Month: January 2007

Alan Reynolds’s *Income and Wealth*

1. I don’t agree with the most notorious claim of the book, namely that income inequality hasn’t gone up over the last few decades.  Gary Burtless has a good, non-polemical look at the data.  See also Bruce Bartlett.  Personally I am struck by what I know about philanthropy, art markets (booming prices, driven by wealth) and academic salaries.  At the micro-level each of these areas appears to reflect a trend of rising income inequality.  Even before I had heard of Piketty and Saez, I felt I was seeing their result right before my eyes.  In terms of more formal data, I also was much influenced by the Thomas Lemieux piece I cited earlier today (Reynolds cites it too, I might add, approvingly, though without considering this angle), which shows that composition effects virtually require income inequality to be rising.  Reynolds would have had a better book if he simply stated that income inequality isn’t going up as much as some people have claimed.

2. The book is of course polemical in style, so it is no surprise it would occasion polemical responses.  Nonetheless I have been disappointed by much of the critical reaction to the book, most typically Jonathan Chait at NR.  With any book, whether you like its attitude or not, the first questions are what the book gets right and what we can learn from it.  (I am someone who had GMU economics Ph.d. students read Barbara Ehrenreich’s Nickle and Dimed.)  Many of the critics aren’t asking these questions but rather they are using debating points, or attacks against Reynolds, to dismiss the book altogether.  On many issues Reynolds is correct or at least he makes arguments worth considering.  Often he is simply a massive tonic of common sense when countering the fuzzier-minded of egalitarian arguments.

Neither Reynolds nor the critics try hard enough to get at the real issues, namely which kinds of inequality are present, which are problems, and which are worth worrying about.  The Reynolds book would have done better to try to give us a deeper understanding of the actual problems, whatever they may be, and less to respond to the critics number-by-number; the latter approach rarely convinces many people. 

On specific points, the critics are too dismissive of consumption data, and Reynolds defends them too passionately.  And what about happiness?  Are there special problems concerning unequal health care?  Just how bad is emergency room care relative to gold-plated insurance plans?  Is the biggest problem of the poor, as one MR commentator points out, simply having to hang around other poor people?

Overall both philosophy (a rigorous treatment of which complaints are exactly complaints about inequality) and sociology are badly needed in this debate.  On both sides of the fence I yearn for just a bit more Amartya Sen.  The numbers, one way or the other, taken alone, aren’t going to convince very many people.

Markets in everything, deficit spending edition

The Illinois lottery may be up for sale.  The current status is discussed in yesterday’s NYT.  The state hopes to get $10 billion.  The lottery had $630 million in profits last year on sales of $2 billion.  The buyer would get all profit for 75 years.

Here is the source.  Larry Ribstein remarks: "Yet more evidence that a hedge fund is no match for a politician when it comes to short-term thinking."

Incomes and inequality: what the numbers don’t tell us

Here is my NYT column from today (right now the on-line piece has some typos/broken links, I hope they will be fixed), excerpts:

Much of the measured growth in income inequality has resulted from
natural demographic trends. In general, there is more income inequality
among older populations than among younger populations, if only because
older people have had more time to experience rising or falling

Furthermore, more-educated groups show greater income
inequality than less-educated groups. Uneducated people are more likely
to be clustered in a tight range of relatively low incomes. But the
educated will include a greater range of highly motivated breadwinners
and relaxed bohemians, and a greater range of winning and losing
investors. A result is a greater variety of incomes. Since the United
States is growing older and also more educated, income inequality will
naturally rise.

Thomas Lemieux, professor of economics at the
University of British Columbia, estimates that these demographic
effects account for about three-quarters of the observed rise in income
inequality for men and 69 to 95 percent of the observed rise in income
inequality for women (AER June 2006, earlier version at, "Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill")…In other words, rising income inequality is not just a result of
unfairness or bad public policy…

Studies of personal happiness, based on questionnaires and
self-reporting, indicate that the inequality of happiness is not
growing over time in the United States. Furthermore, the United States
has an inequality of happiness roughly comparable to that of Sweden or
Denmark, two nations with strongly egalitarian reputations. (See the
symposium in Journal of Happiness Studies, December 2005.) American
society offers good opportunities for people to be happy, even if not
everyone becomes rich.

My conclusion?

What matters most is how well people are doing in absolute terms.  We
should continue to improve opportunities for lower-income people, but
inequality as a major and chronic American problem has been overstated.

Income vs. consumption inequality

Some time ago, John Quiggin became apoplectic at libertarians citing TV and Playstation purchases as evidence against American poverty being a serious problem; Henry Farrell chimed in too.  John asserts that consumption data "tell[s] us precisely nothing about what’s happening to inequality."

