James Pethokoukis

Politics and policy from inside Washington

Study: Income inequality in America is overstated

Sep 23, 2009 17:36 UTC

First the summary of new research from economist Robert Gordon:

The rise in American inequality has been exaggerated both in magnitude and timing. Commentators lament the large gap between the growth rates of real median household income and of private sector productivity. This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure. Further, the timing of the rise of inequality is often misunderstood. By some measures inequality stopped growing after 2000 and by others inequality has not grown since 1993. This cessation of inequality’s secular rise in 2000 is evident from the growth of Census mean vs. median income, and in the income share of the top one percent of the income distribution. The income share of the 91st to 95th percentile has not increased since 1983, and the income ratio of the 90th to 10th percentile has barely increased since 1986. Further, despite a transient decline in labor’s income share in 2000-06, by mid-2009 labor’s share had returned virtually to the same value as in 1983, 1991, and 2001.

Recent contributions in the inequality literature have raised questions about previous research on skill-biased technical change and the managerial power of CEOs. Directly supporting our theme of prior exaggeration of the rise of inequality is new research showing that price indexes for the poor rise more slowly than for the rich, causing most empirical measures of inequality to overstate the growth of real income of the rich vs. the poor. Further, as much as two-thirds of the post-1980 increase in the college wage premium disappears when allowance is made for the faster rise in the cost of living in cities where the college educated congregate and for the lower quality of housing in those cities. A continuing tendency for life expectancy to increase faster among the rich than among the poor reflects the joint impact of education on both economic and health outcomes, some of which are driven by the behavioral choices of the less educated.

Me: Indeed, part of this is the Wal-Mart factor where lower-income households have been able to substitute less expensive goods, giving their real spending power a big boost.


Despicable and ignorant. Maybe it’s not alright that people HAVE TO shop at Walmart just to stretch their dollars… using that kind of barometer to say everything is alright for people who have to spend every dollar they make to make ends meet, I think that says a lot about the author. I would love to propose to anyone who thinks that people are better off today than, say, ten years ago try this simple test: try to only spend what you could make working 50hrs a week (ie two part time jobs) at Walmart or MacDonald’s (after taxes, so roughly $300/wk) for a whole month. That’s food, utilities, gasoline. Let’s see how you feel about the economy after that exercise. Maybe, if you live alone, you’re ok, but try it with 2 or more dependants (kids). If you don’t starve first, comeback afterwards and write a commentary in this blog.

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Sarah Palin speaks! Some thoughts on her speech in Hong Kong

Sep 23, 2009 16:34 UTC

So Sarah Palin gave her big speech in Hong Kong. She talked about eliminating cap gains and estate taxes, giving people tax breaks to buy their own health insurance, and took a few shots at the Fed. That section was particularly interesting. (A bit of video here.) Here is the WSJ’s take:

“How can we discuss reform without addressing the government policies at the root of the problems? The root of the collapse? And how can we think that setting up the Fed as the monitor of systemic risk in the financial sector will result in meaningful reform?” she said. “The words ‘fox’ and ‘henhouse’ come to mind. The Fed’s decisions helped create the bubble. Look at the root cause of most asset bubbles, and you’ll see the Fed somewhere in the background.”

“Lack of government wasn’t the problem, government policies were the problem. The marketplace didn’t fail. It became exactly as common sense would expect it to,” she said. “The government ordered the loosening of lending standards. The Federal Reserve kept interest rates low. The government forced lending institutions to give loans to people who as I say, couldn’t afford them. Speculators spotted new investment vehicles, jumped on board and rating agencies underestimated risks. So many to be blamed on so many different levels, but the fact remains that these people were responding to a market solution created by government policies that ran contrary to common sense,” she said.

Me: I will  alsopredict that she’ll also come out strong against TARP, which may be a big dividing line among 2012 candidates.


OK, here are my thoughts on the substance of the speech. Palin fundamentally doesn’t understand the causes of the economic crisis (this should come as no surprise to anybody that has ever seen her interviewed).
Government was not the root cause of the crisis and it is simply untrue to say that financial markets didn’t fail. If anything, INSUFFICIENT regulation (a lack of sensible constraints on leverage, etc) was a larger part of the problem. Saying this does not make one a socialist.
You can have a sensible discussion about such matters with an intelligent conservative like Mitt Romney, but Palin has absolutely nothing to offer to the debate.

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Geithner on the Hill (live blogging)

Sep 23, 2009 14:34 UTC

Treasury Secretary Timothy Geithner speaks before the House Financial Services Committee on financial regulatory reform this morning and I am there.

9:33 It begins

9:35 Barney Frank says financial regulatory reform is not dead for 2009.

9:37 Frank says a busy schedule, including working on Fridays.

9:38 Frank says Senate counterparts tell him its full-speed ahead for them, too.

