay $200 to $350 a month each, depending on the amenities.

Gurbir Dhillon, a senior majoring in molecular cell biology, pays $70 more than his four housemates each month for the privilege of having what they enviously call “the penthouse suite” — a princely boudoir with a whirlpool tub worthy of Caesars Palace and a huge walk-in closet, which Mr. Dhillon has filled with baseball caps and T-shirts."

"A confluence of factors led to the unlikely presence of students in subdivisions, where the collegiate promise of sleeping in on a Saturday morning may be rudely interrupted by neighborhood children selling Girl Scout cookies door to door.

This city of 79,000 is ranked third nationally in metropolitan-area home foreclosures, behind Las Vegas and Vallejo, Calif., said Daren Blomquist, a spokesman for RealtyTrac, a company based in Irvine, Calif., that tracks housing sales. The speculative fever that gripped the region and drew waves of outside investors to this predominantly agricultural area was fueled in part by the promise of the university itself, which opened in 2005 as the first new University of California campus in 40 years."

Friday, November 18, 2011

60 Minutes: Insider trading is legal for members of Congress-but it is nothing new, it started in 1790

See Congress insiders: Above the law?. Here is a brief excerpt:
"* Members of Congress have bought stock in companies while laws that could affect those companies were being debated in the House or Senate.

* At least one representative made significant stock purchases the day after he and other members of Congress attended a secret meeting in September 2008, where the Fed chair and the treasury secretary informed them of the imminent global economic meltdown. The meeting was so confidential that cell phones and other digital devices were confiscated before it began."

But legislators acting on their self interest is not new. Charles Beard wrote about this in his book An Economic Interpretation of the Constitution of the United States. He argued that self-interest was a big force in how the framers wrote the constitution.

In the 1950s, Forrest McDonald wrote a book called We the People : The Economic Origins of the Constitution, in attempt to refute Beard. But more recently, economic historian Robert A. McGuire wrote a book called To Form a More Perfect Union: A New Economic Interpretation of the United States Constitution. He used modern statistical analysis to show that the Beard thesis may be legitimate.

My students might recall that I talk about this on the first day of the semester. Congressmen in 1790 voted on the "Funding and Assumption Act" based on how much money they would receive if that bill passed. The bill paid back all of the debts (bonds or securities) from the Revolutionary War at full value (they were not getting paid back before the Constitution was passed because under the Articles of Confederation all states had to agree to a tax increase-this did not happen much so taxes were never raised to pay back the money the government borrowed to finance the war). But under the Constitution if both the House and the Senate passed a tax increase and the president signed it, it became law.

The debts were securities or bonds. Some congressman owned them. I found how much about half the congressmen owned in these bonds from McDonald's book. The ones who voted yes on the bill had an average of about $6,800 while the ones who voted no had about $764. So it is possible that money influenced the vote.

Here is a passage from John Spencer Bassett's book about the "Funding and Assumption Act" The Federalist System, 1789-1801:
"All the speculating class, in Congress and out of it, were zealously in favor of the scheme; and while it was till being debated they were trying to by all the means known to their class to buy up, even in the remote parts of the country, the old bonds at the depreciated values."

Here are they guys who voted yes and their dollar value of their bond holdings:

BURKE 5252
CLYMER 14000
GALE 4252
GERRY 50000
IZARD 20865
KING 10000
MORRIS 11000
READ 341
STRONG 10903
WHITE 1619

Now the no votes

FEW 640

Wednesday, November 16, 2011

The San Antonio College Student Newspaper, "The Ranger," Has A Front Page Story On "Occupy Wall Street"

Here is the link:

Occupy movement only beginning, political science professor says

I submitted an op-ed piece in reply. It is below. I guess I will find out on Monday if they print it.

I am very concerned about the front page article the Ranger did on the Occupy Wall Street Movement.

I can understand and sympathize with the protesters. Unemployment is especially high for young people. I got my B.A. in 1982, a year when the unemployment rate was over 9%. It was again the next year. In fact, both unemployment and inflation averaged 7.7% over the nine years from 1975-1983. I began college in the middle of that difficult economic period. It was also a time of bailouts. The government bailed out Chrysler and Continental Bank.

