Tuesday, January 29, 2013

Economics In 1 Sentence

How to summarize the most valuable insight of Macroeconomics in one sentence?

John Lanchester: "governments are not households"

Tyler Cowen: “Today is a long run from some time back.”

Scott Sumner: "The money (MOA) market drives cycles in employment, as well as long run growth in nominal aggregates, whereas government policies and cultural practices encouraging wealth creation drive long term real growth." or "Money is really important, but no one understands it."

Thursday, January 24, 2013

Stagnating Median Income: Not That Bad?

Many, including myself, have been really bothered by this:

This trend is often the primary concern among progressives. We've had a lot of economic growth over the last few decades, but since the 70's the median income has hardly budged. When people complain about income inequality in the U.S., the idea that worries them the most is usually that all the economic growth is unfairly going to the top, while the average worker gains nothing. In fact, I got the above graph from the wikipedia page on income inequality in the U.S., and the subtitle of that image is "The benefits of increased productivity over the last 35 years have not gone to the middle class".

However, I recently saw something that really confused me about this:

Even though the median income only increased 3% from 1980-2005, the median income for all demographics actually increased much more than that. How is that possible? It turns out this is just a case where we don't intuitively understand mathematics very well. Steve Landsburg explains a hypothetical situation that makes this more clear:
Imagine a farmer with a few 100-pound goats and a bunch of 1000-pound cows. His median animal weighs 1000 pounds. A few years later, he’s acquired a whole lot more goats, all of which have grown to 200 pounds, while his cows have all grown to 2000. Now his median animal weighs 200 pounds.

A very silly person could point out to this farmer that his median animal seems to be a lot scrawnier these days.The farmer might well reply that both his goats and his cows seem to be doing just fine, at least relative to where they were.

That’s exactly what’s happened with median incomes. Each demographic group has progressed, but at the same time, there’s been a great influx of lower income groups — women and nonwhites — into the workforce. This creates the illusion that nobody’s progressing when in fact everybody’s progressing.

This makes sense. Median incomes started stagnating - and income inequality started rising - around 1970. That was around the time it started becoming culturally accepted for women to have careers. And it was soon after the Immigration and Nationality Act of 1965 which allowed much more immigration into our country.

Surely there are other factors as well; reality is complicated. But unless this data is just wrong, there's far less reason to be concerned with the issue of our median wages and income inequality than most progressives realize. When I first started spending time trying to really understand politics around 4 years ago, this issue quickly shot to the top of my priorities. But now, when you combine the data above with this and this, it has really fallen toward the bottom of my list.

Wednesday, January 23, 2013

We are gaining, not losing, freedom

It gets annoying to constantly see the complaints from some people that, nowadays, our "liberties" are being "infringed upon" compared to "the good old days" of America. That's most clearly not true for anyone who is not a WASP straight male. But even beyond that, David Frum wrote something a couple of months ago that surprised me:

In 1962, the government regulated the price and route of every airplane, every freight train, every truck and every merchant ship in the United States. The government regulated the price of natural gas. It regulated the interest on every checking account and the commission on every purchase or sale of stock. Owning a gold bar was a serious crime that could be prosecuted under the Trading with the Enemy Act. The top rate of income tax was 91%.
It was illegal to own a telephone. Phones had to be rented from the giant government-regulated monopoly that controlled all telecommunications in the United States. All young men were subject to the military draft and could escape only if they entered a government-approved graduate course of study. The great concern of students of American society -- of liberals such as David Riesman, of conservatives such as Russell Kirk and of radicals such as Dwight Macdonald -- was the country's stultifying, crushing conformity.
Even if you look only at the experiences of white heterosexual men, the United States of 2012 is a freer country in almost every way than the United States of 1962.

Monday, January 21, 2013

Income Inequality vs. Economic Growth

This is largely just to keep track of this post from Krugman if I want to find it again.

One common viewpoint on the economy is that the rich spend less than the non-rich, so the more income inequality we have, the weaker our aggregate demand will be. This would help explain why our 2 depressions of the last century have occurred when inequality was high. And it was one of the first thoughts I had around explaining why our economy does noticeably better under democratic presidents than republican ones.

