Posts Tagged ‘economists’

 

What is it about the music industry when it comes to discussing the grotesque levels of inequality that prevail today?

Last year, Alan Krueger used it to explain the “winner-take-all economy,” as a way of introducing the Great Gatsby curve at the Rock and Roll Hall of Fame.

The music industry is a microcosm of what is happening in the U.S. economy at large. We are increasingly becoming a “winner-take-all economy,” a phenomenon that the music industry has long experienced. Over recent decades, technological change, globalization and an erosion of the institutions and practices that support shared prosperity in the U.S. have put the middle class under increasing stress. The lucky and the talented – and it is often hard to tell the difference – have been doing better and better, while the vast majority has struggled to keep up.

And now we have Robert Frank doing much the same, using the example of his two sons, who “comprise two-thirds of the Nepotist, a band in the hypercompetitive indie music scene of New York City” (nepotism in the free national publicity, you say?) to discuss the difference between winner-take-all and long-tail economics.

No doubt, I’m biased, but I think that my sons are good enough to break out in today’s music market. Yet a stark reality persists: Because there are thousands of talented bands today, their odds of stardom are vanishingly small.

The fact is, the music industry is not at all a good example of winner-take-all economics. Sure, there are a few winners and lots of folks who struggle to get by at the bottom—and a long history of artists’ complaints about being ripped off by the recording industry.

But that’s not the story told by economists like Krueger and Frank. Their analysis is all about technology and market share, and the few artists who manage at any point in time to dominate the charts, perform in gigantic concert venues, and rake in the money. It’s as if being a winner is all about getting rents.

The problem is, musicians and other “stars” (authors, artists, athletes, and celebrities) make up only a tiny fraction of the winners, the members of the top 1 percent. The rest, the majority of the minority, get their incomes from elsewhere.

What Krueger and Frank don’t want to talk about is the real winner-take-all economy, in which lots of people produce the surplus that is then appropriated by a tiny minority at the top. A large and growing surplus that either shows up as corporate retained earnings or is distributed to others, both inside and outside those corporations, who manage to “share in the booty.” In that economy, the use of new production technologies means that corporate profits and the percentage of income captured by the top 1 percent are both soaring, while the wage share and the incomes of the other 99 percent continue to decline.

Workers and the other members of the 99 percent are, like Frank’s sons, not short on talent. It’s just that their talents are always at the service of their employers, who continue to be the real winners in the current economy.

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You have to give credit to mainstream economists: they’ll do anything to avoid talking about class.

Take the current discussion about inequality. Right now, eyes are clearly focused on two major trends: the share of national income going to the top 1 percent (and therefore the gap between them and the other 99 percent) and the share of profits and wages in national income (and therefore the growing gap between capital and labor). The issues are on the agenda, the data are easily accessible, and the charts are dramatic.

Here’s what the share going to the top 1 percent looks like (from the World Top Incomes Database):

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And here are the profit and wage shares (from FRED, the Economic Research unit of the St. Louis Fed, where blue represents the profit share and red the wage share):

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Clear enough?

But, of course, once you look at inequality through the lens of those two data series, you have to talk about class: about how capital is gaining at the expense of labor, and about how top income earners are getting their share of the surplus created by labor. (There is, of course, a lot more work that needs to be done, in terms of both the data and an analysis of the data, but at least it’s a start.)

Mainstream economists, as it turns out, want us to look elsewhere—not at class but at the effects of anything and everything else. That’s how we get such nonsense as “Marry Your Like: Assortative Mating and Income Inequality,” an NBER working paper by Jeremy Greenwood et al.

Has there been an increase in positive assortative mating? Does assortative mating contribute to household income inequality? Data from the United States Census Bureau suggests there has been a rise in assortative mating. Additionally, assortative mating affects household income inequality. In particular, if matching in 2005 between husbands and wives had been random, instead of the pattern observed in the data, then the Gini coefficient would have fallen from the observed 0.43 to 0.34, so that income inequality would be smaller. Thus, assortative mating is important for income inequality. The high level of married female labor-force participation in 2005 is important for this result.

Fortunately, Kevin Drum has showed how silly and misleading their analysis is. At best, assortative marriage patterns might tell us something about changes in the distribution of income between, say, the the middle fifth and the next quintile up. But that’s it.

