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September 16, 2010

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The Distribution of Income in OECD Countries

Posted: 16 Sep 2010 01:08 AM PDT

Richard Green:

While Arrow showed the impossibility of a well defined ordering of social preferences... ...we tend to act as if there is one anyway. That is, we place a lot of focus on GDP per capita when evaluating economic success. By this measure, the US is, of course, successful. By a slightly different measure from the OECD (go to page 37), average disposable income per household, the US ranks second after Luxembourg among the nations measured. Luxembourg has about the same population of Long Beach, so it is hard to worry too much about it.

But a social welfare function that looks at the lowest decile of income is just as legitimate (or perhaps I should say, illegitimate). By this measure, the US ranks 20th among countries measured, which places it toward the bottom of the OECD pack, with levels similar to Greece and Italy.

On the other hand, the top 40 percent of American household are better off than their counterparts in all other countries (with the exception of Luxembourg), reflecting a great deal of affluence across a large number of people. So where to pick? As Arrow would say, that is really impossible.

Here is the chart that he mentions:

Ineq-cross-country-by-income

Here's a bit more detail on the distribution of disposable income (the bars start at the average income of the upper 10% and end at the average income of the bottom 10%, with the average income for each of the other eight deciles marked by horizontal lines):

Ineq-cross-country

As you can see, the US has the widest distribution.

It would be nice to move the bottom of the US distribution up since it's a bit of an outlier for countries with average income in the vicinity of ours. But that might require raising taxes on the wealthy and redistributing income, or at least using the money to try and improve the conditions that lead to this outcome. That would then cause the people at the upper end of the distribution to quit working hard and taking risks, people would stop innovating, and our entire society would devolve into socialism ending our way of life as we know it. So, sorry, nothing we can do.

links for 2010-09-15

Posted: 15 Sep 2010 11:02 PM PDT

Eichengreen: Competitive Devaluation to the Rescue

Posted: 15 Sep 2010 12:16 PM PDT

In response to Japan's intervention on the Yen, Barry Eichengreen reminds us that in In March 2009, he argued that coordinated cross-country quantitative easing by monetary authorities would be better than the competitive devaluation we seem to be heading towards since it avoids large, temporary swings in exchange rates:

Competitive devaluation to the rescue, by Barry Eichengreen, guardian.co.uk: Every day it seems more likely that we are destined – or should one say doomed? – to replay the disastrous economic history of the 1930s. We have had a stock market crash to rival 1929. We have had a banking crisis comparable to 1931. With the economic meltdown in eastern Europe we have the prospect of a financial crisis in Vienna, exactly as in 1931. We have squabbling among the major economies over the design of rescue loans, just as when the Bank for International Settlements was hamstrung in its efforts to contain the crisis in Austria. We have the prospect of a failed world economic conference in London to dash remaining hopes for a co-operative response, just as in 1933.
And if all this wasn't enough, now we have the dreaded specter of competitive devaluation. In the 1930s, one country after another pushed down its exchange rate in a desperate effort to export its way out of depression. But each country's depreciation only aggravated the problems of its trading partners, who saw their own depressions deepen. Eventually even countries that valued currency stability were forced to respond in kind.
In the end competitive devaluation benefited no one, it is said, since all countries can't devalue their exchange rates against each another. The only effects were to fan political tensions, heighten exchange rate uncertainty, and upend the global trading system. Financial protectionism if you will.
Now, we are warned, there are signs of the same. The Bank of England is not exactly discreetly encouraging the pound to fall. And just last week the Swiss National Bank intervened in the foreign exchange market to push down the franc. Will Japan, the United States and China be long to follow? Will we all yet again end up shooting ourselves in the foot?
In fact, this popular account is a misreading of both the 1930s and the current situation. In the 1930s, it is true, with one country after another depreciating its currency, no one ended up gaining competitiveness relative to anyone else. And no country succeeded in exporting its way out of the depression, since there was no one to sell additional exports to. But this was not what mattered. What mattered was that one country after another moved to loosen monetary policy because it no longer had to worry about defending the exchange rate. And this monetary stimulus, felt worldwide, was probably the single most important factor initiating and sustaining economic recovery.
It is true that the process was disorderly and disruptive. Better would have been for the countries concerned to co-ordinate their moves to a more stimulative monetary policy without sending exchange rates on a roller-coaster ride. But, not for the first time, they failed to agree. Those in the most precarious positions had no choice but to pursue the new policy unilaterally.
In any case, monetary easing achieved through a process of "competitive devaluation" was better than no monetary easing. ...
This, in a nutshell, is our situation again today. Sterling's weakness reflects, in part, the exceptional severity of the British slump. But it also reflects the fact that the Bank of England has moved further and faster in the direction of quantitative easing than any other central bank. ... Now the Swiss National Bank has followed suit...
Will other central banks, seeing their own currencies strengthen, conclude that the threat of deflation has grown more immediate and also now move quickly to quantitative easing? If so, exchange rates against sterling and the franc will revert to more normal levels. And, with quantitative easing all around, the world will receive the additional dose of monetary stimulus that it desperately needs.
Better of course would be for the major countries to agree to co-ordinate their monetary policy actions. Then exchange rates will not move by large amounts in one direction today and the opposite direction tomorrow. There will not be further disruptions to the global trading system. There will not be international recriminations over beggar-thy-neighbor policy. The G20 countries could even make such co-ordination part of their agreement at the 2 April summit in London. Or not.

Monetary policy works through lowering interest rates and encouraging new investment, but people seem to have forgotten all about the long and variable lags, particularly for monetary policy. The problem of finding "shovel ready" projects in not limited to the public sector. Even projects that are already planned take time to set in motion in response to lower interest rates (if producers are even willing to initiate new projects given the bleak outlook for sales).

We need to remember that policy takes time to work, that the risks are not symmetric, and that the consequences of failing to act in a timely manner could be very costly down the road. We need to take action now, and not just from coordinated monetary policy. A coordinated fiscal intervention is also needed, but, unfortunately for the jobless, that's not going to happen.

EPI: State and Local Public Employees Undercompensated

Posted: 15 Sep 2010 10:09 AM PDT

A new study from the EPI says that once you control for differences between public and private sector employees, public sector employees are, on average, undercompensated:

State and local public employees undercompensated, EPI study finds: State and local public employees are undercompensated, according to a new Economic Policy Institute analysis. The report, Debunking the Myth of the Overcompensated Public Employee: The Evidence by Labor and Employment Relations Professor Jeffrey Keefe of Rutgers University, finds that, on average, state and local government workers are compensated 3.75% less than workers in the private sector.
The study analyzes workers with similar human capital. It controls for education, experience, hours of work, organizational size, gender, race, ethnicity and disability and finds that, compared to workers in the private sector, state government employees are undercompensated by 7.55% and local government employees are undercompensated by 1.84%. The study also finds that the benefits that state and local government workers receive do not offset the lower wages they are paid.
The public/private earnings differential is greatest for doctors, lawyers and professional employees, the study finds. High school-educated public workers, on the other hand, are more highly compensated than private sector employees, because the public sector sets a floor on compensation. The earnings floor has collapsed in the private sector.
The Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst and the DC-based Center for Economic Policy Research are also releasing a study today, which echoes the national findings of Debunking the Myth of the Overcompensated Public Employee at a regional level. PERI's report, The Wage Penalty for State and Local Government Employees in New England finds a "wage penalty" for state and local government workers in New England of almost 3%.

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