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from MacroScope:

The U.S. productivity farce

Economists don’t agree on much but they do tend to converge on one idea – productivity improvements are the key to long-term prosperity. Except that who benefits from productivity increases matters as much as the efficiency gains themselves, according to two reports from the liberal Economic Policy Institute in Washington.

The first finds that rising income inequality in the United States means that the benefits of better productivity are accruing mainly to the very wealthy. The EPI offers this startling nugget of data as basic food for thought: U.S. productivity grew 80.4 percent from 1973 to 2011, while average hourly compensation rose just 39.2 percent in the same period, and median compensation, which excludes outliers, gained a paltry 10.7 percent.

Writes Lawrence Mishel, EPI president and author of the reports:

Productivity growth, which is the growth of the output of goods and services per hour worked, provides the basis for the growth of living standards. However, the experience of the vast majority of workers in recent decades has been that productivity growth actually provides only the potential for rising living standards: Recent history, especially since 2000, has shown that wages and compensation for the typical worker and income growth for the typical family have lagged tremendously behind the nation’s fast productivity growth.

John Tasini, a labor activist who made an unsuccessful bid for the U.S. Senate in 2006, puts the disparity in perspective by calculating what the minimum wage would be if its rise had kept up with productivity growth, as it did before the mid-1970s.

The minimum wage today, if it reflected productivity gains over the last 30 years, should be between $19-$20 an hour. Raising the minimum wage, then, to $8.50 an hour seems like a big deal – except when you understand that it hides the vast robbery that has taken place of the past 30 years and it certainly will not make it possible for people to live with dignity and respect.

from Chrystia Freeland:

Colonial America: How Swede it was

America used to be Sweden: According to new research, the America of the Founding Fathers was ‘‘more egalitarian than anywhere else in the measurable world.’’

That’s an important finding, and one that will surprise most Americans today. Both inequality and American exceptionalism are high on the national political agenda. One idea that brings those issues together is the belief that Americans have an exceptional cultural tolerance for income inequality. Unlike Europeans, the thinking goes, most Americans are confident that they are ‘‘soon to be rich.’’ As a result, the conventional wisdom has it, Americans in the middle look up to their 1 percent and are loath to tax them.

But historical research by the economists Peter H. Lindert and Jeffrey G. Williamson shows that when it comes to inequality, this American exceptionalism is an inversion of the conditions that prevailed at the time of American Revolution. In that era, which is so often invoked in today’s political and social battles, America was the world’s most egalitarian society – and proud to be so.

‘‘There has been an absolute reversal,’’ Lindert told me. ‘‘Compared to any other country from which we have data, America in that era was more equal. Today, the Americans are the outliers in the other direction.’’

Nowadays, we think of the postwar era as a halcyon time for the U.S. middle class. But it turns out that, in relative terms, colonial America, too, was a great country for the 99 percent, particularly when compared with the folks back in the old country.

‘‘Americans who were free were very well-off, and better off than their counterparts in the mother country,’’ Lindert said. ‘‘Every kind of person by occupation was better off than their counterpart by occupation. The carpenters, the shopkeepers and so forth all had a slightly better income than in the mother country.’’

Slavery is America’s original sin and was the great global injustice of that age. But on a purely economic basis, even when slaves are included in the calculation of inequality, America comes out as the most egalitarian.

from MacroScope:

High inequality makes it tougher to reform economies: Swedish Finance Minister

Americans are all too acquainted with the shouting-match politics that tends to accompany any debate over economic policy: everyone is yelling and nobody is listening. The toxic political discord in Washington has become so familiar it is almost a cliché.

It turns out high levels of income inequality, which the United States is also famous for, could be to blame. According to Anders Borg, the Finance Minister of Sweden, a large wealth gap makes it harder to achieve political consensus because the debate is poisoned by mistrust. Speaking at the Peterson Institute this week, Borg said high inequality in Southern Europe was a factor preventing those countries from achieving agreement as they struggle with a deep financial crisis:

You need to deal with the social cohesion issue. You cannot have a society where the conflicts that are built in become so strong that you undermine the political ability to deal with problems. If I compared Sweden with Spain or Italy or Greece, one of the reasons we have been able to these reforms is that our income differences are substantially lower which also means that the political tension is on a completely different level.

from MacroScope:

A highly unequal U.S. recovery

No wonder most Americans feel like the recession never ended. A new paper from Emmanuel Saez, a Berkeley professor and expert on inequality, shows the overwhelming majority of income gains – 93 percent – accrued in 2010, the first full year of the U.S. recovery, went to the top 1 percent richest Americans. (Thanks to our friends at Counterparties for bringing the paper to our attention.)

The research suggests economic growth, even if it gathers speed, will not be nearly sufficient to close the income gap that has been the target of national Occupy protests. Instead, only drastic tax reforms of the sort seen during the 1930s might do the trick.