Even progressive economists can get distracted in this discussion—as for example when Larry Mishel discusses the “tight link” between the minimum wage and inequality. While, yes, a declining real minimum wage can increase the 50-10 wage gap (the difference between the median and the 10th percentile earner) but that’s not the real source of income inequality in the United States. It does tell us something about inequality among wage-earners—and that can undermine labor as a whole, by lowering the floor and thus leaving all wage-earners in a more desperate position. But, again, that’s it.

Better it seems to me to focus our attention on the real sources of inequality in the United States. And that means we have to face the class questions straight on. Anything else is merely a distraction.

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It used to be Harvard-based neoclassical economists could count on their Republican friends and allies to support their free-market policies. Now, apparently, not so much.

That’s the only explanation for why Jeffrey Frankel has to step forward and attempt to remind Republicans that market mechanisms—such as cap-and-trade and Obamacare—were their idea.

In the US, cap-and-trade was originally considered a Republican idea. Market-friendly regulation was pushed by those who thought of themselves as pro-market, rather than by those who thought of themselves as pro-regulation. . .

Republican politicians have now forgotten that this approach was ever their policy. To defeat the last major climate bill in 2009, they worked themselves into a frenzy of anti-regulation rhetoric. . .

One can draw a fascinating parallel between the evolution of American political attitudes toward market mechanisms in the area of environmental regulation and Republican hostility to the Affordable Care Act, also known as Obamacare. Obamacare is a market mechanism in the sense that health insurers and care providers remain private and compete against each other.

Frankel is, in fact, right. Both cap-and-trade and Obamacare came straight out of Republican think tanks, precisely in the way neoclassical economists had designed them. Then, they were the best of friends. Now, apparently, Republicans have to be reminded of that friendship.

Or scared into remembering that close relationship. Because, Frankel warns, the alternative is more government regulation.

It really is a sign of how much political and economic discourse has changed in the United States that it’s Democrats who are implementing market-based, originally Republican-designed policies. And that, even more: from the perspective of someone like Frankel, any government regulation of business (not, mind you, government ownership) can blithely be referred to as “command and control.”

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OK, the movie isn’t very good. (The Wolf of Wall Street is basically Goodfellas goes to Wall Street, with more cocaine and less violence, in which Scorcese focuses on the low-hanging fruit of penny-stock huckstering rather than on the real, much-more-powerful culprits behind the financial crisis.) But that doesn’t mean there aren’t wolves that need to be exposed: the academics who are bought and paid for by Wall Street.

Charles Ferguson, in the Inside Job, did a fine job shining light on some of the the better-known economists—R. Glenn Hubbard, Larry Summers, Frederic Mishkin, and so on—who have been willing to be paid to play in the debates surrounding financial deregulation.**

Around the same time, Reuters [pdf] conducted a study of academics who present themselves as disinterested experts at U.S. Congressional hearings but who have industry ties they don’t reveal. Thus, for example, roughly a third of the 82 academics who gave testimony to the Senate Banking Committee and the House Financial Services Committee between late 2008 and early 2010 (as lawmakers debated the biggest overhaul of financial regulation since the 1930s) did not reveal their financial affiliations in their testimony.

More recently, both The Nation and the New York Times have carried out similar studies—of academics who reap the rewards of defending one or another practice developed by Wall Street firms to manipulate financial markets for enormous gains.

As it turns out, it was Elizabeth Warner, the modern-day Leonard Horner, who sounded the alarm back in 2002 about the emerging market for scholarly data, “as journalists, lobbyists and legislators search for facts to pepper their public statements and better influence public opinion.” In her own area of bankruptcy law, she cites the example of the Credit Research Center located at Georgetown University that was taking money from the consumer credit industry to produce studies supporting the credit industry’s political positions. What happens is that the kind of studies issued by such centers acquire an academic legitimacy but the data they report are considered “proprietary,” belonging exclusively to the industry funders who decide what data are released and what data are held private.

Warren’s conclusion?

The market for data threatens the role that social science research can play in policymaking. When data become a commodity—purchased, packaged, and sold to a willing public under a university imprimatur by those who profit from its distribution—then empirical work becomes little more than cheap ad copy. When that happens, the value of every kind of research academics do declines sharply. Like it or not, our collective worth is on the line.

When that happens, all of us—inside and outside the academy—fall prey to the wolves of Wall Street.

 

*I reserve the right to change the title of this post, since I’m going to see David O. Russell’s American Hustle later today. If I do, I’ll disclose the fact that I knew Russell back when he was in college.