I cannot agree with this claim:

1. Consumption is robust for many categories, not just fancy TVs.

2. The data indicates that the people buying the stuff are not miserable, or at least not miserable for economic reasons.  There are plenty of historical episdoes where consumption does fall, and we know that is not a pretty state of affairs.

3. The demand for flat TVs and the like is not just a relative price effect, it is also a wealth effect.

4. If robust demand for fancy TVs and PlayStations is not convincing, what kind of consumption data would be?  Let’s say there was a robust demand, among the middle classes, for medium-size yachts.  Rembrandt etchings?  Wouldn’t that show something?  It can be argued that "TVs are not enough," but that is not reason to reject consumption data out of hand.  It is a reason to look at more categories of consumption.

Consumption studies do have the following defects:

1. They sample smaller numbers of people than do good income studies, and they cannot pin down the consumption patterns of definite percentiles very easily.

2. Money spent is not always money well spent.

3. The data series do not go far back in time and there may be problems of consistency over time.

4. People may be borrowing and accumulating large debts.  Note that in this case, however, the comeuppance, however bad it may be, has yet to come.  It could instead be argued that "inequality will (someday, when the debts come due) be a serious problem."

Mark Thoma surveys some interesting pieces.  Here is a very detailed study of the topic.  Here are many excellent slides on the topic.

Consumption data, even if sometimes misused by zealous libertarians, are not a means of dismissing the poverty problem, but they do put that problem in another light. 

First, they show that income and wealth data overstate poverty and inequality problems.  Second, a focus on income data leads one to conclude that the elderly require most of the assistance.  A focus on consumption data lead one to conclude that helping parents with children is, in many cases, more important.  That sounds right to me.

Small steps toward a much better world

Via Henry Farrell, the probabilistic alarm clock:

Lifehacker links to
an invention that I’ve thought for years would be a good idea (I’m sure
that plenty of other people have had the same thought).   Many people
have their clocks running a few minutes fast, to encourage them to
leave earlier for appointments to get there on time etc.  The
problem with this is that if you’re half-way rational, you’ll correct
for the error, making it useless.  So the solution is to have a
probabilistic clock, where the clock is fast, but you aren’t sure how
fast it is within a given and relatively short time range.  Thus, you’re
more likely to depart early for your appointments and get there on time
(or a few minutes ahead, most probably, in many situations).  This is
exactly what some bloke has programmed, although it doesn’t appear that it has an alarm feature yet.

Tim Harford covered a similar topic last week.

New issue of Econ Journal Watch


In Growing Public, Peter Lindert suggests
that the welfare state may be a free lunch, and points to Sweden to
make the case. Here, Andreas Bergh empirically challenges Lindert’s
characterization of Sweden and the role Sweden plays in his argument.
Lindert responds.

Ronald Michener and Robert Wright rejoin the debate with Farley Grubb over money supply in colonial America.

Economics In Practice:The top journals have drastically reduced
critical commentary. Robert Whaples suggests an explanation, namely the
quest for citations to the journal. Philip Coelho and James McClure
respond with another explanation, the quest for citations to editorial

Do economists reach a conclusion on road pricing? Robin Lindsey
finds that on the main issue of using pricing to manage congestion,
there is a strong consensus among economists working in the field. But
there is little consensus on secondary issues—how to price road usage,
whether to subsidize, whether to earmark revenues, whether to privatize.

Character Issues:A previous article assessed the 1981 open
letter signed by 364 economists protesting the macroeconomic policy of
the Thatcher government. Philip Booth provides the list of signatories,
among them A.B. Atkinson, David Austen-Smith, Partha Dasgupta, Angus
Deaton, John Eatwell, Frank Hahn, Nicholas Kaldor, Mervyn King, J.E.
Meade, Andrew Oswald, Joan Robinson, Amartya Sen, and John Sutton.

Intellectual Tyranny of the Status Quo:The Real Bills Doctrine, Pro and Con:  Richard Timberlake replies to Per Hortlund.

Why do (some) economists support the minimum wage?

Alan Blinder: I would not put large weight on this, but I think that to some extent attitudes and mores matter.  Regardless of Pareto efficiency, we do not allow indentured servitude or child labor.  Similarly, a $7.25 minimum wage would state that society deems it wrong to pay less.

Peter Dorman: Since Tocqueville (at least) there is a well-established argument that greater equality of income and respect is associated with better democratic performance.  This is a near-consensus position in political theory.