The article said that "the movements' focus is big business and the government's failure to regulate big business." They also seem to be concerned about inequality and how much money the top 1% makes. I believe that the movement is either wrong about these issues or overstates their importance. And their solutions could harm the economy in the long run. How exactly regulations and taxes can harm the economy is not widely understood. So let me try to explain.

Let's take regulation. Many feel that it was a lack of regulation that caused the financial crisis. This is a highly debatable point. Experts like Nobel Prize winner Gary Becker, Peter Wallison, Jeffrey Friedman, Columbia University economist Charles Calomiris and Stanford University economist John Taylor have written on how it was regulations that were the main cause. Banks were told to lower their lending standards which caused the demand for houses to reach unsustainable levels. Even the business writer for the New York Times, Gretchen Morgenson, has written a book which lays at least part of the blame on the government created Fannie Mae and Freddie Mac.

It also may not be true that we don't have enough regulations. Federal spending by regulatory agencies is about nine times higher today than it was in 1970 (adjusted for inflation). Thousands of pages of new regulations are added every year.

But if we did add even more regulations, how will we make them work? Does each regulator do more work or do we hire more regulators? If the latter, we run into what economists call "the law of increasing opportunity cost." We have to keep taking better and better workers out of the private sector to join government agencies. Fewer goods and services will be produced. The cost of regulation will grow exponentially.

Regulators are also subject to "capture" by the interests they are supposed to be monitoring. They end up not serving or protecting the public since they may have already worked in that industry and regular people don't have time to watch what government agencies do.

Regulations cost about 8% of the national income each year since we need to pay the cost of the government agencies and businesses must spend money to comply with regulations.

Much has been made of the growing inequality problem. One way to measure this is the "Gini coefficient." The higher it gets, the less equal the distribution of income (it ranges from 0 to 1). Yet the Gini coefficient for full-time workers only rose from .31 in 1970 to .40 in 1994. It has basically been unchanged since then. So by that count, then, inequality is not especially worse now.

It is true that the top 1% of earners have seen their share of income rise. But 57% of those in the top 1% in 1996 were not there in 2005. The incomes of the top 1% fell about 16% from 2007-09 while the median income fell just 1.5%. The number of people making $1 million or more per year fell 40%.

People are also not stuck at the bottom. Of those in the lowest one-fifth of incomes in 2001, 44% had moved to a higher "quintile" by 2007. That may not be enough income mobility for some, but I think it is still quite a bit. More people might move between income brackets in Europe than the U. S., but the generally lower incomes in Europe make that easier.

Those at the bottom of the income ladder may be doing better over time than is commonly believed. To measure incomes over time, we need to adjust for inflation. But economists have discovered that we should not use the same price index for the rich and poor. The one for the poor has not risen as much over time. Once this is taken into account, we can see that incomes have not stagnated as much as is normally believed.

Many propose higher tax rates on the rich to deal with inequality. Yet this can lead to problems when recessions hit. The higher income earners are now seeing their incomes fluctuate more and they go down more than for most people in recessions. If we rely too much on them for tax revenue, it will mean extra large budget deficits in recessions, as many states have seen recently. In 2007, the top 1% paid about 37% of all federal income taxes. The more we rely on them for revenue, the bigger the problem will be in the next recession.

Taxes have another problem. They cause increasingly exponential damage to economic efficiency. Taxes distort economic activity. If I normally buy a shirt for $20 and then if that shirt is taxed, say, $5, I may choose not to purchase it. That is a loss for me and for the seller. Our total losses are called the "deadweight loss." It turns out that if you double a tax, the amount of inefficiency or deadweight loss quadruples. So every one-percentage point increase in taxes causes more harm to the economy than the previous one.

The damage to the economy from extra regulations and higher tax rates does not have to be great. Even if incentives to work and produce are only slightly diminished and inefficiency rises marginally, the costs in the long-run can be great due to the compounding effect.

The per capita GDP from 1980-2009 grew 1.95% in the US and 1.83% in the EU. That difference may seem small. But, if, for example, per capita income was 20,000 in both the US and EU in 1980, the per capita income (or GDP) now would be 35,015 in the US and 33,839 in the EU, a difference of $1,176. Maybe not a big difference, but it might matter to many families. But after 100 years the US income level would be 12% higher. After 200 years it would be 26% higher.