**Partly as a result of that negative exposure, the American Economics Association was forced to consider developing a code of conduct it has never had. Instead, it adopted a very limited disclosure policy [pdf], according to which the only rule is that “Every submitted article should state the sources of financial support for the particular research it describes.”

Follow-up. . .

As it turns out, I did go to see American Hustle, which is terrific—superior (in my humble opinion) to Scorcese’s film. Russell has managed to capture a nation of small-time con artists (not unlike the characters in such TV series as The Sopranos and The Wire), who both deserve our affection (in the earnest manner in which they reinvent themselves and try to “do the right thing”) and represent a distraction from the real culprits (the big-time con artists whose activities have actually put people out of work and driven them into poverty and have deprived them of much-needed social benefits, like food stamps and unemployment compensation).

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Clearly, liberal economists and columnists are having a difficult time making sense of two key problems at the same time: unemployment and inequality.

Some (like Ezra Klein) think we need to focus on unemployment right now, and leave the issue of inequality until later. Others (like Dean Baker) argue that, since unemployment is a main cause of inequality, economic growth and tighter labor markets will reduce the unequal distribution of gains in the current economy. And then, of course, there are still others (like Paul Krugman) who, while they consider inequality to be a “Big Something Deal,” still think the real issue is how it negatively influences politics and thus prevents policymakers from enacting the obvious unemployment-reducing policies.

I suppose I should be happy that some progress has, in fact, been made: unemployment and inequality are both on the table right now. Finally!

Still, the problem has been staring us in the face for a long time, and liberal thinkers are only now getting around to considering the possibility that perhaps the two problems are related. No, it’s not an iron law: there can be and have been periods in U.S. economic history of growing inequality with low unemployment, and periods of high unemployment with falling inequality. But when inequality has returned with a vengeance and unemployment remains intolerably high—when the levels of inequality are simply grotesque and tens of millions of workers are unemployed, underemployed, and, if they have a job, are paid below-poverty wages—well, then, we have a problem that the liberal models of economics and politics simply can’t handle.

That’s when we have to look at the political economy as a system, one that for the past six years has generated disastrous levels of both inequality and unemployment with no end in sight. It’s not just a matter of looking at how high unemployment leads to more inequality or at rising inequality as a cause of excessive unemployment. What they need are theories, models, and data series that allow them to see how unemployment and inequality are both being caused by an economic system in which the decisions to create (or not) adequate jobs and to capture large portions of national income are concentrated in a few hands.

Then, and only then, will they be able to walk and chew gum at the same time.

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Mainstream academic economists have finally caught up with American everyday economists, who have long supported—and by great margins—an increase in the minimum wage.

Laura Tyson presents the mainstream economists’ case: there’s simply no economic reason—either micro or macro—not to support a higher minimum wage for American workers. And there’s every reason to support a minimum wage that is much higher than the current $7.25 an hour:

Putting more income into the hands of minimum-wage workers would not only reduce poverty; it would also stimulate consumer spending at a time when inadequate demand continues to impede a robust recovery and job creation. Using very different methodologies, two recent studies confirm that an increase in the minimum wage to the $10 range would lift spending, gross domestic product and job creation.

Contrary to the warnings of its opponents, a higher minimum wage would, under current economic circumstances, mean more employment, not less.

That’s it. Done!

But, before we get too excited, let’s remember what a $10.10-an-hour minimum wage represents: It is still only half of what, on average, American workers (production and nonsupervisory employees on private nonfarm payrolls) currently receive. And, on an annual basis, it only amounts to $20,200, which is just above the poverty line for a family of three.

So, let’s follow the lead of the American public, ignore the howling from low-wage employers and their political shills, and raise the minimum wage. And then admit, it’s only the beginning.

fast food

Everyone knows we live in a fast-food nation (everyone, that is, who has read Eric Schlosser’s book or seen Richard Linklater’s movie). But not everyone is aware that it’s only a tiny portion of the nation that benefits—directly and indirectly—from the existence of fast food.*

Some, of course, benefit directly, because they either receive in CEO compensation or in the form of stock dividends a portion of the enormous profits created within the fast-food industry.

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The reason profits are so high is because fast-food wages are very low (an average of $8.69 an hour for those working at least 27 weeks in a year and 10 hours a week), and fast-food employers are able to shift the cost of the low wages they pay their employees to public programs (such as Medicaid, the Children’s Health Insurance Program, Earned Income Tax Credits, food stamps, and Temporary Assistance for Needy Families).

