Entries Tagged as 'wealth'

Romney Doesn’t Carry Small Change

December 12th, 2011 at 4:46 pm 47 Comments

Mitt Romney’s proposed $10,000 bet with Rick Perry has earned a lot of criticism for the candidate. Given that it was a rhetorical device (albeit a clumsy one) rather than an actual bet and given that a $10,000 is not really a lot of money for a presidential campaign, I’m personally inclined to give Romney a pass.

That said, another story that got much less media attention at the time it happened does really seem to show that he is out of touch on financial issues. Here are the basics: during a campaign stop, a small boy offered Romney a small bird he had folded out of a dollar bill, Romney glanced in his wallet and, at first, the Washington Post reports, could only find a $100 bill. (He eventually found a $5 to give to the boy.)

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America’s New Consumer Divide

David Frum June 10th, 2011 at 2:21 pm 61 Comments

Chrystia Freeland reports new research that suggests that 10% of US households account for 50% of US consumer spending.

Remember how folk singers back in the 1960s used to complain about the conformity of mass culture?

Little boxes on the hillside,
Little boxes made of ticky tacky,
Little boxes on the hillside,
Little boxes all the same.
There’s a green one and a pink one 
And a blue one and a yellow one,
And they’re all made out of ticky tacky
And they all look just the same.

Good news, reports Freeland: “mass affluence may be a thing of the past.” Instead, the American future will offer many culturally fascinating contrasts between rich and poor.

Trump’s Number Crunchers Get to Work

David Frum April 22nd, 2011 at 6:49 pm 24 Comments

So Donald Trump is working with his accountants to prepare disclosure forms. This reminds me of a favorite joke.

A CEO is interviewing accountants for his company. Three applicants sit in the waiting room to be interviewed.

The first applicant enters the magnificent office, very nervous. The CEO motions the accountant to take a seat. “I’m a simple man,” says the CEO, “and I have only one simple question for you. What is two plus two?”

The accountant cheers up. This is going to be easier than he dared hope. “Four!” he answers brightly.

The CEO shouts: “Next!”

The second accountant enters, takes a seat. The CEO asks again: “What is two plus two?” This accountant thinks for a moment. “Do you want the answer in binary format or base 10?”

The CEO nods, impressed. “You’re smart. Congratulations. Next!”

The third accountant enters, takes a seat. Once more the same question: “What is two plus two?” This accountant does not hesitate. “What would you like it to be?”

As the Donald would have said: “You’re hired.”

Stiglitz’s Inflated Income Gap

April 11th, 2011 at 7:01 am 39 Comments

I’m never going to win a Nobel Prize.  Maybe in literature.  I don’t know why Joseph Stiglitz’s new Vanity Fair piece on inequality is so off-base.  But it is.  And it’s incredibly frustrating (1) to see someone so intelligent be thwarted by ideology and (2) to watch as his views are propagated on the basis of his name recognition.

What’s a lonely uninvited-to-Davos blogger to do?  Blog.  Herewith, my fact check of the VF article.  Stiglitz writes (henceforth in italics),

The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year.  In terms of wealth rather than income, the top 1 percent control 40 percent.  Their lot in life has improved considerably.  Twenty-five years ago, the corresponding figures were 12 percent and 33 percent.

Stiglitz doesn’t cite any of his figures (possibly a limitation of the outlet), but the Piketty & Saez estimate of the top one percent’s income share in the most recent year (2008) was 18 percent, which is just a hair closer to “nearly a quarter” than it is to “just over a tenth”.  Their data says that share was 9 percent in 1985, but that should be adjusted upwards to 13 percent.  Similarly, CBO says the top one percent’s share was 17 percent in 2007 for after-tax income, up from 11 percent in 1989.  Saez’s estimate of the top one percent’s share of wealth is 21 percent for 2000, 21 percent for 1990, and 22 percent for 1985.  Edward Wolff’s is 35 percent for 2007, up from 34 in 1983 (which I doubt is statistically different from 35 in this case).  The top appears to have experienced income and wealth losses from 2007 to 2009 while the bottom experienced gains.  Taken together, the top one percent’s income share rose from 11-13 percent twenty-five years ago to 17-18 percent according to the most recent data.  The top one percent’s wealth share basically hasn’t risen.

