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October 26, 2011

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"Important Ideas Have Been Discovered—or, Rather, Rediscovered"

Posted: 26 Oct 2011 12:33 AM PDT

John Cassidy:

Where Is the New Keynes?, by John Cassidy: On Monday, I was on Leonard Lopate's WNYC radio show talking about my recent article on John Maynard Keynes. (The piece is no longer behind a firewall. You can read it here, and listen to the interview here.) At the end of the show, Leonard asked me an interesting question: Has the financial crisis and Great Recession produced any big new economic ideas? ...
Certainly, there is no new Keynes. But I do think that some important ideas have been discovered—or, rather, rediscovered. Here are six of them...:
1. Finance matters. This lesson might seem obvious to the man in the street, but many economists somehow managed to forget it. ...
2. Credit busts are different from ordinary recessions. ...
3. Positive feedback and multiple equilibria have to be taken seriously. With the rise of rational expectations theory, the idea that financial markets and entire economies can spiral into bad outcomes—and for no very good reason—was relegated to a mathematical curiosity: so called "sunspots." Now, the notion is back, and for good reason. It appears to describe the world pretty well. ...
4. Especially in financial markets, self-regarding rational behavior isn't necessarily socially optimal. ...
5. Monetary policy doesn't always work very well. This lesson should have been relearned in Japan. One person who did relearn it was Paul Krugman. ...
6. Fiscal stimulus programs don't provide a panacea for deep recessions, but the alternatives—do-nothing policies or austerity—are much worse. If you doubt this, I would suggest you look at what is happening in Greece and the United Kingdom, where austerity programs have been in effect for more than a year. As for the Obama stimulus, most serious studies show it did have a positive impact on G.D.P. growth and job creation—as detailed in this helpful post by Dylan Matthews...
Looking at this list, anyone familiar with Keynes will quickly realize that almost all of the points on it can be found in his writings, at least in embryo form. ...

I'll add one more: Before the crisis Alan Greenspan assured us that there wasn't a housing bubble, and even if there was, and it popped, the Fed could contain its effects and clean up afterward. Nothing to worry about. That was wrong.

That points to one more: The Fed needs better ways to identify bubbles. Because of the belief that bubbles could be contained and easily mopped up, little effort was made to find ways to identify bubbles as they were inflating. Now that we know how much damage bubbles can do -- something we should have known already -- we need to put effort into finding reliable indications of bubbles, and then take action to stop them from doing severe damage.

Another: In this type of recession, saving banks is not enough to restore the economy. It's critical to help households too.

"Trends in the Distribution of Income"

Posted: 26 Oct 2011 12:24 AM PDT

This is from the CBO:

Trends in the Distribution of Income, by Edward Harris and Frank Sammartino, CBO Director's Blog: From 1979 to 2007, real (inflation-adjusted) average household income, measured after government transfers and federal taxes, grew by 62 percent. That growth was not equal across the income distribution: Income after government transfers and federal taxes (denoted as after-tax income) for households at the higher end of the income scale rose much more rapidly than income for households in the middle and at the lower end of the income scale.

In a study prepared at the request of the Chairman and former Ranking Member of the Senate Committee on Finance, CBO examines the trends in the distribution of household income between 1979 and 2007. (Those endpoints allow comparisons between periods of similar overall economic activity.)

After-Tax Income Grew More for the Highest-Income Households

CBO finds that between 1979 and 2007:

  • For the 1 percent of the population with the highest income, average real after-tax household income grew by 275 percent (see figure below).
  • For others in the 20 percent of the population with the highest income, average real after-tax household income grew by 65 percent.
  • For the 60 percent of the population in the middle of the income scale, the growth in average real after-tax household income was just under 40 percent.
  • For the 20 percent of the population with the lowest income, the growth in average real after-tax household income was about 18 percent.

Growth in Real After-Tax Income from 1979 to 2007

As a result of that uneven income growth, the distribution of after-tax household income in the United States was substantially more unequal in 2007 than in 1979: The share of income accruing to higher-income households increased, whereas the share accruing to other households declined. Specifically:

  • The share of after-tax household income going to the highest income quintile grew from 43 percent in 1979 to 53 percent in 2007. (Each quintile contains one-fifth of the population, ranked by adjusted household income.)
  • The share of after-tax household income for the 1 percent of the population with the highest income more than doubled, climbing from nearly 8 percent in 1979 to 17 percent in 2007.
  • The population in the lowest income quintile received about 7 percent of after-tax household income in 1979; by 2007, their share of after-tax income fell to about 5 percent. The middle three income quintiles all saw their shares of after-tax income decline by 2 to 3 percentage points between 1979 and 2007.

