Category: Economics

Are Americans saving too little for retirement?

Maybe not, here is an interesting article:

Mr. Scholz said he and his co-authors of a study, “Are Americans
Saving ‘Optimally’ for Retirement?” found oversaving across all
economic and education levels and most ethnic or racial groups as well.
(It found that Hispanics tended to save less.)  Those who were not
saving enough were usually missing their target by only a small amount.

The one exception to this optimism involves people who enter
retirement single, either because their spouse died early, they
divorced, or they never married.  The studies found this group did not
save enough…

The starting point for most retirement plans is the so-called
replacement rate.  It says an American needs an annual income in
retirement equal to 75 percent to 86 percent of what he or she earned
in the final year of employment.  Someone making $100,000 would
typically plan for about $85,000 a year in retirement.

…Mr. Kotlikoff’s calculations showed that Fidelity’s online calculators
typically set the target of assets needed to cover spending in
retirement 36.4 percent too high.  Vanguard’s was 53.1 percent too high. 
A calculator offered by TIAA-CREF, one of the largest managers of
retirement savings, was 78 higher than his calculation.

Those very same financial planners earn money only to the extent you save.  Here is one previous post on savings.  Here is my post on how to spend less money.  Here is my post suggesting most Americans are saving enough.  Read them all, if you haven’t already.

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
fortunes.

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 www.irs.princeton.edu/seminars/lemeiux.pdf, "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.

New issue of Econ Journal Watch

Comments:

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
insiders.

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.

Abigal Alliance v. FDA

In May I wrote about the stunning ruling by the DC Circuit Court of Appeals that dying patients have
a due process right to access drugs once they have been through
FDA approved safety trials.  (See the link for some amazing quotes from the ruling.)  The case is now on appeal and possibly headed to the Supreme Court and I am thrilled to have a role.

I am one of the authors of an Amici Curiae brief, a friend of the court brief.  The DC Circuit Court of Appeals made it’s ruling based on the right to control one’s own body:

A right of control over one’s body has deep roots in the common law. The
venerable commentator on the common law William Blackstone wrote that the right
to “personal security” includes “a person’s legal and uninterrupted enjoyment
of his life, his limbs, his body, [and] his health,”…barring a terminally ill
patient from use of a potentially life-saving treatment impinges on this right
of self-preservation.

But the court noted that a patient’s fundamental right could be rebutted if the FDA can show
that its policy of barring access to these drugs is "narrowly tailored
to serve
a compelling governmental interest."

The brief, submitted by Jack Calfee, Dan Klein, Sam Peltzman, Benjamin Zycher and myself, argues that barring access to experimental drugs does not serve a compelling governmental interest and in fact reduces patient welfare.

Unfortunately, I do not think that the Abigail Alliance can win the case; recognizing the rights that the DC Circuit of Appeals recognized would be too big a blow to our nanny state.  Nevertheless, if we can help the court to be aware of some of the tradeoffs involved with drug regulation that will be valuable and it’s also great to be on a paper with Peltzman.

Thanks also to Ted Frank and others for acting as Counsel for the Amici Economists.

Markets in everything, plain stupidity edition

KUMHO Tire USA…December 21, 2006…announces the introduction of the world’s first fragrance automotive tire, the ECSTA DX. 
The project is the “fruition” of more than a year’s worth of research
and development to deliver an alluring aroma tire that replaces the
normal “black rubber” smell with heat-resistant oils in the scent of
lavender, and in later versions, neroli (orange) or jasmine.  Visitors
to www.kumhotireusa.com [product is here] can find the nearest Discount Tire store or TireRack.com will ship them for installation.

Here is a link.  Here are more sources.  Thanks to Natasha for the pointer.  I guess it matters if you are run over by the car…

Markets in everything, Australian surfer dude edition

Tired of your current life?

This auction is for a New Life in the coastal town of Wollongong, Australia of a 24 year old male.

– Will introduce to all my friends & potential lovers (around 8 which I have been flirting with

– I have around 15 close friends and around 170 other friends – I have 2 nemeses

– Lifestyle is very social. It includes a lot of going out.

NB: Friends will treat you exactly as they have treated me. This includes friends who take me surfing, running, climbing and cook for me. All of these features will be transferred over to the winning applicant.

Life also includes the following features:

Will have access to a cruisy job in March delivering fruit.
You will write a satirical horiscope in the University of Wollongong Magazine.
You will have new parents to have Christmas with & birthday presents from friends.
A birthday party will also be organised for you.

This auction also includes the following
– A 4 week training course by the former me which includes the following:
– Many anecdotes and stories from a very interesting and intriguing past 24 years of my life
– 6 Jokes
– Training in becoming me (fashion, food, lifestyle, style of seduction, interests)
– Haircut like mine
– Piercings to the value of $180.
– Lessons in my personal history (The good stuff and the bad stuff)
– Skills Lessons (as mentioned above)

NB: After the 4 week training winning bidder will also receive 2 months of on-call support.

Here is the link, thanks to Hugh for the pointer.  There have been eighty bids and the price is over $40,000 Australian dollars.  The winner does not receive the passport, driver’s license, or inheritance rights of the seller.

