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February 4, 2013

Latest Posts from Economist's View


Latest Posts from Economist's View


Posted: 24 Jan 2013 12:33 AM PST
This is part of the introduction to a new paper by Karen Dynan, Douglas Elmendorf, and Daniel Sichel on household income volatility (they find that volatility has increased in recent decades):
The Evolution of Household Income Volatility, by: Karen Dynan, Douglas Elmendorf, and Daniel Sichel: Editor's Note: The full version of this paper is available at the website for the B.E. Journal of Economic Policy and Analysis. An earlier working version of the paper can be directly downloaded [here].
1. Introduction Researchers have found it relatively straightforward to document changes in the volatility of the U.S. economy as a whole over the last several decades. The aggregate U.S. economy entered a period of relative stability known as the Great Moderation in the mid-1980s and, much more recently, has been in dramatic flux since the onset of the financial crisis and Great Recession in 2007 and 2008. However, aggregate trends do not necessarily translate into trends in the experiences of individual households. For example, the Great Moderation is generally thought to be a period over which the economy became more dynamic, with globalization, deregulation, and technological change increasing the competitive pressures and risks faced by workers. Given these developments, it is not clear that the economic environment facing individual households was in fact more stable during this period. Thus, to the extent that one is interested in household economic security, one is compelled to consider micro data. Accordingly, a large literature has developed that directly examines the volatility of earnings and income at the household level. While income volatility is not the same thing as the risk or uncertainty faced by households, changes in volatility are likely to be associated with changes in risk and uncertainty. ...
To summarize our results, we estimate that the volatility of household income—as measured by the standard deviation of two-year percent changes in income—increased about 30 percent between the early 1970s and the late 2000s. The rise in volatility did not occur in a single period but represented an upward trend throughout the past several decades; it occurred within each major education and age group as well. Yet, the run-up in volatility was concentrated in one important sense: It stemmed primarily from an increasing frequency of very large income changes rather than larger changes throughout the distribution of income changes.
Turning to the components of income, we estimate notable increases in the volatility of labor earnings and transfer income and a small increase in the volatility of capital income.  Household labor earnings (combining earnings of heads and spouses before estimating volatility at the household level) became more volatile even though the volatility of individual earnings (heads and spouses taken as individual observations) edged down. The explanation is that women's earnings became less volatile while men's earnings became more volatile, and the latter matters more for household earnings because men earn more than women on average. We show that rising volatility in men's earnings owes both to rising volatility in earnings per hour and in hours worked, though our interpretation could be affected by changes in PSID methodology. And we demonstrate that earnings shifts between household members, as well as shifts in market income and transfer income, provide only small offsets to each other. ...
Posted: 24 Jan 2013 12:24 AM PST
Fred Moseley responds to my comments on his comments (I suggested that if he wants a theory of exploitation that is consistent, he should consider dropping Marx's Labor Theory of Value, which does not actually explain value, and instead explain exploitation in more modern terms, i.e. with reference to why workers have not received their marginal products in recent decades):
Thanks to Mark for posting my critical comment on Krugman's explanation of stagnant real wages and declining wage share of income, and for his introductory comment, which raises fundamental issues.
A question for Mark: how do you know what the "MP benchmark" is that workers should have received. The MP benchmark is presumably the "marginal product of labor", but how do you know what this is? I know of no time series estimates of the aggregate MPL (independent of income shares) for recent decades. If you know of such estimates, please send me the reference(s).
What you have in mind may be estimates like Mishel's estimates of the "productivity of labor" and the "real wage of production workers", which shows a widening gap in recent years (see Figure A in "The wedges between productivity and median compensation growth"; ). But these estimates of the "productivity of labor" are not of the MPL of marginal productivity theory, but are instead the total product divided by total labor. These estimates are more consistent with Marxian theory than with marginal productivity theory. And I agree that explaining this divergence is an important key to understanding the increasing inequality in recent decades. I think the explanation has to do with a number of factors that have put downward pressure on wages: higher unemployment, outsourcing and threat of more, declining real minimum wage, attacks on unions, etc. This is very different from Krugman's "capital-biased technological change".
A word on the labor theory of value: the LTV is not mainly a micro theory of prices, but is instead primarily a macro theory of profit. And I think that it is the best theory of profit by far in the history of economics (there is not much competition). It explains a wide range of important phenomena in capitalist economies: conflicts over wages, and conflicts over the length of the working day and the intensity of labor in the workplace, endogenous technological change, trends and fluctuations in the rate of profit over time, endogenous causes of economic crises, etc. (For further discussion of the explanatory power of Marx's theory see my "Marx Economic Theory: True or False? A Marxian Response to Blaug's Appraisal", in Moseley (ed.) Heterodox Economic Theories: True or False?; available here:
Marginal productivity, in very unfavorable contrast, can explain none of these important phenomena.
Thanks again.
Fred
Just one comment. If the LTV cannot explain input or output prices, and it doesn't, how can it explain profit?
(Okay, two -- In defense of Krugman, his book Conscience of a Liberal was anything but a "capital-biased technological change" explanation of rising inequality, and he stated the "capital-biased technological change" explanation as something to look into rather than a conclusion he has drawn. For example, he says:
More on robots and all that ... there's another possible resolution: monopoly power. Barry Lynn and Philip Longman have argued that we're seeing a rapid rise in market concentration and market power. The thing about market power is that it could simultaneously raise the average rents to capital and reduce the return on investment as perceived by corporations, which would now take into account the negative effects of capacity growth on their markups. So a rising-monopoly-power story would be one way to resolve the seeming paradox of rapidly rising profits and low real interest rates. As they say, this calls for more research; but the starting point is to realize that there's something happening here, what it is ain't exactly clear, but it's potentially really important.
So I don't think it's completyely fair to say that Krugman's explanation for rising inequality is "capital-biased technological change.")
Posted: 24 Jan 2013 12:15 AM PST
Tim Taylor looks at recent evidence on the relationship between income and happiness:
Does Income Bring Happiness?, by Tim Taylor: Back in 1974, Richard Easterlin published a paper called "Does Economic Growth Improve the Human Lot? Some Empirical Evidence" (available here and here, for example). Easterlin raised the possibility that what really matters to most people is not their absolute level of income, but their income level relative to others in society. If relative income is what matters, then an overall rise in incomes doesn't make me any better off relative to others, and so my happiness does not increase. ...
Since then, the question of whether income brings happiness has been much-debated by economist and other social scientists. In "The New Stylized Facts about Income and Subjective Well-Being," Daniel W. Sacks, Betsey Stevenson, and Justin Wolfers offer a compact and readable summary of the evidence (much of which they generated in earlier research) that income is not just relative--and so more income does increase happiness. The paper is available as IZA Discussion Paper No. 7105, released in December.
At a basic level, this research looks at economic data on levels of income and compares it with survey data on on life satisfaction. ... As a starting point, let's compare countries across the world... The horizontal axis of the graph is a logarithmic scale...

