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July 21, 2014

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Latest Posts from Economist's View


Paul Krugman: The Fiscal Fizzle

Posted: 21 Jul 2014 12:33 AM PDT

"We don't have a debt crisis, and never did":

The Fiscal Fizzle, by Paul Krugman, Commentary, NY Times: For much of the past five years readers of the political and economic news were left in little doubt that budget deficits and rising debt were the most important issue facing America. Serious people constantly issued dire warnings that the United States risked turning into another Greece ...
I'm not sure whether most readers realize just how thoroughly the great fiscal panic has fizzled...
In short, the debt apocalypse has been called off.
Wait — what about the risk of a crisis of confidence? There have been many warnings that such a crisis was imminent, some of them coupled with surprisingly frank admissions of disappointment that it hadn't happened yet. For example, Alan Greenspan warned of the "Greece analogy," and declared that it was "regrettable" that U.S. interest rates and inflation hadn't yet soared.
But that was more than four years ago, and both inflation and interest rates remain low. Maybe the United States, which among other things borrows in its own currency and therefore can't run out of cash, isn't much like Greece after all.
In fact, even within Europe the severity of the debt crisis diminished rapidly once the European Central Bank began doing its job, making it clear that it would do "whatever it takes" to avoid cash crises in nations that have given up their own currencies and adopted the euro. Did you know that Italy, which remains deep in debt and suffers much more from the burden of an aging population than we do, can now borrow long term at an interest rate of only 2.78 percent? Did you know that France, which is the subject of constant negative reporting, pays only 1.57 percent?
So we don't have a debt crisis, and never did. Why did everyone important seem to think otherwise?
To be fair, there has been some real good news about the long-run fiscal prospect, mainly from health care. But it's hard to escape the sense that debt panic was promoted because it served a political purpose — that many people were pushing the notion of a debt crisis as a way to attack Social Security and Medicare. And they did immense damage along the way, diverting the nation's attention from its real problems — crippling unemployment, deteriorating infrastructure and more — for years on end.

Links for 7-21-14

Posted: 21 Jul 2014 12:06 AM PDT

Tyler Cowen on Global Inequality

Posted: 20 Jul 2014 02:07 PM PDT

Dan Little:

Tyler Cowen on global inequality: Tyler Cowen sounds a bit like Voltaire's Pangloss when he argues, as the New York Times headline puts it, that we are living "all in all, [in] a more egalitarian world" (link). Cowen acknowledges what most people concerned about inequalities believe: "the problem [of inequality] has become more acute within most individual nations"; but he shrugs this off by saying that "income inequality for the world as a whole has been falling for most of the last 20 years." The implication is that we should not be concerned about the first fact because of the encouraging trend in the second fact.

Cowen bases his case on what seems on its face paradoxical but is in fact correct: it is possible for a set of 100 countries to each experience increasing income inequality and yet the aggregate of those populations to experience falling inequality. And this is precisely what he thinks is happening. Incomes in (some of) the poorest countries are rising, and the gap between the top and the bottom has fallen. So the gap between the richest and the poorest citizens of planet Earth has declined. The economic growth in developing countries in the past twenty years, principally China, has led to rapid per capita growth in several of those countries. This helps the distribution of income globally -- even as it worsens China's income distribution.

But this isn't what most people are concerned about when they express criticisms of rising inequalities, either nationally or internationally. They are concerned about the fact that our economies have very systematically increased the percentage of income and wealth flowing to the top 1, 5, and 10 percent, while allowing the bottom 40% to stagnate. And this concentration of wealth and income is widespread across the globe. (Branko Milanovic does a nice job of analyzing the different meanings we might attach to "global inequality" in this World Bank working paper; link.)

This rising income inequality is a profound problem for many reasons. First, it means that the quality of life for the poorest 40% of each economy's population is significantly lower than it could and should be, given the level of wealth of the societies in which they live. That is a bad thing in and of itself. Second, the relative poverty of this sizable portion of society places a burden on future economic growth. If the poorest 40% are poorly educated, poorly housed, and poorly served by healthcare, then they will be less productive than they have the capacity to be, and future society will be the poorer for it. Third, this rising inequality is further a problem because it undermines the perceived legitimacy of our economic system. Widening inequalities have given rise to a widespread perception that these growing inequalities are unfair and unjustified. This is a political problem of the first magnitude. Our democracy depends on a shared conviction of the basic fairness of our institutions. (Kate Pickett and Richard Wilkinson also argue that inequality has negative effects on the social wellbeing of whole societies; link.)

The seeming paradox raised here can be easily clarified by separating two distinct issues. One is the issue of income distribution within an integrated national economy -- the United States, Denmark, Brazil, China. And the second is the issue of extreme inequalities of per capita GDP across national economies -- the poverty of nations like Nigeria, Honduras, and Bangladesh compared to rich countries like Sweden, Germany, or Canada. Both are important issues; but they are different issues that should not be conflated. It is misleading to judge that global inequality is falling by looking only at the rank-ordered distribution of income across the world's 7 billion citizens. This decline follows from the moderate success achieved in the past fifteen years in ameliorating global poverty -- a Millenium Development Goal (link). But it is at least as relevant to base our answer to the question about the trend of global inequalities by looking at the average trend across the world's domestic economies; and this trend is unambiguously upward.