Micro-credit puzzles

There is a new approach to micro-credit:

…a very great deal has been written on the subject of microfinance.  But a lot of it makes relatively little sense, especially to economists like Joe Stiglitz [TC: I would not have worded it that way].  For one thing, interest rates on microcredit are enormous: 30% to 60% is common, and rates over 100% are not unheard-of.  And yet default rates remain very low: how is this possible? And how is it possible that demand for loans seems to be unrelated to the interest rate charged?  And why is it that borrowers seem to have little if any interest in medium-sized loans, even when they’re offered?

A forthcoming paper by Shahe Emran, Mahbub Morshed and Joseph Stiglitz not only asks those questions, but goes a long way to answering them, too. It turns out that the main factor behind all these puzzles is the place of women in society, and especially extreme illiquidity in the market for women’s labor…

While there exists a labor market for male labor, for women, the outside labor market is largely missing in most of the developing countries, especially in the rural areas.  Even where the market for female labor exists, the ‘selling price’ is, in general, much lower than the ‘buying price’, due to the transaction costs that might reflect social norms regarding women’s participation in the formal labor market (like Purdah) along with the usual search, information and monitoring costs.  The existence of a transaction cost band implies that many households fall within the band, and the female labor endowment becomes non-tradable for such a household (i.e., household specific missing market for female labor).  This implies that the shadow wage rate for the non-traded part of the household labor is determined by the complementary resources available to a household, like land.  For a poor household with little land, the shadow wage, in the absence of microcredit interventions, is very low, possibly close to zero.  The availability of microcredit enables this nontraded part of the labor to be productive.

Translated into English, a little bit of credit acts as a catalyst for women outside the labor market, turning them into economically productive individuals.  Once they become economically productive, they can pay back small loans.  But they’re not productive enough to pay back medium-sized loans.

To put it another way, how can the marginal product of capital be so high?  Perhaps the interest on a microloan isn’t a pure return on capital, it is also a return on labor.  Without a tiny bit of capital, the labor can’t be tapped.  (So the marginal product of capital isn’t really all that high in Indian slums, for instance.)  Supposedly that is why microcredit works, and why larger loans are much less popular.

This is ingenious, but the theory won’t hold up if it focuses on liberating the labor power of women.  There are plenty of micro-credit markets where most of the loans finance the productive efforts of already-employed men.  A more realistic explanation has to consider micro-credit as micro-insurance (what if the kid needs to go to the doctor?, liquid funds are needed now), and the high rate of implicit taxation which needy relatives impose on spare household liquidity.  Both of these factors will get the private return from borrowing to be high, without requiring a comparably high rate of economic growth.

Here is the link.  Here is my earlier column on micro-credit.

They thought they had me, but I had them! Maybe.

In a moment of weakness after my furnance broke down I bought a service contract.  Now every few months I get a "free cleaning" during which the furnace repair guy tells me about all the other products I need.

The salesman, sorry, I mean furnace repair guy, seems honest and genuinely concerned about my ambient body temperature.  Of course, I never listen to him or buy anything and this makes me very happy.  See, I figure that most people do purchase additional services from such a fine young man.  If so, then perhaps the real purpose of selling the insurance contract is not the insurance- it’s to get the salesman in your door several times a year.  And that means that the insurance qua insurance contract ought to be reasonably priced, maybe even under-priced, or at least not jacked up as high as it would be if it didn’t lead to further sales.

Thus, I have cleverly reasoned my way out of foolishness and towards brilliance –  such reasoning is to be distrusted.  Nevertheless, I wonder whether the argument does not generalize.

Why I don’t believe in liquidity traps

The core idea is that the government prints more money but people just hold it.  If nominal interest rates are low, OK, maybe no one wants to buy more bonds (however under some assumptions this will lower bond prices and raise rates again, bonus points if you can work through the whole analysis with real and nominal rates and price level paths).  But they will buy more goods, thereby stimulating aggregate demand.  If they won’t buy more goods, just print even more money.  The spending impulse will kick in. 

For another view, Paul Krugman argues people may not expect the inflation to continue for long enough, and therefore won’t spend their money but will instead expect a future deflation further down the road.  I think that creating and maintaining the inflationary expectations is quite easy, especially if the inflation will boost output and employment and thereby make politicians popular with voters.  If you print money, people don’t think "hmm…that is inflationary…that means someday the central bank will have to deflate, I’ll wait six years and spend this new money when prices are really low."  Yes, I see the intertemporal equilibrium concept, but nope, that fails Psych 101.  Krugman also borrows the idea of an ongoing negative real rate of interest, but this describes Battlestar Galactica, not the twentieth century.

Open market operations, when tried, seem to have worked in 1932.  Was Japan in a liquidity trap in the 1990s?  They could have printed more money and given it to me.  With an interpreter at my side, I would have spent it right away.  Who knows, maybe you could have helped me.  Here is a good critique of Krugman on Japan.

Perhaps there is a knife edge setting where printing too little money leads to hoarding and printing too much money leads to hyperinflation.  So a risk-averse central bank is stuck.  I doubt this, people don’t act so closely in accord but rather they adjust their cash balances at different speeds.  So again, just print some more money to get out of the liquidity trap.

What is the evidence for a liquidity trap?  Low nominal rates and the absence of a recovery?  That’s not much evidence.  I suspect real coordination problems are at fault in most of these settings, and hoarding is at most a secondary issue.  Few serious economic problems are purely monetary in nature, yet the liquidity trap encourages us to embrace that dangerous idea.

The bottom line: I once wrote a paper arguing the liquidity trap is possible.  Now I think that Milton Friedman was right all along.