[UPDATE: See MIT economist Erik Brynjolfsson's comment below, which led me to add this paragraph.  Brynjolfsson raises an important point (though I wouldn't call it a mistake) in noting that Stiglitz may have been referring to the Piketty and Saez numbers that include realized capital gains in "income".  I chose the series excluding capital gains because the timing of when capital gains are realized has everything to do with tax law, the strength of the economy, and when people retire.  The P&S series including capital gains still doesn't account for all the unrealized gains accruing to people (most importantly, those accruing to people in their retirement accounts).  Capital gains realization is "lumpy" in a way that makes trends problematic.

But I will concede that the level of the top's income share (including realized capital gains) is closer to 25 percent than the P&S numbers I cite above suggest.  Now whether their share of income including unrealized capital gains is closer to 25 percent or 17 or 18 percent is an open question.  And I still say the series excluding capital gains is the way to go for trend estimation.  But look, all this aside, the CBO series includes realized capital gains (but also considers taxes and other things the P&S series leaves out).  And it shows the same basic trend and level as my conclusion above.]

While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall.  For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone.

The 18 percent figure looks to be from Piketty and Saez (the change from 1998 to 2008).  The claim about median incomes falling is incorrect if one takes into account the value of employer- and government-provided health insurance.  (Majorities of workers with employer coverage say they prefer more generous coverage to higher wages, so it turns out employers aren’t crazy in substituting ever-more-costly insurance for wages over time.)  The decline in earnings (not income) for men with just a high school diploma is probably less than 12 percent.  Based on some analyses I’ve been working on using the Current Population Survey, I find that men with a high school diploma but no four-year college degree saw a 12 percent decline in earnings over the roughly 33-year period from 1971-73 to 2003-2007, but that doesn’t take into account the caveats I mention in this post.  And earnings among women with the same level of education rose by over 50 percent, so that’s inconvenient for Stiglitz.

The change in household or family income among men with just a high school diploma was, I’d wager, positive even before factoring in the caveats.  And while I can’t cite the paper yet, research I’ve seen using the PSID rejects the conclusion that wives have been forced to work more due to stagnant husband earnings—the biggest increases in work were among wives with the best-educated husbands, and while the hours of married men declined, those of single men did not (suggesting that the decline among married men was a reaction to increased work among their wives).  I’ll update this post when I can cite the paper (though that won’t be for a couple months anyway).  But think about it–did all these women increase their college-going simply in anticipation of marrying men with stagnant earnings, or did they prefer the fulfilling professional options that a college degree afforded them?  Or consider–is declining fertility, delayed marriage, and increased college-going among women in developed countries around the world all somehow related to rising American inequality?  You can get the basic trend on work by sex by marital status from Table 1 of this paper while you anxiously await my update.

All the growth in recent decades—and more—has gone to those at the top.

Nope, not if “the top” refers to “the top 1 percent” cited two sentences earlier.  According to the Piketty and Saez data, depending on whether one uses the share of nominal or real (inflation-adjusted) gains and whether one includes or excludes capital gains in “income”, the share of income growth going to the top one percent from 1998 to 2008 was between 22 and 33 percent.  If you go back to 1988, the range is from 19 to 32 percent of gains since then.  And keep in mind that when you start from an unequal distribution, if everyone experiences the same rate of income growth, a disproportionate share of gains will go to the top.

In terms of income inequality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride.  Among our closest counterparts are Russia with its oligarchs and Iran.

Compared to nearly all of the major nations of western and central Europe, the U.S. does have higher inequality (but it may not be that far off from the U.K. or Canada).  The only numbers I could find for Russia and Iran are from the CIA World Factbook (the quality of which I can’t speak to).  Out of 136 countries, the U.S. is ranked 40th worst.  Iran is ranked 43rd and Russia 52nd.  So that sounds bad, right?  Meh.  Hong Kong and Singapore rank worse than the U.S., and Indonesia, India, and Ethiopia rank much better than Russia.  Stiglitz will have to do better than this if he wants to argue that American inequality is a big deal.

First, growing inequality is the flip side of something else; shrinking opportunity….Second, many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy.