Here is a pair of graphs from The Economist that address both topics (reproduced at the XrayDelta blog here). The left panel demonstrates the trend that Cowen is highlighting. The global Gini coefficient has indeed leveled off in the past 40 years. The right panel indicates rising inequalities in US, Britain, Germany, France, and Sweden. As the second panel documents, the distribution of income within a sample set of national economies has dramatically worsened since 1980. So global inequalities are both improving and worsening -- depending on how we disaggregate the question.

The global Gini approach is intended to capture income inequalities across the world's citizens, not across the world's countries. Essentially this means estimating a rank-order of the incomes of all the world's citizens, and estimating the Lorenz distribution this creates.

We get a very different picture if we consider what has happened with inequalities within each of the world's national economies. Here is a graph compiled by Branko Milanovic that represents the average Gini coefficient for countries over time (link):

This graph makes the crucial point: inequalities within nations have increased dramatically across the globe since 1980, from an average Gini coefficient of about .45 to an average of .54 in 2000 (and apparently still rising). And this is the most important point: each of these countries is suffering the social disadvantages that go along with the fact of rising inequalities. So we could use the Milanovic graph to reach exactly the opposite conclusion from the one that Cowen reaches: in fact, global inequalities have worsened dramatically since 1980.

Thomas Piketty's name does not occur once in Cowen's short piece; and yet his economic arguments about capitalism and inequality in Capital in the Twenty-First Century are surely part of the the Cowen's impetus in writing this piece. Ironically, Piketty's findings corroborate one part of Cowen's point -- the global convergence of inequalities. Two French economists, Fran├žois Bourguignon and Christian Morrisson, made a substantial effort to measure historical Gini coefficients for the world's population as a whole (link). Their work is incorporated into Piketty's own conclusions and is included on Piketty's website. Here is Piketty's summary graph of global inequalities since 1700 -- which makes the point of convergence between developed countries and developing countries more clearly than Cowen himself:

So what about China? What role does the world's largest economy (by population) play in the topic of global economic inequalities? China's per capita income has increased by roughly 10% annually during that period; as a population it is no longer a low-income economy. But most development economists who study China would agree that China's rapid growth since 1980 has sharply increased inequalities in that country (linklink). Urban and coastal populations have gained much more rapidly than the 45% or so of the population (500 million people) still living in backward rural areas. A recent estimate found that the Gini coefficient for China has increased from .30 to .45 since 1980 (link). So China's rapid economic growth has been a major component of the trend Cowan highlights: the rising level of incomes in previously poor countries. At the same time, this process of growth has been accompanied by rising levels of inequalities within China that are a source of serious concern for Chinese policy makers.

Here are charts documenting the rise of income inequalities in China from the 2005 China Human Development Report (link):

 
 
 

So rising global income inequality is not a minor issue to be brushed aside with a change of topic. Rather, it is a key issue for the economic and political futures of countries throughout the world, including Canada, Great Britain, the United States, Germany, Egypt, China, India, and Brazil. And if you don't think that economic inequalities have the potential for creating political unrest, you haven't paid attention to recent events in Egypt, Brazil, the UK, France, Sweden, and Tunisia.

'California's Job Growth Defies Predictions after Tax Increases'

Posted: 20 Jul 2014 10:21 AM PDT

This article, by David Cay Johnston, is getting a surprising number of retweets:

State's job growth defies predictions after tax increases, by David Cay Johnston, The Bee: Dire predictions about jobs being destroyed spread across California in 2012 as voters debated whether to enact the sales and, for those near the top of the income ladder, stiff income tax increases in Proposition 30. Million-dollar-plus earners face a 3 percentage-point increase on each additional dollar.
"It hurts small business and kills jobs," warned the Sacramento Taxpayers Association, the National Federation of Independent Business/California, and Joel Fox, president of the Small Business Action Committee.
So what happened after voters approved the tax increases, which took effect at the start of 2013?
Last year California added 410,418 jobs, an increase of 2.8 percent over 2012, significantly better than the 1.8 percent national increase in jobs. ...

'Why Not Worker Control?'

Posted: 20 Jul 2014 08:46 AM PDT

Chris Dillow:

Why not worker control?: "Workplace autonomy plays an important causal role in determining well-being" conclude Alex Coad and Martin Binder in a new paper. This is consistent with research by Alois Stutzer which shows that procedural utility matters; people care not just about outcomes but about having control, which is why the self-employed tend to be happier than employees.

This implies that a government that is concerned to increase happiness - as David Cameron claims to be - should have as one of its aims a rise in worker control of the workplace.

This is especially the case because research shows that the cliche is true - a happy worker really is a productive worker. For this reason, it shouldn't be a surprise that there's a large (pdf) body of research which shows that worker coops can be at least as productive and successful as hierarchical firms. ...[examples]...

Greater worker control, therefore, might increase well-being directly and also raise productivity. Which poses the question: why, then, is it so firmly off of the political agenda? It's not because it's a loony lefty policy. ... Nor do I think it good enough to claim that there's no voter demand...

Instead, I suspect there are other answers to my question. ... As Pablo Torija Jimenez has shown, "democratic" politics now serves the interests of the very rich. And these benefit from managerialist control of workplaces even if most of the rest of us do not.

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