In 2010, average real income per family grew by 2.3% but the gains were very uneven. Top 1% incomes grew by 11.6% while bottom 99% incomes grew only by 0.2%. Hence, the top 1% captured 93% of the income gains in the first year of recovery. Such an uneven recovery can help explain the recent public demonstrations against inequality. It is likely that this uneven recovery has continued in 2011 as the stock market has continued to recover.

National Accounts statistics show that corporate profits and dividends distributed have grown strongly in 2011 while wage and salary accruals have only grown only modestly. Unemployment and non-employment have remained high in 2011. This suggests that the Great Recession will only depress top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s. Indeed, excluding realized capital gains, the top decile share in 2010 is equal to 46.3%, higher than in 2007.

Looking further ahead, based on the U.S. historical record, falls in income concentration due to economic downturns are temporary unless drastic regulation and tax policy changes are implemented and prevent income concentration from bouncing back. Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration until the 1970s. In contrast, recent downturns, such as the 2001 recession, lead to only very temporary drops in income concentration.

from Mohamed El-Erian:

Learning from tomorrow’s leaders

Have you tried speaking to a group of bright high school students wondering about what the current state of the world means for them and what they should do about it? I am grateful to have done so last week: I ended up gaining insights into how some of tomorrow’s leaders are thinking about the world they will inherit.

My presentation was divided into three parts. The conversations that ensued, both at the talk and thereafter, were broader in scope and, yes, much more interesting.

We first tried to construct a framework that finds common links among headlines that many teenagers find troubling, and understandably so. Unfortunately it is a rather long list, including indicators of too few jobs, too much debt, growing social tensions, squabbling and ineffective politicians and, more generally, a sense that America is losing vibrancy at a time when some other parts of the world are getting stronger and less predictable.

To identify these links we spoke about why and how confidence is eroding in America’s ability to deliver on its long-standing promises of prosperity, opportunity and social fairness. We then traced this to damaging institutional failures in the private and public sectors, insufficient investment in America’s future, multiyear debt dynamics and the realities of fundamental global realignments.

Our second challenge was to ask whether this state of affairs is reversible. The answer is clearly yes, but it will take a major, comprehensive, sustained effort to change some things and to do others much better. This will only occur if, first, there is a better sense of shared responsibility and, second, our elected representatives overcome their inclination to bicker and instead converge on a common vision and purpose.

The third and most difficult challenge was to translate all this into action items for these talented students to debate and pursue. Yes, they were exceptionally fortunate in that their schooling exposed them to strong academics, deep educational traditions and a good sense of community; but they owed it to themselves, their families and society to go well beyond that.

Certain items were easy to convey, like the importance of continued education. Just think, according to the jobs report released last Friday, the unemployment rate for those with less than a high school education was 13.1 percent in December compared with the national average of 8.3 percent and just 4.2 percent for those with an undergraduate degree or higher.

from MacroScope:

Is there a skills gap at the Fed?

Ask most economists why the distribution of wealth in the United States has become so unequal over the last three decades and they will likely offer a two word answer: skills gap. They point out that Americans with a college education have a lower jobless rate than those without one, and that better-educated workers make more money than their counterparts.

Yet as regional Federal Reserve presidents disclosed their personal asset holdings for the first time ever, the figures showed a gaping range: from the tens of thousands to the tens of millions.

The report showed the wealthiest officials, Richard Fisher and William Dudley of the Dallas and New York Feds respectively, made millions working the financial industry – Fisher running a hedge fund and Dudley as chief U.S. economist and partner at Goldman Sachs. It would be tough to argue that the two are any more skilled than the career PhD Fed economists who were at the bottom of the list.

James Galbraith of the University of Texas at Austin LBJ School said in response to an email request for comment:

The Fed data show one of two things: either the skills gap is bunk, or the profession of economics (which invented the notion of a skills gap) does not impart valuable skills. Either way, the news for the economists is not good.

In 2007, inequality reached levels not seen since the Great Depression – the first of many hyperbolic comparisons to the 1930s that would soon follow with the onset of a massive financial crisis. In February of that year, Fed Chairman Bernanke gave his only speech ever directly on the topic of inequality. Here is how he described the “skills gap”:

A key observation is that, over the past few decades, the real wages of workers with more years of formal education have increased more quickly than those of workers with fewer years of formal education. … To a significant extent, to explain increasing inequality we must explain why the economic return to education and to the development of skills more generally has continued to rise.

from Felix Salmon:

Why Davos is ignoring Occupy

If you're Europe, and your struggling people are called "Greeks", and your rich people are called "Germans", then the World Economic Forum will spend pretty much limitless amounts of time and effort on attempts to understand the dynamics between the two and (doomed) plans to try to prevent it from turning into a fully-blown crisis.