Market Income Shifted Toward Higher-Income Households

The major reason for the growing unevenness in the distribution of after-tax income was an increase in the concentration of market income—income measured before government transfers and taxes—in favor of higher-income households. Specifically, over the 1979 to 2007 period, the highest income quintile's share of market income increased from 50 percent to 60 percent (see figure below), while the share of market income for every other quintile declined. In fact, the distribution of market income became more unequal almost continuously between 1979 and 2007 except during the recessions in 1990–1991 and 2001.

Shares of Market Income, 1979 and 2007

Two factors accounted for the changing distribution of market income. One was an increase in the concentration of each source of market income, which consists of labor income (such as cash wages and salaries and employer-paid health insurance premiums), business income, capital gains, capital income, and other income. All of those sources of market income were less evenly distributed in 2007 than they were in 1979.

The other factor was a shift in the composition of market income. Labor income has been more evenly distributed than capital and business income, and both capital income and business income have been more evenly distributed than capital gains. Between 1979 and 2007, the share of income coming from capital gains and business income increased, while the share coming from labor income and capital income decreased.

Market Income Grew Rapidly for the Highest-Income Households

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

The precise reasons for the rapid growth in income at the top are not well understood, though researchers have offered several potential rationales, including technical innovations that have changed the labor market for superstars (such as actors, athletes, and musicians), changes in the governance and structure of executive compensation, increases in firms' size and complexity, and the increasing scale of financial-sector activities.

The composition of income for the 1 percent of the population with the highest income changed significantly from 1979 to 2007, as the shares from labor and business income increased and the shares of income represented by capital income decreased as a share of their income.

Government Transfers and Federal Taxes Became Less Redistributive

Although an increasing concentration of market income was the primary force behind growing inequality in the distribution of after-tax household income, shifts in government transfers (cash payments to individuals and estimates of the value of in-kind benefits) and federal taxes also contributed to that increase in inequality. CBO estimates that the dispersion of market income grew by about one-quarter between 1979 and 2007, while the dispersion of income after government transfer and federal taxes grew by about one-third.

Because government transfers and federal taxes are both progressive, the distribution of after-transfer, after-federal-tax household income is more equal than is the distribution of market income. Nevertheless, the equalizing effect of transfers and federal taxes on household income was smaller in 2007 than it had been in 1979.

Specifically, in 1979, households in the bottom quintile received more than 50 percent of transfer payments. In 2007, similar households received about 35 percent of transfers. That shift reflects the growth in spending for programs focused on the elderly population (such as Social Security and unemployment compensation), in which benefits are not limited to low-income households.

Likewise, the equalizing effect of federal taxes was smaller. Over the 1979–2007 period, the overall average federal tax rate fell by a small amount, the composition of federal revenues shifted away from progressive income taxes to less-progressive payroll taxes, and income taxes became slightly more concentrated at the higher end of the income scale. The effect of the first two factors outweighed the effect of the third, reducing the extent to which taxes lessened the dispersion of household income.

links for 2011-10-26

Posted: 26 Oct 2011 12:06 AM PDT

Inequality and Mobility

Posted: 25 Oct 2011 12:06 PM PDT

New column:

Income Inequality Is Hobbling the Middle Class

It's on inequality and economic mobility.

Regulatory Uncertainty is Not the Problem

Posted: 25 Oct 2011 08:46 AM PDT

The Treasury Department's new chief economist, Jan Eberly, says regulatory uncertainty is not the cause of slow job growth:

 Is Regulatory Uncertainty a Major Impediment to Job Growth?, by Dr. Jan Eberly, Treasury Notes: Last week at a Senate hearing Secretary Geithner said, "I'm very sympathetic to the argument you want to be careful to get the rules better and smarter, but I don't think there's good evidence in support of the proposition that it's regulatory burden or uncertainty that's causing the economy to grow more slowly than any of us would like."
Economists from across the political spectrum have also weighed into this debate and reached the same conclusion. ... Nonetheless, two commonly repeated misconceptions are that uncertainty created by proposed regulations is holding back business investment and hiring and that the overall burden of existing regulations is so high that firms have reduced their hiring.
If regulatory uncertainty was a major impediment to hiring right now, we would expect to see indications of this in one or more of the following: business profits; trends in the workforce, capacity utilization, and business investment; differences between industries undergoing significant regulatory changes and those that are not; differences between the United States and other countries that are not undergoing the same changes; or surveys of business owners and economists.  As discussed in a detailed review of the evidence below, none of these data support the claim that regulatory uncertainty is holding back hiring. ...

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