March 5th, 2012 at 8:23 am

I’m overdue for one of these.  H/t to HS for help compiling.

From my post titled, Poverty, Inequality, and the Stages of Grief:

“What is it specifically about the wealthy becoming wealthier that is causing lower incomes to grow at a slower rate: how is their gain another’s loss?”

If the structure of economic returns shifts in such a way that the benefits of growth flow more to one group than another—i.e., inequality is on the rise—then that one groups’ gain can be the other’s loss.  Globalization has at times worked this way.  For example, high-end domestic engineers might design a product here, one that generates significant profit (and thus helps to boost growth), only to have said product produced abroad.  Growth continues apace but its benefits fail to reach production workers, many of whom will now find work in the lower value-added parts of the service sector.

I recently posted the figure in this post to show what this pattern of growth looks like, with incomes up, on average, over this ten year period by 20%, but falling at the low end, and rising by three times that rate among the top 1%.  In these situations, inequality acts like a wedge or a funnel, channeling most of the growth to one income group and bypassing another.

From my post Manufacturing: Why We Should Help the Sector (But Not Too Much):

“What would you say to implementing stricter environmental standards on US imports, or labor standards, or even an import minimum wage?”

I’m sympathetic to ideas like this and some of them are in our trade treaties, though I don’t see a lot of enforcement.  That’s one problem—can we really successfully monitor such behavior among all of our trading partners?  Unlikely.

But another problem is that we have to be careful when trying to enforce standards like these because emerging economies need to evolve towards these standards…they can’t get there overnight.  That was certainly the experience in this country as well as every other advanced economy.

So I’d say we should avoid trade agreements, for example, in countries with egregious abuses—the recent agreement with Colombia, a country with a history of violence towards those trying to organize workers, was misguided by this standard. But in general, countries need to evolve toward the standards you mention. Your question is well-taken…perhaps conditions like these would help nudge that evolution, but it could also thwart it by blocking trade instead of allowing them gains from trade that could help them improve their living and other standards.

From my post Hey, Something Good Happened This Week:

“I am having a discussion with a friend about the effects of minimum wage. He cited studies done by Walter Williams and Sowell who say that minimum wage has a negative effect on employment, especially on minorities. How would you respond to these studies?”

I poked around a bit on the net and from what I saw, they seem like propaganda without much thought or analytic rigor.  Mostly what they seem to be saying is that unemployment of low-wage workers went up a lot in the last few years…it must be the minimum wage!  Obviously, that’s nonsense (there was this…um…big demand contraction).

This is always an empirical question, and it is widely acknowledged that the path-breaking book, Myth and Measurement, by Alan Krueger and David Card, presented extremely rigorous analysis of the impact of minimum wages on employment.  Their findings, often based on pseudo experiments which bolster their reliability, stand in stark contrast to more rhetorical approach of Williams et al (or the citation of high unemployment in recession), and they changed the minds of many objective observers.  (Here’s a great post by a top notch economist, Arin Dube, looking back on Myth and Measurement, discussing its game-changing impact and reflecting on corroborating work done since.)

Most everything I could find from Williams and Sowell was just theoretical meanderings about how wage mandates must lead to higher unemployment, because…that’s what the models say.

Here’s a Williams quote, e.g.:

Imagine that a worker’s skill level is such that he can only contribute $5 worth of value per hour to the employer’s output, but the employer must pay him a minimum wage of $7.25 per hour, plus mandated fringes such as Social Security, unemployment compensation and health insurance. To hire such a worker would be a losing economic proposition. If the employer could pay that low-skilled worker the value of his skills, he would at least have a job and a chance to upgrade his skill and earn more in the future.

First off, health insurance isn’t a “mandated fringe” and most low-wage workers don’t get such coverage.  But more importantly, you see here the classical economic assumption that people are all paid their “marginal product”—the value of their personal, marginal contribution to the firm’s output, an amount that is known to employers.  In the real world, that kind of precise calibration doesn’t occur.  If it did, then yes, anytime the minimum wage went up, everyone affected by it would lose their job, because their new wage would be higher than their marginal product.  The fact that this doesn’t happen should lead you away from the rhetorical stuff and toward the empirical work, as described by Dube above.

From my post The Wrong Narrative on Larry Summers:

“My problem with Summers is captured by the words ‘To accomplish a more significant reduction in the output gap would require that a stimulus well over $1 trillion–which would likely not accomplish the goal because of the impact it would have on markets.’ Where is the economic analysis to support this claim regarding the impact that it would have on markets?”

Another question from this post: “My issue is that every time it’s leaked that someone from the administration was against larger stimulus, the response seems to be ‘No, I really supported larger stimulus.’ If everyone was in favor of larger stimulus, why wasn’t the stimulus larger?”

Starting with the second question, it sounds a little bit like how everyone was a member of the French resistance.  I can only tell you that back in the day, we thought that getting an $800 billion stimulus package through Congress was a signal achievement.  No one, and I mean no one, thought it would solve everything.  But neither did anyone walk around thinking, ‘man we really blew it—we could have gotten a $1.X trillion package if we’d pushed harder.’  Though one thing I know I regretted back then was allowing Congressional R’s to stuff the ATM patch—a $70 billion tax break that should and would have been passed separately—take up space in the bill.

Re the first question, you raise a very strong point.  There isn’t evidence to support the claim that in the midst of the worst downturn since the GD, markets would have reacted badly to the White House calling for a stimulus over $1 trillion.  In fact, there’s surprisingly little evidence for markets reacting badly (or well) to information about deficits.  This is more a meme of Washington policy makers who view themselves as market whisperers—they believe they can channel future market reactions.  (On the other hand, political and implementation constraints re a stimulus package of that magnitude were real.)