OK, so now Stiglitz is trying to tell us why we should care about the inequality that he exaggerates.  But these are just assertions.  The best evidence suggests that opportunity for men to move from the bottom to the top over the course of a career hasn’t changed much over the past 35 to 40 years, and it has unambiguously increased for women (see Figures 15A and 15B).  Across generations, the evidence is extremely thin, but it doesn’t point to an unambiguous increase or decrease in opportunity over the past few decades.  As for inequality and efficiency, my dissertation advisor, Christopher Jencks, has found that there is little correlation between economic growth and inequality levels, which doesn’t exactly help those who believe inequality promotes growth but is equally problematic for Stiglitz and others who believe that inequality is inefficient.

When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it’s tempting to see our growing inequality as a quintessentially American achievement…

Here Stiglitz is conflating income inequality (growing) with wealth inequality (basically flat and at a historic low in the U.S.).  Whatevs.

America’s inequality distorts out society in every conceivable way.  There is, for one thing, a well-documented lifestyle effect—people outside the top 1 percent increasingly live beyond their means.

So document it!  The share of families with any debt rose from 72 percent in 1989 to 77 percent in 2007, though note that the share with assets also grew.  Median net worth (assets minus debt) rose from $75,500 to $120,600.  In the wake of the housing bust, it fell, but it was still around $92,000 in 2009.  Among people with debt, median debt payments rose from 15.3 percent of family income in 1989 to 18.6 in 2007.  These are pretty small changes in indebtedness, and I’m not sure how Stiglitz could empirically link them to inequality.

Inequality massively distorts our foreign policy.

Ummm…going for the Peace Prize next?

[T]he chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe.

What little evidence there is suggests that upward mobility is lower in the U.S. only for men and only for those who start out poor.  [UPDATE: Just to clarify, I'm talking about only men who start out poor, not men plus all people who start out poor.  See the linked paper for details, but we're talking about 12 to 13 percent of the population, roughly.]

All of this is having the predictable effect of creating alienation—voter turnout among those in their 20s in the last election stood at 21 percent, comparable to the unemployment rate.

Oh boy, the shift to political science by economist pundits is always fraught with danger.  The 2010 election is a single data point (and an off-year election, when voting rates are much lower).  I’ll just quote from a fact sheet from a Tufts research center that studies civic engagement among youth:  “The 2008 election marked the third highest turnout rate among young people since the voting age was lowered to 18.”  What any of this has to do with inequality is anybody’s guess.

In recent weeks we have watched people taking to the streets by the millions to protest political, economic, and social conditions in the oppressive societies that they inhabit….The ruling families elsewhere in the region look on nervously from their air-conditioned penthouses—will they be next?…As we gaze out at the popular fervor in the streets, one question to ask ourselves it this: When will it come to America?

My guess is never.  By the way, Joe, be honest–were you using a pseudonym here?

Originally published at The Empiricist Strikes Back.

Are American Workers in a Great Stagnation?

March 29th, 2011 at 2:56 pm 14 Comments

Economist Tyler Cowen, of whom I’m generally a big fan, has summarized an interesting post by Michael Mandel suggesting that recent claims of productivity growth have been illusory.  Cowen ends by trumpeting Hamilton Project analyses claiming to show that men’s earnings declined by 28 percent between 1969 and 2009.  This claim, like the Mandel analyses, reinforces Cowen’s argument that we are in a Great Stagnation, but it’s not true!  Stop this meme!

I’ve not had much time to blog recently, so I submitted a brief critique in the comments to the David Leonhardt blogpost that introduced the world to this unfortunate study (co-authored, unfortunately, by a fellow classmate of mine from Harvard’s inequality program) and in the comments to the Hamilton Project post.

Here’s the basic problem: the analyses assign all nonworking men annual earnings of $0, and since labor force participation among men has declined, the result is a big drop in median earnings over time.  But a lot of that decline in labor force participation is attributable to earlier retirement (they include men as old as 64), later and longer school enrollment (they include men as young as 25), rising “disability” rates (which do not correspond in any obvious way with changes in health or job demands but which do correspond with increasing generosity in disability benefits), and other factors having nothing to do with the strength of labor markets.