We also have to realize that recovery from a recession caused by a financial crisis takes more time than in other recessions. This is what research by economists Carmen Reinhart and Kenneth Rogoff has shown.

So I think we should be careful about adding more regulations or higher tax rates to our economy. Let's not rush into anything based on what the Occupy Wall Street movement says. The occupiers would probably site other statistics or interpret them differently. But let's recognize that theirs is not the only valid view on these issues.

Sunday, November 13, 2011

Vehicle Exhaust Linked To Brain-Cell Damage, Higher Rates of Autism

See The Hidden Toll of Traffic Jams by ROBERT LEE HOTZ, science writer for the WSJ. In my macro classes earlier this semester I talked about externalities like pollution. The ideal policy to me would be to tax any activity equal to the costs it imposes. This article shows what some of the damages are. Excerpts:
"New public-health studies and laboratory experiments suggest that, at every stage of life, traffic fumes exact a measurable toll on mental capacity, intelligence and emotional stability."

"So far, the evidence is largely circumstantial but worrisome, researchers say. And no one is certain yet of the consequences for brain biology or behavior. "There is real cause for concern," says neurochemist Annette Kirshner at the National Institute of Environmental Health Sciences at Research Triangle Park in North Carolina. "But we ought to proceed with caution.""

"Recent studies show that breathing street-level fumes for just 30 minutes can intensify electrical activity in brain regions responsible for behavior, personality and decision-making, changes that are suggestive of stress, scientists in the Netherlands recently discovered. Breathing normal city air with high levels of traffic exhaust for 90 days can change the way that genes turn on or off among the elderly; it can also leave a molecular mark on the genome of a newborn for life, separate research teams at Columbia University and Harvard University reported this year."

"Children in areas affected by high levels of emissions, on average, scored more poorly on intelligence tests and were more prone to depression, anxiety and attention problems than children growing up in cleaner air, separate research teams in New York, Boston, Beijing, and Krakow, Poland, found."

"The evidence is growing that air pollution can affect the brain," says medical epidemiologist Heather Volk at USC's Keck School of Medicine. "We may be starting to realize the effects are broader than we realized.""

"...children born to mothers living within 1,000 feet of a major road or freeway in Los Angeles, San Francisco or Sacramento were twice as likely to have autism,..."

"Scientists believe that simple steps to speed traffic are a factor in reducing some public-health problems. In New Jersey, premature births, a risk factor for cognitive delays, in areas around highway toll plazas dropped 10.8% after the introduction of E-ZPass, which eased traffic congestion and reduced exhaust fumes, according to reports published in scientific journals this year and in 2009. The researchers, Princeton University economist Janet Currie and her colleagues at Columbia University, analyzed health data for the decade ending 2003."

Friday, November 11, 2011

M1 and M2 show big gains in the last 12 months

For the data, see Money Stock Measures from the Federal Reserve.

From October 2010 to October 2011, M1 was up about 21% while M2 was up about 9.9%.

From November 2009 to November 2010, M1 was up about 8.1% while M2 was up about 3.1%.

So the last 12 months have seen much bigger increases than in roughly the previous 12 months.

The CPI was up about 3.87% from September 2010 to September 2011. From November 2009 to November 2010, the CPI was up only 1.1%. From September 2009 to September 2010 it was also up only 1.1%. Maybe all the extra money is leading to some inflation.

It seems like the big increases in the CPI came early in this year. The numbers below show the annualized rate of inflation for each month (from the previous month). For example, if the price rise from January 2010 to February 2010 lasted 12 months (compounding, of course), the annual rate of inflation would have been just .30%. Obviously we had some big increases from January to May this year. When May ended, prices were 3.1% higher than at the end of December. If that rate were to last a whole year, we would have an inflation rate of about 7.6%. So it looks like things have slowed down a bit. But who knows for sure with all the money out there. It does depend on the velocity, too. The Sept. 2011 CPI was only about .4% higher than the May 2011 CPI.