Many who cut their teeth in the economic policy of the Clinton years believe that markets reacted well to the move from deficit to surplus as stocks soared and bond yields came down in the latter 1990s.  And they’re by no means necessarily wrong…deficits should very much come down in recovery and if crowding out—gov’t borrowing and spending crowding out private sector borrowing, thus raising interest rates—is going to occur, that’s when it should happen.  But not in the midst of cataclysmic recession!!

So, like I said, you raise a good question, and I’ve become quite wary of people telling me how the markets are going to react to deficits.  You should be too.

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10 comments in reply to "YAIA"

  1. Fred Donaldson says:

    “Imagine that a worker’s skill level is such that he can only contribute $5 worth of value per hour to the employer’s output, but the employer must pay him a minimum wage of $7.25 per hour…”

    To which I would add: “suppose the worker (unit?)starves to death on $5 an hour, or dies from no medical care at $7.25?”

    No minimum wage means lower wages, and lower wages leads to more food stamps, Medicaid, Section 8 housing, and all the other things that haters of minimum wage hate.

    However, if the minimum wage haters can figure out ways for the poor to pay for their own food stamps, this is another winner for them. Do I hear Medicare eligibility age raised, higher premiums for Medicare, Social Security moved up to 70, and that wonder of all, making the bottom 47% “contribute to income taxes”?

  2. cat says:

    “But another problem is that we have to be careful when trying to enforce standards like these because emerging economies need to evolve towards these standards…they can’t get their overnight. That was certainly the experience in this country as well as every other advanced economy.”

    With the news reports saying the leading cause of death in China is cancer closely linked to industrial pollution that sounds a little to neo-liberal stance. It is every countries right to decide if they want to poison their population from unregulated pollution, but should we be really condoning it? To use China as an example where the leading cause of death is now Cancer and the underlying cause is probably polution.

  3. perplexed says:

    -“From my post Manufacturing: Why We Should Help the Sector (But Not Too Much):”

    No doubt we should be doing what we can through “our” government to do what’s “best” for the economy but the lack of transparency, measurement, and reporting are making this impossible because help for businesses crowds out help for other social needs when government and taxes are the “enemy.”

    While we seem to know a great deal about every nickel we provide to our destitute private welfare recipients, our corporate and oligarch welfare subsidies are largely hidden behind a “curtain” of obfuscation and almost never included and reported on when we talk about our distribution of welfare dollars. If the pie charts included the whole pie to begin with, a much more rational discussion would ensue.

    • Michael says:

      “Government” and “taxes” are not the enemy to conservative Americans. “Americans” are the enemy to conservative Americans. Once you hate women, people of color, LGGTQ folks, people who work for a living, and any white men who are traitors in favor of the aforementioned, you just round up.

  4. NoPolitician says:

    Here is my thought on “What is it specifically about the wealthy becoming wealthier that is causing lower incomes to grow at a slower rate: how is their gain another’s loss”

    I believe that there is a false frame here. The wealthy becoming wealthier doesn’t cause lower incomes to grow at a slower rate. Both are symptoms.

    Tax policy is a good example of the cause. Take two extreme situations: a tax rate which drops to 0% for incomes over $1 million, and one that goes to 100% for incomes over $1 million.

    In the first case, every incentive is for someone to get over that $1 million threshold – they will pay 0 taxes on such income. That means they will squeeze every last penny they can out of their business. Maybe moving production from Ohio to Mexico will get the owner another $1m in profit. Nothing stopping them from doing this. The money is worth the blowback.

    In the second case, there is no incentive to earn over $1m. That means a company approaching that number will start generating expenses. Hire some more people to do lower-priority work. Pay existing employers more. Forget about the move to China which is going to increase profits by $1m – not worth the effort since the government is going to get that $1m.

    • Michael says:

      In the US, the wealthy become wealthy mainly by stealing from people who work for a living. That’s what “increasing inequality” really means — that bread is snatched from the mouths of middle class children in order to feed the vanity pigeon flocks of the wealthy.

  5. Jim Z. says:

    It would also seem an embaressment that almost 40% of the stim. bill were tax cuts not direct spending. In fact the direct spending parts, spread over some 2.5 years, does seem slim in the context of the severety of the economy, even as perceived in early 2009.

  6. Th says:

    The main excuses given to the idea the stimulus was too small seem to either be that the economy was far worse than thought or/and the amount was what was politically possible. My question from the recent discussions is: did the President know that Romer’s (your?) model showed that $800b was only 2/3’s of the gap and could then prepare for the possibility of falling short? Even in my puny experience as a decision maker, I would have been furious to find my advisers were not giving me the best information available. In short, did Obama know Romer’s model (now known to be based on higher economic output than actually existed) showed $1.2t? Did Biden know?

    • perplexed says:

      And why if “everyone” knew the stimulus was likely to be too small was the amount allowed to be inflated to make it look larger than it was. Huge tax breaks to wealthy oligarchs is a “gift,” not stimulus spending. Krugman (among others) estimated that the actual “stimulus” in the “stimulus” bill was closer to $500 billion. Most of the rest was an award for being a 1%er. But maybe bailing out the TBTF banks instead of nationalizing them appears more palatable if the cost of it looks lower? And now we’re going to further impede the truth from coming out by selling the banks “get out of jail free” cards for what is to them “chump change” that does almost nothing to compensate their victims? Current explanations create more questions than they answer: http://jaredbernsteinblog.com/the-self-imposed-limits-of-reaction-to-a-crisis/#comment-29435

      Didn’t Woodward or Bernstein pass along their “genes” to anyone?

    • Michael says:

      And if we all knew this, why did they lie through the Summer of Recovery?