I re-crunched the numbers as follows.  I included all men age 20 to 59 except for those who said they worked only part of the year or not at all because they were retired, going to school, in the Armed Forces, sick or disabled, or taking care of home and family.  Using the inflation adjustment that the Hamilton guys likely used, I find a decline in median earnings of 9 percent, not 28.

Note, however, that comparing 1969 and 2009 holds up a likely peak year (when the business cycle was at a high) to a trough year (when it was at a low).  Comparing 1969 to 2007 is apples-to-apples, and when I did that, the median was exactly the same in both years (to the dollar, which is a pretty crazy coincidence).  Finally, if I use the Bureau of Economic Analysis “personal consumption expenditures” deflator, which I think overstates inflation somewhat less than other commonly-used deflators, median earnings among men rose 7 percent from 1969 to 2007.

Seven percent is no great shakes, but this figure is also too small for assessing how men’s economic fortunes have changed over time.  None of these analyses account for the fact that as a group, husbands reduced their hours over time in response to rising work and wages among wives.  Nor do they account for the rising share of non-wage benefits in total compensation (health and retirement benefits have eaten into wages, presumably following the preferences of the median worker).  Nor do they include the impact of taxes (which have declined) and tax credits (which have increased).  In addition, even my figures may overstate inflation, thereby understating the earnings increase over time–inflation measurement is much more tricky when choices within categories of goods and services and retail outlets explodes. Finally, the analyses do not account for changes in the composition of the population.  For instance, the fact that more men today are nonwhite and foreign-born pushes the 2009 median down, but it is likely that the typical white, nonwhite, native-born, and foreign-born men are all doing better than the trend in the overall median implies.  Someday I’ll get to a full analysis.

Subject for discussion (and a future post): how are we as a nation supposed to clearly understand the state of the economy and our living standards when even moderate think tanks and researchers are so eager to hype negativity?  As I’ve said before, policymakers aren’t the only people who–individually or collectively–can talk down the economy.

How Do the Rich Vote? Follow the Money

February 27th, 2011 at 10:39 am 11 Comments

In response to my recent blogpost arguing that the rich really are more Republican, FrumForum reader Ken writes that the truly wealthy “vote Democrat by a margin of two to one.” Ken cites a Wall Street Journal article from 2008 to support this claim. Unfortunately, the statistics in that article are unsourced. Robert Frank, the author of this article, cites a survey by Prince & Associates. Back when that article came out, I tried to track down the data and the claim and got nowhere. Here’s what I wrote back in 2008:

Do I believe [the claim that voters worth $30 million or more were favoring Barack Obama]? Not really. My problem here is that I don’t know where the survey is coming from. How did Prince & Associates sample people making $30 million or more? Without knowing at least something about the sampling, it’s hard to say anything at all about these claims. For example, a graph accompanying the article linked above gives estimates of about 0.1 million households with over $25 million and 9 million households with over $1 million. This ratio is about 1%; thus, in a simple random sample of 493 people worth over $1 million, you’d expect to see about a whopping 5 people in the survey worth over $30 million. Or maybe there were 6 such people in the sample; that would explain why the percentages of the super-rich cited in the linked article are 16% (1 in 6) and 67% (4 in 6). The survey might have more than 6 super-rich people in it; I don’t know since no details are given. (I searched on the web for the survey but all I could find were links to the Robert Frank article discussed here.) How do you take a sample of super-rich people? Prince & Associates is a Connecticut-based consulting company that describes itself as “the foremost empirical research firm in the realm of private wealth. . . Using purposive sampling methodologies, Prince & Associates, Inc. has created statistically valid single-study and panel samples providing detailed insights into the hard-to-reach and exceptionally private universe of the affluent.” I respect that this sort of sampling is difficult but it’s hard for me to evaluate it when no description is provided of the sample. I’ll email Russ Alan Prince to see if he can enlighten me on this, but really I’d think it would be the responsibility of a Wall Street Journal reporter to ask some questions here. (I guess it’s possible that Frank did ask some questions but for proprietary reasons did not want to describe the sampling methodology, but if so I would’ve appreciated just a sentence or two on it, to give me a little more confidence in the results.)