9:39 Frank talks about TBTF and how America hates it, doesn’t like that incompetence is “immunized.” “There will be death panels enacted by this Congress.”

9:41 Says Bush White House felt it had no options other than pay all creditors or none of the creditors. This will change.

9:42 Is against a “pre-ordained” list fo systemically important institutions. Like porno, “You’ll know it when you see it.”

9:44 Sees a future regulator who would tell an AIG to get out of CDS business and unwind portfolio

9:45 Ranking GOPer Spencer Bachus starts to speak. Doesn’t want to rescue firms but liquidate and resolve them. Bad mouths the Fed’s ability to identify systemic risk. Also rips into consumer finance piece.

9:46 Now we are going around the horn as other committee members give their two (minute) cents.

9:50 Jeb Hensarling (R) is going after bailouts and saying they are making economy worse, mentions jobsless recovery. He seems unaware that Frank is already going to tone down some Obama proposals like consumer finance.

9:51 Luis Guitierrez (D) dismissed the regulatory abilities of Fed and FDIC, talks up consumer finance. More capital, less leverage to stop TBTF. “Only government can stop” another Lehman.

9:55 Republicans say things need to slow down.

9:56 Geithner speaks. Says WH is only focused on “what will work.”

9:57 Hits on consumer finance first. Failures were “extensive and costly.” And to fix this we need to have national standards on credit providers.

9:58 TG: We need fundamental overhaul without hurting consumer choice.

10:00 TG: We need tools to resolve TBTF firms.  We need a way to allow failure to happen with huge collateral damage to economy. “Can’t let momentum for reform fade as memory of crisis recedes.”

10:02 TG asked about BF changes to plain vanilla aspect of consumer finance proposal. TG says he is supportive of BF changes!

10:04 Doesn’t Tier One designation create a subsidy? TG says he is worried about that issue but that they will be subject to leverage limits and keep more capital and more conservative restraints on risk taking. But we need tools to intervene to be dismantled and restructured without taxpayer bearing burden. Our jobs is to make sure”system is less vulnerable.”  Can’t let financial crisis “burn itself out.” Can’t “abolish the fire station.”

10:07 Maxine Waters says she is very worried about speculative use of CDS. Also seems to want to completely ban them. No just naked CDS.

10:11 TG gives a “how did that work out for you” kind of answer to the idea of keeping consumer finance authority dispersed.

10:13 TG: Don’t want to see “a bunch of bureaucrats” limit consumer choice.

10:15 Hensarling do you favor Frank death panel for troubled companies.

10:16 TG: It could be receivership or conservatorship for TBTF companies.

10:17 Mandatory standardized products for consumers not off the table but looking at other approaches, too.

10:18 JH: Wouldnt retailers like Walmart fall under new consumer authority.

10:19 Seems to say if you offer consumer credit, you play by same rules. “It’s black and white.” If you compete with banks, you fall under new agency, he seems to say. (Hensarling sees it as a new reg regime for US retailers.)

10:21 TG: Leverage is a biggie, especially for systemically important firms. Adds that “I have not had the privilege” of working on Wall Street.

10:24: TG: How best to prevent moral hazard. Cant expect the market to constrain excess leverage or wait for crisis to burn itself out.

10:35 What about proprietary trading/ toxic assets? TG:  Won’t guarantee those activities. Also,new capital is coming into the system because of disclosure. More liquidity toxic assets markets. Govt. capital just  now being allocated.

10:37 GOP presses TG on consumer reg consolidation. TG: Other regulators are not incompetent or unprincipled but also are protecting turf. More importantly, status quo did not work.

10:42 On derivatives and hedging. TG: Some companies need to hedge risk and also need customized products.

10:44 On credit ratings agencies. TG: We need to decrease ratings dependence and a critical part of that is that people who sell securities retain some of the risk.

10:46  TG has seen Frank note on fin reform changes but only briefly “but broad thrust looks encouraging and promising” and “nothing troubles me.”

10:51 Sherman (D) and section 1204 (resolution authority) and SuperTARP.  Can we limit $ to $1 trillion in taxpayer dough or come to Congress.TG responds: I dont recognize most of your concerns and would be a mistake to harden or create an expectation that government will save you. You are fundamentally mischaracterizing the bill. (Sherman presses him on dollar limit.) I would not support proposals to put us in position we were in 2007 and 2008. Sherman: The problem with Wall Street is that Congress had to be involved.

10:57 Sherman: This creates moral hazard.

11:00 (From GOP)Will consumer energy push out smaller players, community banks and raise costs, creating bigger financial institutions. TG: This won’t increase costs for community banks. And we want to preserve capacity to use derivative markets to hedge.

11:09 Manzullo (R) Was root cause of collapse that subprime not regulated enough, people buying home they could not afford. TG: One of a number of factors.