Arindrajit Dube: Increased income (and reduced inequality) has broad effects throughout society and polity; this includes (but is not limited to) increased self worth, increased ability to use added time to spend with kids, attend community college, etc., from an income effect.

Amitava Dutt: Reducing poverty, reducing inequality.  Creating a culture where people realize that some basic needs of people should be satisfied.

Robert M. Feinberg: I’m not sure if this is exactly what is meant here, but I would see notions of fairness playing a role.

John R. Morris: Economic justice for low income people.

Jesse Rothstein: I believe that a great deal of bargaining happens within parameters that are determined, in part, by societal expectations. Government policy has some role in determining those expectations.

Paul Swaim: …I think it is important that adults working full time can earn  enough to make a substantial contribution to supporting a decent living standard and take pride in their status as workers. Put differently, people playing by the rules should not feel like total losers (or be considered as such by their fellow citizens). The minimum wage can probably make a modest contribution to approaching this objective.

William Van Lear: Suggests a society committed to fairness and recognizes that power has a role in determining outcomes.

Mark Votruba: Vast disparities in wealth and income stability of democratic capitalism, as suggested by Alan Greenspan.  I would add that our sense of community is undermined, which in turn undermines the social norms towards “appropriate” social behaviors, especially by those at the bottom.

Jeffrey Waddoups: Reducing wage inequality will increase the quality of democratic institutions.

Bernard Wasow: A low cost demonstration of concern for low wage workers that causes little damage.  Elicits a buy-in by low wage workers to the polity

Henry W. Zaretsky: Improved living conditions for affected workers and their families.  Less likely to become dependent on public programs such as welfare and Medicaid.  More incentive to seek work.   More stake in the system.  More independence.

It is easy to read these and think "Ah, how narrow is neoclassical economics in contrast to these fine thoughts."  My response is instead: "These people are making a mountain out of a molehill."  Bernard Wasow is the guy who makes the most sense.

If you wish to understand the gap between market-oriented and more left-wing economists, this piece is an excellent place to start.

Paul Krugman on health care

…Basically, everyone agrees that health care is a messed-up sector. But
there are two opposing doctrines about what the problem is.

I believe — and the evidence, I think, supports this belief — that the
big problem is "adverse selection." An insurance plan offered to
everyone at the same rate would be a great deal for relatively sick
people, a poor deal for the healthy. So one of two things happens to
private insurance. Either plans go into the "adverse selection death
spiral," as sick people flock in, driving up rates, driving out more
healthy people, and so on. Or insurance companies spend a lot of the
money they receive in premiums screening out "high-risk" clients, so
that the system has huge overhead and the neediest cases are excluded.

The clean solution to this problem is for the government to provide
insurance to everyone. Other rich countries do that. So do we, for
older Americans, veterans, and others. Actually, government health
insurance is already bigger in America, in dollar terms, than private
insurance — it covers fewer people, but that’s because the elderly, who
cost more, are handled by the government.

Employment-based insurance is a distant second-best, but better than
nothing. Large employers, in particular, can spread risk widely,
creating the kind of risk pool that dies from adverse selection in the
individual market. And the tax preference for employer-based care, more
or less by accident, has helped sustain this imperfect fix — which is
why I’m highly skeptical of anything that might erode that preference.

What conservatives in the "consumer-directed" health movement believe,
however, is that the big problem is "moral hazard" — people consume too
much medical care, because someone else pays for it.

Now, this isn’t entirely wrong. People probably do undergo expensive
surgery with questionable effectiveness, and so on, because it’s not
out of pocket. Curbing that was supposed to be the point of managed
care. But managed care didn’t deliver, because people — rightly — don’t
trust private H.M.O.’s to make life and death decisions on their
behalf. Successful managed care only takes place in institutions like
the V.A. where there’s more trust in the institution’s motives.

The whole consumer-directed thing is, in my view, just at attempt to
avoid facing up to that failure. Rather than admit that private-sector
institutions aren’t any good at rationing, conservatives now say that
patients should be induced to ration their own care by being forced to
pay more out of pocket. And that’s where Bush’s attack on gold-plating
comes from: reduce the tax advantage of employer-based care, and
deductibles and co-pays might go up.

The trouble is that the big money is in stuff like heart operations or
other areas where (a) people can’t pay out of pocket in any case — they
must have insurance or go untreated — and (b) people really aren’t
sufficiently well informed to make the decisions. Yet the whole focus
of consumer-directed doctrine is on things like routine visits to
doctors’ offices and annual dental checkups. It’s going where the money
isn’t — because the advocates just can’t believe that markets aren’t
always the answer.