Feb. 0.30%
Mar. 5.04%
Apr. 2.10%
May 0.93%
June -1.17%
July 0.25%
Aug. 1.67%
Sep. 0.70%
Oct. 1.50%
Nov. 0.51%
Dec. 2.08%

Jan. 5.87%
Feb. 6.08%
Mar. 12.35%
Apr. 8.01%
May 5.79%
June -1.28%
July 1.07%
Aug. 3.36%
Sep. 1.84%

Click here to see CPI figures

The numbers below show the annualized rate of increase in both M1 and M2 for each month (from the previous month). First M1.

Feb. 17.13%
Mar. 6.30%
Apr. -8.81%
May 3.66%
June 14.07%
July 2.18%
Aug. 15.14%
Sep. 16.92%
Oct. 7.07%
Nov. 28.78%
Dec. 7.58%

Jan. 15.43%
Feb. 14.65%
Mar. 11.25%
Apr. 6.27%
May 21.99%
June 10.01%
July 43.05%
Aug. 83.32%
Sep. 15.98%
Oct. 9.01%

Now M2

Feb. 10.05%
Mar. -3.04%
Apr. 1.52%
May 5.71%
June 4.17%
July 2.26%
Aug. 6.53%
Sep. 6.82%
Oct. 5.73%
Nov. 5.36%
Dec. 4.65%

Jan. 3.40%
Feb. 8.66%
Mar. 3.86%
Apr. 4.40%
May 7.16%
June 12.30%
July 30.07%
Aug. 34.42%
Sep. 6.08%
Oct. 3.59%

Wednesday, November 09, 2011

U.S. exports and imports as a percentage of total output, 1869-2005

Below is a graph from Macroeconomics (6th Edition) by Andrew B. Abel, Ben S. Bernanke and Dean Croushore. A question about this came up in my micro class this week. Here is how they describe the graph in the book:

"U.S. exports and imports,1869-2005 The figure shows U.S. exports (black) and U.S. imports (red), each expressed as a percentage of total output. Exports and imports need not be equal in each year: U.S. exports exceeded imports (shaded gray) during much of the twentieth century. During the 1980s, 1990s and early 2000s, however, U.S. exports were smaller than U.S. imports (shaded red). Sources: Imports and exports of goods and services: 1869-1959 from Historical Statistics of the United States, Colonial Times to 1970, pp. 864-865; 1960-2005 from FRED database, Federal Reserve Bank of St. Louis, and BOPM; output is from Fig. 1.1."

The output data from Fig. 1.1 comes from an article by Christina Romer.

“The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908.” Journal of Political Economy 97 (February 1989): 1-37.

The percentages seem a little higher than other sources, though. Click on the graph to see a much larger version.

Sunday, November 06, 2011

Does It Pay To Be A Garbage Miner?

This past week in my microeconomics class, we read a chapter about trash in the book The Economics of Public Issues. It raised the issue of how can we reduce the amount of trash we have and how do we get rid of the trash we do have.

For some people, though, going through garbage is a job. See Guatemala's trash 'miners' risk lives to find gold by ALBERTO ARCE of the Associated Press. Excerpts:

"A torrent of gray, toxic water spews from a drainage tunnel and surges along the ravine, tumbling along garbage that has fallen from the Guatemalan capital's main landfill 1,000 feet (300 meters) above.

Despite the foul odors, the danger of unstable piles of garbage collapsing and the chance for heavy rain to suddenly raise the water level, dozens of people are busily at work searching for jewelry and other metal scraps knocked loose from the trash."

One worker said:

""I found a bracelet with 9 grams (0.32 avoir ounces) of gold. I got 2,000 quetzals ($256) for it."

It may not seem like much, but it's almost as much as the monthly $270 minimum wage in this Central American nation."

"If the scavengers don't find jewelry, they collect screws, faucets and other recyclable metal items that they can sell for 85 cents a pound. That amounts to twice the minimum wage for an average trip.""

Friday, November 04, 2011

What happened to income of the top 1% from 2007-2009?

See The Rich Get Poorer by Greg Mankiw, Harvard economics professor. Here is his blog post:
"Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.

According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879 to $32,396."

That works out to a 1.5% drop in median income and a 16.1% drop in income for those in the top 1%.

