Faster productivity growth would be great. I’m just not at all sure we can count on it to lift middle-class incomes.

April 21st, 2015 at 8:21 am

Recently, a number of economists and commentators have suggested that faster productivity growth would be a big way to boost the income of middle-class households. I’m all for faster productivity growth, though I’d argue no one knows how to reliably make it happen. But given the wedge of inequality between productivity and low and middle incomes, wages, and wealth, I’m skeptical that this would work as well as some think.

So I wrote this paper exploring the issue and adding some of my own estimates. Here’s the intro:

Faster productivity growth would be great. But don’t count on it to raise middle-class incomes.

The stagnation of middle-class incomes is one of the most important and influential trends in American economics. Politicians, from President Obama to Hillary Clinton and Jeb Bush have consistently argued that loosening the middle-class squeeze is a major goal of their policies. Prominent economist Larry Summers recently wrote that in crafting “global as well as domestic” economic policy, “the middle class matters the most,” warning against approaches that offer “little to those in the middle.”

In recent weeks, largely motivated by an analysis by President Obama’s economic team, a solution to stagnant middle-income growth has been elevated: faster productivity growth. The President’s Council of Economic Advisors (CEA) tells us the following:

“What if productivity growth from 1973 to 2013 had continued at its pace from the previous 25 years? In this scenario, incomes would have been 58 percent higher in 2013. If these gains were distributed proportionately in 2013, then the median household would have had an additional $30,000 in income.”

That’s a huge increase—more than 50 percent—over the current median household income of about $52,000. Given an increase of this magnitude, it’s no surprise that the idea that higher productivity growth is an important answer to stagnant middle-class incomes has been touted by various commentators in this debate. Based on the CEA’s calculation, Tyler Cowan goes as far as to claim that faster productivity growth would not just boost middle class incomes, but would increase their economic mobility, implying they’d gain relative to other groups.

There are, however, two problems with all this cheerleading. First, there is a large and persistent gap between productivity growth and middle-class incomes: we cannot realistically assume that faster productivity growth would reach the middle as opposed to doing an end-run around them on its way to the top. Second, while it would be great to have faster productivity growth, I’m afraid we must be humble about our ability to make that happen.

In what follows, I document the inequality-induced split between median family income and productivity growth, with a focus on the point that, while productivity did slow in the mid-1970s, it still grew much faster than middle incomes. In this regard, income inequality has increasingly played a wedge-like role between middle-class income and productivity growth.

This observation on the role of inequality in the income/productivity split is key to my argument. Productivity is really another way of looking at overall, or macroeconomic growth—it is aggregate output per hour. A central, even definitional, characteristic of increased inequality is that less growth reaches the middle class relative to the wealthy. Thus, to assign the benefits of faster productivity growth to the middle class is analogous to assuming away growing inequality, an obvious “diagnostic” mistake with the potential to distract policy makers who want to help middle-class families from the importance of policies designed to push back against rising inequality.

To be clear, faster productivity growth would be a highly welcomed development, and would surely help boost median incomes to some degree. But as long as inequality continues to play a wedge-like role between aggregate growth and the incomes of low- and middle-income households, analysts need to be much more cautious in their assumptions regarding the benefits of faster productivity to the middle class.

…read the rest of the paper; and here’s the data set I used for those who’d like to mess around with the numbers.

Chris Christie dangles the keys

April 17th, 2015 at 12:53 pm

As I stressed on CNBC this AM, Chris Christie’s entitlement plan is not a good plan. It is instead a classic “key dangle” (“look over here, not over there!”), as the folks at Vox nailed yesterday,

–While all the attention has been on benefit cuts for wealthier recipients, that part by itself does very little in terms of boosting the program’s long-term solvency.

–He gets his solvency bucks from raising the retirement age, and that is an across-the-board cut for affected retirees. As my CBPP colleagues noted: “Raising the retirement age amounts to an across-the-board cut in benefits, regardless of whether a worker files for Social Security before, upon, or after reaching the full retirement age.  A one-year increase in the full retirement age is equivalent to a roughly 7 percent cut in monthly benefits for all retirees who are affected.”

–Given that the increase in longevity has been concentrated among higher income elderly, the incidence of this benefit cut is particularly pernicious to those who need Social Security benefits the most.

–Which, by the way, is most elderly: 2/3 of Soc Sec beneficiaries depend on the program for half of their income; for 1/3, it’s 90% of their income. That also why these means-testing ideas targeting the wealthy don’t do much to boost solvency; to really make a difference, you’d have to whack retirees who very much depend on this income source. (This seems a good place to mention the Soc Sec is fully solvent for 18 more years; after that, if we do nothing–and woe betide us if that’s the case–benefit payouts would have to fall by 25%.)

–Raising the Medicare eligibility age is another bad Christie idea. It saves money for Medicare but actually raises national health care costs. Why? Because you’re taking the youngest, healthiest seniors out of the more efficient program, and passing them over to the less efficient private system, where they’re relatively older, sicker, and more costly.

–Finally, his idea for a per-capita cap on Medicaid, as Catherine Rampell points out today, whacks another group of vulnerable people:

Limiting federal funding on Medicaid spending would indisputably accomplish one objective: Limiting federal funding on Medicaid spending. But that’s it. It won’t make the growing costs of the program magically disappear. It would just dump them onto someone else’s doorstep, in this case the states’, which are likely less equipped to deal with complex management and cost control given their smaller scale. State governments would either have to contribute more of their own funds or, more likely, institute deep cuts to poor beneficiaries and the providers that serve them. Medicaid already spends so little per beneficiary — about 27 percent less for children, and 20 percent less for adults, than private insurance does on similar patients — that further cuts would almost certainly cause providers to exit the program, reducing access to care.

I don’t know where Gov. Christie stands on the estate tax repeal, but this week’s Republican agenda, including his own, appears to be based on the realization that what’s hurting America is that there’s just too damn much retirement and health-care security being enjoyed by the low-income elderly and the poor, and b) the richest estates aren’t rich enough.

But hey, good for them for making the “hard choices!”