Those at the very top of the nation also benefit from the fast-food industry because, as a result of low wages and public programs to assist the working poor, fast-food prices are kept down. Thus, the price of one of the elements of the wage bundle of all workers—food—is kept low. Thus, workers in all industries—not just fast food but the production of all goods and services—have to spend less of their day working for themselves and more of the day working for their employers. That, in turn, raises profits in those industries, a portion of which shows up in the executive-compensation packages and dividends of the tiny minority of income earners.

The prototypical high-net-worth individuals who are “coastal, educated, older, white and male,” certainly don’t consume fast food on a regular basis.** But they’re the folks who benefit, both directly and indirectly, from the existence of a fast-food nation.

 

*The information in this post comes from two recent reports: Super-Sizing Public Costs: How Low Wages at Top Fast-Food Chains Leave Taxpayers Footing the Bill [pdf], by the National Employment Law Project, and Fast Food, Poverty Wages: The Public Cost of Low-Wage Jobs in the Fast-Food Industry [pdf], by Sylvia Allegretto et al. at the University of California, Berkeley, Center for Labor Research and Education and the University of Illinois at Urbana-Champaign Department of Urban & Regional Planning.

**Although at least one neoclassical economist who opposes any increase in the minimum wage, John Cochrane, occasionally does.

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Do Eugene Fama and Robert Shiller, two of this year’s laureates for the Nobel economics prize, make odd bedfellows?

On one level, certainly. Fama has no idea what a financial bubble might be, while Shiller sees bubbles all around us. Yanis Varourfakis agrees:

The moment I heard that Fama and Shiller (together with Hansen) were awarded the latest pseudo-Nobel in Economics, my initial thought was: What next? A Darwin Prize to some Arch Creationist? The Award for Top Seamanship to the Titanic’s captain?

But then I quickly changed my mind. Awarding this ‘Nobel’ to both Fama and Shiller was a brilliant hedge. One that can only be bested by awarding the Physics Nobel to Galileo and to the Inquisitor who condemned him.

But it also makes perfect sense to award the prize to both Fama and Shiller—not as a hedging of bets or a splitting of the difference but because, at another level, they’re in perfect agreement: both of them want to see more markets. This is one Tyler Cowen gets right:

Robert Shiller is best known for warning about the internet stock market bubble and later the housing bubble. What is most impressive to me, however, is that most people who think that markets can be inefficient are anti-market. Shiller’s solution to market problems, however, is more markets! The housing market, for example, has traditionally had two problems. Since each house is unique there has been no market index of housing prices so that people couldn’t easily see bubbles and if they could see them on the ground there was no easy way to short the market (to try to profit from the bubble in a way that would moderate the bubble). Moreover, because there haven’t been good housing indexes a very large amount of each average person’s wealth has been tied up with an asset that can fluctuate substantially in price. Most house buyers, in other words, are putting all their eggs in one basket and crossing their fingers that the basket doesn’t go bust. In recent years, that has been a very unfortunate bet.

Shiller’s solution to the problems in the housing market has been to make the market better—he created with Case and Weiss–the Case-Shiller Index. For the first time, it’s possible to see in real time housing prices and compare with averages over time and it possible to buy options and futures on the index which will help for forecasting. Moreover, it’s possible that in the future insurance products can be built based on local versions of the index–thus you could insure yourself against big declines in the price of housing in your neighborhood.

Shiller’s housing index is also a window into how macro markets could also be used to create livelihood insurance, a type of private unemployment insurance. Moral hazard and adverse selection make it difficult to protect any single individual from unemployment but indexes in the unemployment rate of dentists or construction workers could be used to provide some insurance for workers in these fields when conditions in their entire industry are poor.

So, this year’s decision is perfectly consistent with a long line (stretching back to 1968) of market-friendly prizes from the Nobel economics committee.

Plus, as one former student wrote to me this morning, “quite overwhelmed by that unprecedented gender-balance of the (not-really) nobel prize.” It is still the case that not one female economist (and thus with the exception of political scientist Elinor Ostrom, in 2009) has ever been awarded the Nobel Memorial Prize in Economic Sciences.

Fama and Shiller, together, may or may not be odd but they are certainly bedfellows.

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Special mention

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