The substantive reason I’m skeptical about these findings (as well as a similar report by Daniel Gross in 2004) is the following passage from page 144 of our Red State, Blue State book:

Probably the best evidence [about the political views of the richest Americans] comes from studies of political contributions. Political scientist Thomas Ferguson has tracked political donations of top corporate executives and the Forbes 400 richest Americans (or their equivalents, in earlier periods). The data presented in his 1995 book, Golden Rule, indicate that America’s superrich have generally learned Republican, but with some notable exceptions that have changed over time. Certain industries have persistently higher rates of contributions to the Democrats. In the New Deal, these included industries with a strong interest in free trade. Since the Reagan years, finance, and high technology firms have been much friendlier to Democratic presidential candidates than most of the rest of American business. For 2004, Ferguson consolidated the lists of top executives and richest families into a lot of 674 firms and investors. Out of this list, 53% contributed to George W. Bush’s reelection campaign and 16% donated to Kerry, with Bush doing better among the oil and pharmaceutical industries and Kerry getting more from investment banks and hedge funds.

Given that this 53%-16% gap in contributions in 2004, I’m skeptical of the claim that, in 2004, “the haute millionaires, those worth more than $10 million, favored Kerry 59-41.” Which leaves me skeptical of the 2008 survey as well. Perhaps Prince & Associates is oversampling hedge-funders in Connecticut? I emailed Prince back in 2008 but received no response. That’s fine–I’m sure he’s a busy guy with better things to do that answer emails from statistics professors. But the bottom line is the data I’ve seen shows upper income Americans supporting Republicans (with exceptions in some states, some years, and some sectors of the economy). And the claims I’ve seen to the contrary do not seem supported by high-quality data.

Are the Rich More Republican?

February 26th, 2011 at 2:29 pm 15 Comments

I don’t want to spend my whole life on this red state/blue state thing, but I recently follow this Instapundit link and came across the following comment from lawyer and conservative blogger John Hinderaker:

Most rich people who are politically active are liberals, and the Democratic Party gets much more of its support from the wealthy than the GOP.

I’m like, huh? Do people really believe this? Let me take this in three parts.

1. Data. From the 2010 exit polls:

2010exits.png (I was thinking of making a graph but I like the direct feel of a screencap.)

And it’s not just 2010. You can see this in decades of pre-election and exit polls. And it’s not just voting. Political contributions from the richest Americans are generally more likely to go to Republicans than Democrats. In particular, the probability of being a conservative Republican goes up sharply with income.

Just to break this down more carefully: the claim that “most rich people who are politically active are liberals” might possibly be true–after all, the term “politically active” isn’t clearly defined–but I don’t see any evidence of it. Looking at wealthier Americans, rich campaign contributors, whatever, we see much stronger support for Republicans and conservative causes than for Democrats and liberals.

There are some exceptions (as in 2008 when Obama beat McCain in the vote and much more so in funding) and on some particular issues such as gay rights, but overall the pattern is clear.

2. Common sense (or, as we call it in political science, “theory”). Wealthier people tend to be more economically conservative; lower-income people are more likely to support taxes on the rich. This is no surprise: of course it makes sense that if you have more money you’ll have more sympathy with the argument that people should keep what they earn, and if you have less you’ll be more likely to favor redistribution. The correlation between income level and economic ideology is weak (we have graphs in Red State, Blue State making this point), but it’s not zero. Nor would you expect it to be.

3. Demonizing the rich. The above quote is from a conservative blog. At first sight, the view that politically active rich people are mostly Democrats could be comforting: the idea, perhaps, is conservative rich people are busy with their jobs, their families, being productive and enjoying life, while liberal rich people are discontented and can’t resist trying to use the political process to get their way. But the data don’t support this story. So why take that position at all? Why not say that richer people tend to have economically conservative views for good reasons? And that if you’re rich, it might make sense to participate a bit in politics to stop the government from doing things you don’t like?

That is, why can’t Hinderaker take the same reasoning that he uses for the Koch brothers and apply it more generally to rich people? This would have the virtue of being coherent with an economically conservative ideology and also consistent with survey data from campaign contribution records.

I’m not trying to suggest that Hinderaker is trying to mislead, merely that he is confused. It’s an instructive confusion, however, in that it points (to me) to a confusion in ideology.