Now here’s the thing: in the name of consumer-directed health care
theory, Bush is proposing changes that would essentially encourage
people to move into the individual market — which wastes a lot of
money, and doesn’t and can’t work for those most in need — while
undermining the employer-based system, which isn’t wonderful but is
still essential. In particular, healthy high-income people would be
encouraged to drop out of employment-based plans, leaving behind a
sicker risk pool, driving up rates, and pushing employer-based care in
the direction of an adverse selection death spiral. The plan we’re
supposed to learn about tomorrow doesn’t sound big enough to have
catastrophic effects, but it’s a step in the wrong direction.

I might add I don’t think adverse selection is the major problem, nor for that matter would I cite moral hazard.  I would cite the (temporary?) difficulty in evaluating procedures and outcomes, plus consumer irrationality, noting those same consumers still could be rational in choosing insurance plans, even if they screw up their on-the-spot medical decisions.  In my preferred but still imaginary model, consumers rationally choose insurance companies ex ante, those insurance companies make and fund key medical decisions ex post, and other third party intermediaries keep those insurance companies honest.

Do riches give women better sex lives?

A survey released today by Prince & Associates in collaboration with wealth consultant Hannah Grove found that 70% of today’s multimillionaires said being wealthy gave them “better sex.”  (You can request a free copy via email here.)  A majority also said wealth gave them “more adventurous and exotic” sex lives.

The survey polled nearly 600 men and women with net worths of more than $30 million and a mean net worth of $89 million…

The survey’s most-surprising findings relate to the impact that money has on the sex lives of women…Among the respondents, nearly three-quarters of the women surveyed (about 150) said they’d had affairs, compared to about 50% of the men.  While the male numbers are in keeping with findings for the broader American population, the figure for women is almost twice as high as the national average, according to sex researchers.  (More than half of all the men and women surveyed had been divorced at least once.)

Fully 63% of rich men said wealth gave them “better sex,” which they defined as having more-frequent sex with more partners.  That compares to 88% of women who said more money gave them better sex, which they defined as “higher quality” sex.

“This tells us that the women as a whole receive more sexual benefits from wealth than men,” says Ms. Grove.

The article has more, but this is a family blog…

The new Bush health care plan

Jonathan Zasloff writes:

Bush plans to pay for it not by efficiencies, but rather by restricting the benefit packages of the already insured, through the deductibility cap.  I’m sure that there are some extraordinarily lavish plans out there, but is there any serious policy justification for this way to go?  If anything, this seems to be a recipe for business to delete coverage, and throwing more people into the individual market.

Paul Krugman is very negative.  Arnold Kling loves the plan.  Greg Mankiw isn’t complaining.  Ezra Klein says it is better than nothing.

My feelings are mixed, but my view is closest to Zasloff.  In the short run the plan gives more coverage to the people who need it most, while avoiding the mistakes of recent state-level plans.  That doesn’t sound so bad.  (By the way, has anyone serious done a study of subsidy incidence for health insurance tax credits?)

But I cannot side with Arnold Kling’s view that third-party payment lies at the root of America’s health care problem.  Our tolerance for anxiety is sufficiently low that I expect the future to bring more and more insurance of many kinds, whether from the private sector or from government.  The cost of this insurance, in terms of induced inefficiencies, will be high but a secure health care situation is one of the things in life that alone can make a difference between happiness and misery. 

Furthermore given our "political irrationality" (my apologies to many readers, such as Matt and Ezra, but I am referring to your tendency, yes yours, to want national health insurance), there is a positive external benefit attached to private health insurance, above and beyond the gains to the insured.  How far would the Democratic health care agenda get without "45 million uninsured"?

The goal is to get (virtually) everyone insured and keep them insured for as long as possible, and yes I know that eventually means health care at 20 percent of gdp and lots of people getting screwed out of just claims for reimbursement.  It is simply the best we can do, and for that reason I don’t want to tax private health plans.

The ambitious long-run program should be to restructure the insurance industry –through a judicious mix of regulation and deregulation — to encourage competition across service quality rather than competition across cost-shifting.  Frankly I have no idea how to do that but no one has ever convinced me it is impossible or utopian.  We simply need better incentives for evaluating the performance of our insurance companies, and better ways of evaluating the performance of our doctors and hospitals.  I’m not going to call that small potatoes, but compared to how health care has evolved since say 1920 it is not asking for the moon.  That is one reason why I don’t want to lock into total government control of the health care market for the next five generations or more.

In the shorter run, I expect medical tourism to continue to grow in importance, including possibly cruise ships. 

Last week I had my first physical in twenty years, and it seemed no different from visiting a witch doctor who makes you feel better by shaking the rattle.