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June 25, 2015

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Posted: 25 Jun 2015 12:06 AM PDT

'Growth’s Secret Weapon: The Poor and the Middle Class'

Posted: 24 Jun 2015 09:10 AM PDT

Era Dabla-Norris, Kalpana Kochhar, and Evridiki Tsounta at the IMF:

Growth's Secret Weapon: The Poor and the Middle Class: The gap between the rich and the poor is at its widest in decades in advanced countries, and inequality is also rising in major emerging markets...  It is becoming increasingly clear that these developments have profound economic implications.
Earlier IMF work has shown that income inequality is bad for growth and its sustainability. Our new research shows that income distribution itself—not just the level of income inequality—matters for growth.
Specifically, we find that making the rich richer by one percentage point lowers GDP growth in a country over the next five years by 0.08 percentage points—whereas making the poor and the middle class one percentage point richer can raise GDP growth by as much as 0.38 percentage points...  Put simply, boosting the incomes of the poor and the middle class can help raise growth prospects for all.
One possible explanation is that the poor and the middle class tend to consume a higher fraction of their income than the rich. ... What this means is that the poor and the middle class are key engines of growth. But with inequality on the rise, those engines are stalling.
Over the longer run, persistent inequality means that the the poor and the middle class have fewer opportunities to get educated, enhance their skills, and pursue their entrepreneurial dreams.  As a result, labor productivity and growth suffer. ...

'Raisins: When Insiders Set the Rules'

Posted: 24 Jun 2015 09:09 AM PDT

Tim Taylor:

Raisins: When Insiders Set the Rules: Earlier this week, the US Supreme Court in Horne et al. vs. Department of Agriculture overturned an arrangement that had stood since 1937 for the sale of raisins. The case turned on what is apparently a non-obvious question, given that this program had been around for eight decades and lower courts had ruled differently: Does taking 47% of someone's crop count as a a "taking" in the legal sense prohibited by the 5th Amendment to the US  Constitution, which ends with the words " ... nor shall private property be taken for public use, without just compensation." Chief Justice John Roberts wrote the decision for an 8-1 majority. He begins with a compact overview of past practice:

The Agricultural Marketing Agreement Act of 1937 authorizes the Secretary of Agriculture to promulgate "marketing orders" to help maintain stable markets for particular agricultural products. The marketing order for raisins requires growers in certain years to give a percentage of their crop to the Government, free of charge. The required allocation is determined by the Raisin Administrative Committee, a Government entity composed largely of growers and others in the raisin business appointed by the Secretary of Agriculture. In 2002–2003, this Committee ordered raisin growers to turn over 47 percent of their crop. In 2003–2004, 30 percent. 
Growers generally ship their raisins to a raisin "handler," who physically separates the raisins due the Government (called "reserve raisins"), pays the growers only for the remainder ("free-tonnage raisins"), and packs and sells the free-tonnage raisins. The Raisin Committee acquires title to the reserve raisins that have been set aside, and decides how to dispose of them in its discretion. It sells them in noncompetitive markets, for example to exporters, federal agencies, or foreign governments; donates them to charitable causes; releases them to growers who agree to reduce their raisin production; or disposes of them by "any other means" consistent with the purposes of the raisin program. 7 CFR §989.67(b)(5) (2015). Proceeds from Committee sales are principally used to subsidize handlers who sell raisins for export (not including the Hornes, who are not raisin exporters). Raisin growers retain an interest in any net proceeds from sales the Raisin Committee makes, after deductions for the export subsidies and the Committee's administrative expenses. In the years at issue in this case, those proceeds were less than the cost of producing the crop one year, and nothing at all the next. 

Readers who want to plow through the discussions of "takings" and "just compensation" in the decision can feel free to do so. What's interesting to me, from an economic point of view, is that the marketing arrangement for raisins embodies a certain misguided notion of how to create a healthy economy--a notion that still has some resonance today.

In the midst of the Great Depression, firms were losing money and wages were falling. For politicians, the answer to low profits and low wages straightforward. Form organizations of producers that would limit competition and hold down production, thus pushing up prices and helping producers earn profits. On the labor side, set industry guidelines and later minimum wage laws to prevent wages from falling.

This economic philosophy was embodied the National Industrial Recovery Act passed in 1933. Back in my undergraduate days, I took a class in US economic history with Michael Weinstein, who had recently published his 1980 book, Recovery and Distribution Under the National Industrial Recovery Act. The book offered a careful statistical analysis to illuminate the underlying economic themes. When producers all group together to hold down output, the remaining incumbent firms might make higher profits on the sales that remain--but this is literally the opposite of economic growth. Also, it forces consumers to pay higher prices. Trying to push up wages in the middle of a Great Depression can help those who manage to keep their jobs, but when employment is in the neighborhood of 25%, it doesn't help the economy expand, either.

It is revealing that the Raisin Administrative Committee, which sets the proportion of "reserve raisins" to be taken from growers and handlers, lacks any meaningful representation from consumers, or other firms in related industries, or the public more broadly, or those who might wish to enter the market for raisins. ...

In short, the economic arrangements for raisins are an example of what so often happens when economic policy is set by a combination of government and existing firms: the focus tends to be on profits for those existing firms, backed up either by government regulations that function like implicit subsidies or by explicit subsidies. Economic growth ultimately comes from innovation and productivity, not from attempts to tilt the market to favored incumbent firms. ...

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