Mankiw also mentions a paper that shows "that high-income households have riskier-than-average incomes." That is, incomes for the top earners fluctuate alot more than for everyone else. That paper is The Increase in Income Cyclicality of High-Income Households and its Relation to the Rise in Top Income Shares by Jonathan A. Parker and Annette Vissing-Jorgensen, both of Northwestern University. Here is the abstract:
"We document a large increase in the cyclicality of the incomes of high-income households, coinciding with the rise in their share of aggregate income. In the U.S., since top income shares began to rise rapidly in the early 1980s, incomes of those in the top 1 percent of the income distribution have averaged 14 times average income and been 2.4 times more cyclical. Before the early 1980s, incomes of the top 1 percent were slightly less cyclical than average. The increase in income cyclicality at the top is to a large extent due to increases in the share and the cyclicality of their earned income. The high cyclicality among top incomes is found for households without stock options; following the same households over time; for post-tax, post-transfer income; and for consumption. We study cyclicality throughout the income distribution and reconcile with earlier work. Furthermore, greater top income share is associated with greater top income cyclicality across recent decades, across subgroups of top income households, and, in changes, across countries. This suggests a common cause. We show theoretically that increases in the production scale of the most talented can raise both top incomes and their cyclicality."

Wednesday, November 02, 2011

The Deficit Trials 2017 A. D.

I recall a commercial like this back in 1985 or 1986. It paints a bleak picture of America in the future, presumably caused on the growing national debt ($2 trillion then, almost $15 trillion now). I think this thing is way over the top but there may be some real dangers from the debt that I mention below. You might have to watch a brief commercial for some product first. We have been covering the deficit and debt this week in my macro classes. If the embedded video does not appear, use the link below it.

Ridley Scott - W. R. Grace Deficit Trials by angelseyth

Real problems the national debt might cause

. About 28% of the debt is owed to foreign citizens (that is according to the textbook by Tucker-it is probably closer to 30% now). When they get paid back, they come and buy American goods. That leaves fewer goods for Americans (who can't afford to buy as much due to higher taxes that were needed to pay back the debt). BUT THIS MIGHT NOT BE A CONCERN IF WE ORIGINALLY BORROWED THE MONEY FOR A GOOD PURPOSE.

People borrow money all the time to buy houses and cars. Then they pay it back to a person outside of their family or household. We don’t consider this a burden since the money was put to good use. Right after World War II, the national debt was 120% of the GDP. This was much higher than it is now and we survived. No one complains that we borrowed to win the war.

2. Raising taxes might hurt economic incentives. At higher tax rates, people might want to work and invest less. Fewer businesses might expand and fewer news ones created since you will get to keep less profit. But again, THIS MIGHT NOT BE A CONCERN IF WE ORIGINALLY BORROWED THE MONEY FOR A GOOD PURPOSE. Also, if taxes only go up a little, and the debt is slowly paid off each year (like after WW II), it may not hurt too much.

3. We may have fewer government services in the future if we pay back the debt by lowering government spending. But this means that we are trading more government services today for fewer in the future. THIS IS NOT NECESSARILY A BAD THING IF THE MONEY IS SPENT WISELY (which everyone not might not agree on).

For more info ee Reinhart and Rogoff: Higher Debt May Stunt Economic Growth from the WSJ blog last year.

"To all the reasons to worry about the rapid rise in government debt in the wake of the financial crisis, add another: It’ll stunt our growth.

In a new paper presented Monday at the annual meeting of the American Economic Association, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard study the link between different levels of debt and countries’ economic growth over the last two centuries. One finding: Countries with a gross public debt debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP.

The results are particularly relevant at a time when debt levels in the U.S. and other countries at the center of the financial crisis are rapidly approaching the 90% threshold. Gross government debt in the U.S., for example, stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections. The U.K.’s gross government debt stood at 69% of GDP in 2009 and is expected to reach 98% of GDP by 2013.

“If history is any guide,” the rising government debt “is very troubling for the U.S. and other advanced economies,” says Ms. Reinhart.

The relationship between government debt burdens and growth is even stronger for emerging-market economies, Ms. Reinhart and Mr. Rogoff find. For countries above the 90% threshold, average annual growth was about three percentage points lower than for countries with public debt of less than 30% of GDP. The countries above the threshold also experienced much higher inflation: prices rose more than twice as fast as in countries with small debt burdens."