But as Krugman points out in the link above, that idea is hard to square with the correlation of private savings rates and inequality in the past. Here's a graph of our private savings rates over the past few decades:

Income inequality began rising some time in the 70s, with a temporary halt in that trend in part of the 90s. But the savings rate trend is basically the opposite; when inequality was increasing, savings has mostly gone down (therefore private spending went up). I think this pretty much discredits the theory that income inequality leads to lower demand and higher unemployment. There could be some explanation of how it can still be true, but I think it's best to go with the simplest thing that the evidence suggests unless we have a REALLY good reason to suspect otherwise.

Thursday, January 17, 2013

Working vs. Volunteering

I think, as tools for altruism, work (compared to volunteering) is very underrated. Our main criteria for judging the "goodness" of a deed should be its impact; if you can choose between saving 1 life or 2 lives, generally saving 2 lives is better. But we have preconceived notions that cloud that judgment when comparing "work" and "volunteering". We generally look down on "workaholics", but it may be that, if you decide to devote a couple of hours of your free time per week toward a good cause, it would be best to just spend that time at your job.

That may seem counter-intuitive at first, but consider the hypothetical person "Bob". At Bob's job, he makes pills that cure cancer. It takes him an hour to make a single pill. He has decided he wants to be a better person, so he considers spending an hour a week volunteering for a good cause. In his area, he could clean dishes at a soup kitchen or organize donated canned foods. Clearly, he would do the most good by spending that hour making another pill that will cure someone's cancer. He shouldn't believe there's something special about "volunteering" in and of itself that would make it more virtuous than curing someone's cancer.

Nobody's job is quite as good for the world as "Bob's" (I don't think?). But in general, people tend to forget that your job does good for society. The fact that someone is willing to pay you for what you do shows that it's valuable. And most of your necessities, entertainment, and luxuries come through the time someone else puts in at their job. It's good to volunteer at a place that gives canned food to hungry families. But it's also good to be the farmer or manufacturer that are just as (if not more) essential in making that happen. It would be sad for them to feel like what they are doing isn't important just because we don't value the impact of working the way we value the impact of volunteering.

Another overlooked aspect is, in addition to judging the impact of what you are doing, you have to consider how effectively you would do it. And we are usually relatively good at what we do for a living. Plus, the fact that we already spend a lot of time at our job can make it such that it's more clear how to spend an extra hour in an efficient way. I imagine many charities have a hard time figuring out how to put people who only volunteer for an hour every now and then to good use. I know my first hour of work after a vacation is not very productive.

A common objection to the idea of "altruistic over-working" is probably that you can benefit financially from working an extra hour. First, for many on a salary, that's not necessarily the case, though it may lead to better raises/bonuses in the future. But making money does not cancel whatever impact is done by the work itself (think of hypothetical Bob making cancer-curing pills). Additionally, having more money gives you even more opportunities for altruism by putting that money toward a good cause. And even if you just spend the money on something for yourself, one person's spending is another person's income. Self-sacrificing deeds are definitely admirable, but that doesn't mean we should look down on win-win situations.

I'm not suggesting volunteering is not good, and there are definitely many cases where a person does more good from volunteering than working. It just depends on your job, your talents, and your volunteering opportunities. But... if you want to spend some of your free time doing some good for the world, deciding which activity to choose should largely be based on what you expect to have the most positive impact. For some people that will be their job, and hopefully that doesn't get missed when thinking about the options just because it doesn't "sound" as good at first glance.

Monday, January 14, 2013

Don't limit the charitable tax deduction

When the debate was still going on about which deficit reduction deal we should pass in place of the fiscal cliff, one of the common ideas was capping tax deductions, where tax deductions across the board are blocked at a certain dollar amount. This was something that had support of both some Republicans and some Democrats.

The fiscal cliff deal we ended up getting did something like that - it reinstated "PEP and Pease" on high income earners. And for the next deficit deal around the coming sequestration and debt ceiling fiasco, a hard cap on deductions is likely to come up again as an option.

But supporting this, when charitable deductions are not excluded, seems like a blatant example of what I talked about in my post on "the biggest flaw in the Democratic party". Democrats are concerned about poverty and inequality, and want the government to help with it. But the worst cases of poverty, by far, are in third world countries, not America. That is what many charities are addressing. And limiting the tax deduction for charitable giving reduces charitable giving, both by reducing incentives and by leaving those who give with less to give.

I understand raising taxes on the wealthy so we don't have to cut programs for the poor as much. But taxing charitable donations seems like a really self-defeating means towards that end.