Category: Economics

Mr. Velde, in a Chicago Fed Letter
issued in February, has come up with a solution that would abolish the
penny, solve the excess costs of making nickels, help the poor, keep
the Lincoln buffs happy and save hundreds of millions of dollars for
taxpayers.

As Mr. Velde explained in an interview, “We face a
very medieval problem so I took inspiration from the medieval practice
of rebasing.”

He would rebase the penny by having the government declare it to be worth 5 cents.

We would then stop coining nickels at a loss.  Here is more, from Austan Goolsbee.  I am reminded of Neil Wallace’s work from the 1980s on the indeterminacy of equilibrium exchange rates in the absence of legal restrictions.  If we take away government acceptance at par for taxes and the like, is there not an equilibrium where each penny is worth a million dollars?  More ambitiously, if the U.S. government declared that each $20 bill is now worth $100, or each $100 worth $500, would the real exchange rate adjust immediately?
 

…On the global level, it is difficult to argue that inequality is one
of the world’s major political-economic problems. It is hard, at least
for me, to envision alternative political arrangements or economic
policies during the past 50 years that would have transferred any
significant portion of the wealth of today’s rich nations to today’s
poor nations. I can easily envision alternatives, such as Communist
victories in post-World War II elections in Italy and France that would
have impoverished nations now in the rich North.

I can also envision alternatives that would have enriched poor
nations: Deng Xiaoping becoming China’s leader in 1956 rather than 1976
would have done the job there. But alternatives that would have made
the South richer at the price of reducing the wealth of the North would
require a wholesale revolution in human psychology.

Nor should we worry a great deal that some people are richer than
others. Some people work harder, apply their intelligence more
skillfully or simply have been lucky enough to be in the right place at
the right time. But I don’t see how alternative political-economic
arrangements could make individuals’ relative wealth closely correspond
to their relative moral or other merit. The problems that can be
addressed are those of poverty and social insurance-of providing a
safety net — not of inequality.

But on the level of individual societies, I believe that inequality
does loom as a serious political-economic problem. In the United
States, the average earnings premium received by those with four-year
college degrees over those with no college has gone from 30 percent to
90 percent over the past three decades, as the economy’s skill
requirements have outstripped the educational system’s ability to meet
them. Because the required skills acquired through formal education
have become relatively scarcer, the education premium has risen,
underpinning a more uneven distribution of income and wealth.

Ceci Rouse and Orley Ashenfelter of Princeton University report that
they find no signs that those who receive little education do so
because education does not pay off for them: If anything, the returns
to an extra year of schooling appear greater for those who get little
education than for those who get a lot.

A greater effort to raise the average level of education in America
would have made the country richer and produced a more even
distribution of income and wealth by making educated workers more
abundant and less-skilled workers harder to find — and thus worth more
on the market.

Likewise, America’s corporate CEOs and their near-peers earn 10
times more today than they did a generation ago. This is not because a
CEO’s work effort and negotiation and management skills are 10 times
more valuable nowadays, but because other corporate stakeholders have
become less able to constrain top managers and financiers from
capturing more of the value-added.

Similar patterns are found elsewhere. Within each country, the
increase in inequality that we have seen in the past generation is
predominantly a result of failures of social investment and changes in
regulations and expectations. It has not been accompanied by any
acceleration in the overall rate of economic growth. For the most part,
it looks like these changes in economy and society have not resulted in
more wealth, but only in an upward redistribution of wealth — a
successful right-wing class war.

Here is Dave Leonhardt on prizes, including the work of Robin Hanson.  The pointer is from Chris Masse, don’t forget his blog www.midasoracle.org.

Here is Robin’s paper on prizes.

The Fed governors, and Dani Rodrik, both via Greg Mankiw.

His typist also worked for Agatha Christie and, during the time she was typing Schelling’s works on conflict resolution, she was also typing Christie’s classic play The Mousetrap.

That is from Robert Didge’s The Strategist: The Life and Times of Thomas Schelling.  This book is fun, fun, fun.  Rather than trying to signal his abilities as a "serious biographer," Didge gives the reader insight into Schelling and his times.  Yes it does cover both his career as a military advisor and his personal life.  The new Milton Friedman biography was a bore, this is a delight.

We evaluate whether the Renminbi (RMB) is misaligned, relying upon conventional statistical methods of inference.  A framework built around the relationship between relative price and relative output levels is used.  We find that, once sampling uncertainty and serial correlation are accounted for, there is little statistical evidence that the RMB is undervalued.  The result is robust to various choices of country samples and sample periods, as well as to the inclusion of control variables.

Here is the paper. 

My take: Even I don’t go quite that far.  The authors attach more weight to purchasing power parity than I would, and not enough weight to what I call the "newspaper protestations" of investors and capital market analysts, who all seem to want into China.  Nonetheless this paper has real arguments and real numbers.  I see the value of the Chinese currency as vulnerable over time, and this piece is a useful corrective to the many exaggerated claims made on the other side of the debate.

Colonial Downs, which offers betting on horse races at 10 sites across
Virginia, is pushing for changes in state law so that it can offer a
new form of gambling, called historical racing, on which people wager
on horse races that have already taken place [emphasis added].

Sounds stupid, no?  On closer examination, the bets have the logical structure of otherwise-illegal slot machines:

In historical gambling, which is also called instant gaming,
customers would put as little as a nickel and as much as $5 into a
video terminal that resembles a slot machine.  The terminal randomly
selects a race from an archive of at least 10,000 previous horses races
from tracks around the country.  Customers review a graphic showing the
odds and statistics for each horse before deciding which one to bet on.

The
race appears on the monitor.  If the chosen horse wins, the patron will
receive a payout based on the odds, how much was bet and that day’s
purse.

Israelis own 10 percent of the privately owned
area on the moon, according to Tom Wegner, a spokesman for Crazyshop, a
company that sells plots of moon land to private individuals in Israel.

About 10,000 Israelis have purchased moon property since it
became available in 2000.  Of the 10 million acres sold worldwide, 1
million are owned by residents of Israel, Wegner said Wednesday.

Here is more, those who read Hebrew can buy some moon here.  I don’t understand the legality of these claims but I hope the price is appropriately low.  The pointer is from Natasha, the Natasha.

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.

Here at MR we very much believe in the idea of a fair hearing.  Alan Reynolds has now responded to my post on his book (and other commentators), you will find it here in the comments.

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.

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.

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.

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.