On the other hand, if you're a country -- the USA, say -- and your struggling people call themselves "the 99%" while your rich people are called "Davos delegates", then your fundamental asymmetries will be studiously ignored -- and, indeed, encouraged.

I went to one session on executive compensation yesterday, which was filled with global CEOs of various stripes. And a couple of questions that Lance Knobel would like to ask were, amazingly, raised: should there be some kind of cap on CEO compensation? Maybe in terms of the ratio between the CEO's pay and that of the average employee? The answer came swiftly and unanimously: no.

The problem of CEO compensation, it turns out, is not really a problem at all: if you look at most companies, the amount they spend on executive compensation is not really a big part of their revenues. Of course there shouldn't be any kind of regulation. And capping pay only makes sense if you cap corporate size, and no one wants to do that.

That said, there is one outstanding problem with CEO pay: the time when you most need executive talent is not when things are going great, but rather when things are going badly. And often, in that case, compensation structures linked to stock options and the like turn out to be largely worthless. We're good at paying CEOs in good times, but we should probably come up with ways of paying them more in bad times, too. After all, that's when they really prove their mettle.

That panel really helped me understand the general Davos attitude towards Occupy. The delegates here don't feel threatened by it, so much as they just feel a bit indignant at how misguided it is. Obviously, in a big inchoate sense, inequality is a problem. And maybe Occupy is a manifestation of that problem. But the Davos crowd is not even close to listening carefully to what Occupy has to say: they're evidence of the problem, but they're not remotely helpful when it comes to solutions.

As Lance says, "an organization that is at heart a grouping of the world’s largest corporations isn’t necessarily in the best position to improve the state of the world, particularly in an era of the Arab Spring and Occupy". It's another way in which Davos feels past its prime. It's not helping to change the big world problems, in Europe: the best it can do is identify them. And it's utterly divorced from the movements which really might make a difference.

from MacroScope:

Growth not enough to ease inequality: Oxfam

Rising income inequality in rich nations has cast doubt on the old adage, often upheld by the economics profession, that a rising tide lifts all boats. A new report from Oxfam reinforces the notion that wealth does not trickle down of its own accord. The anti-poverty advocacy group says sometimes actively redistributive policies may be needed to address huge income gaps. It also says that, contrary to conventional economic thinking, such policies will directly contribute to better growth rather than impede it.

Inequality, often viewed as an inevitable result of economic progress, in fact acts as a brake on growth. Among the best ways to assure inclusive, sustainable growth and fight poverty, finds the study, are policies that reduce inequality. […]

Inequality erodes the social fabric, and severely limits individuals’opportunities to escape poverty. Where income inequality is high or growing, the evidence is clear that economic growth has significantly less impact on poverty: a trickle-down approach does not work.

The report notes that the United States is the most unequal of the world’s wealthy nations – but that’s old news. More interesting is the finding that even strong rates of growth will not be enough to lift more people out of poverty over the next decade, particularly in the less wealthy G20 nations. The report found that inequality increased in 14 of 18 G20 countries since 1990 despite rapid rates of growth in some countries. Oxfam recommends the following:

The exact policy mix should be tailored to each national context, but policies in successful developing countries suggest the following starting points:

- Redistributive transfers

- Investment in universal access to health and education

- Progressive taxation

- Removal of the barriers to equal rights and opportunities for women

- Reforming land ownership, ensuring the right access to land and other resources, and investing in small-scale food producers

What kinds of redistribution would this involve? Oxfam turns to the United Nations' Economic Council for Latin America and the Caribbean for answers:

ECLAC suggests that cash transfer programs in Latin America typically have three objectives:

- To alleviate poverty through direct income transfers

- To provide incentives for investment in human capacity-building

- To bring the target population into the social protection and promotion networks

Politically impossible? Perhaps. But Oxfam says some countries have already taken some steps successfully, with impressive results.

from MacroScope:

Martin Luther King’s vampire squid: poverty

The devastating U.S. recession of 2008-2009 has highlighted the problems of income inequality and poverty in the world’s richest nation. In 2010, the last year for which data is available, the number of U.S. poor hit a record 46 million. As the country celebrates the Martin Luther King Jr. Day holiday, a look back at the civil rights’ leaders remarks on the subject are enlightening – if only for their continue relevance nearly half a century later:

(One) evil which plagues the modern world is that of poverty. Like a monstrous octopus, it projects its nagging, prehensile tentacles in lands and villages all over the world. Almost two-thirds of the peoples of the world go to bed hungry at night. They are undernourished, ill-housed, and shabbily clad. Many of them have no houses or beds to sleep in. Their only beds are the sidewalks of the cities and the dusty roads of the villages. Most of these poverty-stricken children of God have never seen a physician or a dentist. This problem of poverty is not only seen in the class division between the highly developed industrial nations and the so-called underdeveloped nations; it is seen in the great economic gaps within the rich nations themselves.