The general pattern is clear those in higher-income countries tend to report more life satisfaction. The best-fit straight line is drawn through the data. The much lighter dotted line is a "non-parametric" line which is a best-fit line that isn't required to be straight, and thus flattens out near the bottom and curves more steeply at the top than a straight line. Broadly speaking, it seems as if each doubling of income does lead to a distinct rise in the happiness scale, both for low-income and for high-income countries.
Of course, this result by itself doesn't prove the case either way. It could be that people in high-income countries are happier because they perceive that they are not in low-income countries, and so the happiness from their income is relative, rather than absolute. Thus, a second test is to look within individual countries at the happiness level of those with different income levels. If happiness from income is a relative concept, one might expect that, say, the rise in income from being a low-income person in the U.S to being a high-income person in the U.S. would bring more happiness, but the rise in happiness should be much less within a country than it would be across countries. However, the rise in happiness as a result of higher incomes within a country ends up looking very much like the relationship between countries.

Yet another test is to look at comparisons over time: that is, as economic growth gradually raises income levels, do people on average within a given country report a higher level of  happiness. The data here is harder to interpret, because long-run data on happiness measures isn't available for many countries, and the wording of the survey questions about life satisfaction often changes over time. While acknowledging that the existing evidence is messy and difficult to interpret firmly, the authors argue that it is at least consistent with the same finding: that is, higher income levels over time are correlated with higher reported life satisfaction.
But not for the United States! Sacks, Stevenson, and Wolfers write: "The US, however, remains a paradoxical counter-example: GDP has approximately doubled since 1972 and well-being, as measured by the General Social Survey, has decreased slightly." The authors point out that any individual country may have specific social changes that alter the reported "life satisfaction." In particular, they point out that inequality of income started rising in the U.S. economy in the 1970s, which may explain why the typical or median person in the economy isn't feeling much better off. They write: "We suggest that the US is more of an interesting outlier than a key example."
Those who want to sort through why Sacks, Stevenson, and Wolfers reach different conclusion from Easterlin can dig into the paper itself: a lot of the difference, they argue, is just that more and better data is available now.
For my own part, I confess that I find happiness surveys both intriguing and dubious. It seems to me that higher levels of income are typically correlated with more health, education, travel, consumption, and a higher quality of recreation, so it's not a surprise to me it seems to me that happiness rises with income. On the other side, it does seem to me that survey questions about life satisfaction are answered in the context of a particular place and time. If a person says that their life satisfaction was a 7 in 1960 on a scale of 0-10, and another person says that their life satisfaction is a 7 in 2013, are those two people really equally satisfied? To put it another way, if the person from 2013 was transported by a time machine back to live in 1960, with all their memories and knowledge of the technologies, medicines, foods, education, and travel available in 2013, would that time traveler really be equally happy in either time period? I suspect that when most people are asked to rank happiness on a scale of 0-10, they don't say to themselves: "Well, people living 100 years from now might have extraordinarily high levels of income and technology, so compared with them, I'm really no more than a 2." At best, survey questions on a scale of 0-10 seem like an extremely rough-and-ready way of measuring life satisfaction across very different countries or across substantial periods of time.
Posted: 24 Jan 2013 12:06 AM PST
Posted: 23 Jan 2013 01:07 PM PST
Stiglitz and Bilmes:
No US peace dividend after Afghanistan, by Joseph Stiglitz and Linda Bilmes, Commentary, FT: Nearly 12 years after the US-led invasion of Afghanistan began, a war-weary America is getting ready to leave. ... But the true cost of the war is only just beginning. ...
The number of Iraq and Afghanistan veterans receiving government medical care has grown to more than 800,000, and most have applied for permanent disability benefits. Yielding to political pressure, the White House and Congress have boosted veteran's benefits ... and made it easier to qualify for disability... But the number of claims keeps climbing. ... To recruit volunteers to fight in highly unpopular wars, the military adopted higher pay scales and enhanced healthcare benefits... Meanwhile, there is a huge price tag for replacing ordinary equipment that has been consumed during the wars...
... The US has already borrowed $2tn to finance the Afghanistan and Iraq wars – a major component of the $9tn debt accrued since 2001... Today,... it could have been hoped that the ending of the wars would provide a large peace dividend... Instead, the legacy of poor decision-making from the expensive wars in Afghanistan and Iraq will live on in a continued drain on our economy – long after the last troop returns to American soil.

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