Take my own country for example. We have developed the greatest system of production that history has ever known. We have become the richest nation in the world. Our national gross product this year will reach the astounding figure of almost 650 billion dollars. Yet, at least one-fifth of our fellow citizens - some ten million families, comprising about forty million individuals - are bound to a miserable culture of poverty. In a sense the poverty of the poor in America is more frustrating than the poverty of Africa and Asia. The misery of the poor in Africa and Asia is shared misery, a fact of life for the vast majority; they are all poor together as a result of years of exploitation and underdevelopment. In sad contrast, the poor in America know that they live in the richest nation in the world, and that even though they are perishing on a lonely island of poverty they are surrounded by a vast ocean of material prosperity. Glistening towers of glass and steel easily seen from their slum dwellings spring up almost overnight. Jet liners speed over their ghettoes at 600 miles an hour; satellites streak through outer space and reveal details of the moon.

[…]

So it is obvious that if man is to redeem his spiritual and moral "lag", he must go all out to bridge the social and economic gulf between the "haves" and the "have nots" of the world. Poverty is one of the most urgent items on the agenda of modern life.

[…]

There is no deficit in human resources; the deficit is in human will. The well-off and the secure have too often become indifferent and oblivious to the poverty and deprivation in their midst. The poor in our countries have been shut out of our minds, and driven from the mainstream of our societies, because we have allowed them to become invisible. Just as nonviolence exposed the ugliness of racial injustice, so must the infection and sickness of poverty be exposed and healed - not only its symptoms but its basic causes. This, too, will be a fierce struggle, but we must not be afraid to pursue the remedy no matter how formidable the task.

The time has come for an all-out world war against poverty. The rich nations must use their vast resources of wealth to develop the underdeveloped, school the unschooled, and feed the unfed. Ultimately a great nation is a compassionate nation. No individual or nation can be great if it does not have a concern for ‘the least of these’. Deeply etched in the fiber of our religious tradition is the conviction that men are made in the image of God and that they are souls of infinite metaphysical value, the heirs of a legacy of dignity and worth. If we feel this as a profound moral fact, we cannot be content to see men hungry, to see men victimized with starvation and ill health when we have the means to help them. The wealthy nations must go all out to bridge the gulf between the rich minority and the poor majority.

from MacroScope:

Two cheers for financial innovation

Protests against Wall Street and the U.S. financial system are hanging over an annual gathering of economists and social scientists in Chicago. Yale economist Robert Shiller offered two cheers for capitalist finance, saying that while the U.S. free market system has contributed to higher living standards, the vehemence of the recent public outcry points to a need for greater democratization. This is how he put it in a speech:

Occupy Wall Street … was something that in some sense you could see coming. I think we have increasing concerns about inequality, which is getting worse, about the distribution of power.

But rather than throw the financial system out, Shiller called for tinkering. Financial institutions and structures such as insurance or mortgage securitization have a role in improving social and human welfare, Shiller argued. U.S. economic success is due to a financial system that has evolved over centuries and helped improve the quality of life, he added.  A shortcoming of the Occupy Wall Street movement is that it doesn’t accept those contributions, he said.

Changes in financial structures could make the financial system more responsive to people’s needs, said Shiller. For example, a new type of corporate entity that is allowed in six U.S. states – the “benefit corporation” -- could provide incentives for firms to link success more closely to improvements in social welfare. This charter allows the for-profit companies to explicitly pursue a social purpose as well as its business goal. By law, regular corporations have a fiduciary responsibility to their shareholders to be profitable, while a benefit corporation also has some accountability, overseen by a third party, to perform a public good.

Shiller also wonders why there can’t be a mortgage that has automatic work-out provisions built in. Such a mortgage could require changes to terms and conditions if the borrower experienced job loss or other financial strains. The lender would price in the possibility of such losses at the beginning and cautious borrowers might be willing to pay a higher price for the insurance, Shiller said. In effect, a 30-year fixed rate mortgage is a similar instrument, since it allows lenders to pay a higher interest rate for a long-term loan that that they can refinance.

To contain income disparity, there could be a tax indexed to inequality, the Yale professor suggested. When the income of the top 1 percent of U.S. wage earners exceeds a certain multiple of the nation's median income, the tax would kick in. In 2006, that multiple was 36, up from 12.5 in 1980, he said.

Shiller was not subject to the “mic check” interruption that the Occupy movement uses to disrupt some public officials’ speeches. But some thought he was taking too rosy a view of the benefits of the financial system and the public’s willingness to view financial executives sympathetically. Reynold Nesiba, an economics professor at Augustana College in Sioux Falls, South Dakota, said: