Year: 2013

My office is on a college campus, so it\’s especially hard to avoid noticing that the class of \’13 is going to graduate into a difficult job market, as did their predecessors in the classes of \’12, \’11, \’10, \’09, and \’08. Indeed, colleges and universities are now experiencing a situation in which freshmen arrived in a lousy job market, heard all about the lousy job market for four years of college, and then graduated into a lousy job market. When one hears complaints either about the excessively high cost of college education or about the overly careerist instincts of recent college cohorts, it\’s worth remembering that many of them have experienced subpar labor market rewards from their college degree in recent years. Anthony P. Carnevale,
Andrew R. Hanson, and Artem Gulish explore these issues in their report  Failure to Launch: Structural Shift and the New Lost Generation, a September 2013 report from the Georgetown Public Policy Institute. Here are a few of the figures that jumped out at me.

The proportion of young people in the labor market is dropping, while the share of older people int he labor market is rising. This figure shows that back in 1980, about 50% of all 18 year-olds were in the labor market; by 2012, it was about 30%. However, those in their 50s, 60s, and older are more likely to be in the labor market than they were in 1980.

In fact, the share of young people in the labor market has fallen to a 40-year low. While the decline has been especially pronounced in recent years, it clearly dates back several decades. The usual explanation is a combination of a positive and a negative factor. The positive factor is that more young people are attending colleges and universities, and so are not in the labor force in their early 20s. The negative factor is that the kinds of jobs that were were available to those without a college degree back in the 1960s and 1970s–blue-collar jobs with significant skills that offered the prospect of lifelong economic advancement–have become increasingly scarce.

Today\’s young adults are getting a slower start on adult life. I As a result, it is taking young people longer to start climbing the career ladder. This graph shows the earnings of someone at each age level compared to median earnings, for 1980 and for 2012. In 1980, for example the typical 18 year-old had earnings that were about one-quarter of the median income, but the typical 26 year-old had earnings that were equal to the median income. However, in 1980 earnings dropped off quite sharply when people reached their early 60s. In 2012, the typical workers reach the median level of earnings until age 30–four years later than their counterparts in 1980.And in 2012, while wages still drop off when people reach their early 60s, the decline is not as rapid or as far.

And of course, a later start on careers is also one of the reasons why people are getting married later and starting families later. Carnevale, Hanson, and  Gulish write: \” Evolving social norms entangled with economic hardships have led young people to delay household and family formation. Two-thirds of young adults in their 20s cohabitate; the average age of  marriage increased from 21 to 26 for women and 23 to 28 for men between 1970 and 2006. Over  the same period, the average age of a mother at the birth of her first child increased from 21 to 25. In 1960, three out of four women and two out of three men completed school, left home, achieved financial independence, were married and had children by age 30. In 2000, less than half of women and only one-third of men reached the same milestones by age 30.\”

There is a lot to be said for marrying and having children a little later in life. I married at age 30 and had my first child at age 37. But when I visit with friends my age whose children have already graduate from college, or when I coach youth soccer games on creaky knees, I recognize that a slower takeoff to adulthood has its tradeoffs, too.

Throughout the grim economic statistics of the last five years, I\’ve felt especially badly for three groups: those who have been unemployed at a time when finding a job has been so tough; young people trying to get a foothold in the stagnant labor market; and those who were near or into retirement. This last group is old enough that spending many more years in the labor market wasn\’t a realistic option, even if jobs had been available. Meanwhile, they saw the value of their retirement nest eggs slashed by falling house and stock prices, and have watched while their savings and money market accounts brought them only ultra-low interest rates. LaVaughn Henry offers some evidence on these points in \”Are Households Saving Enough for a Secure Retirement?\” an \”Economic Commentary\” written for the Federal Reserve Bank of Cleveland.

One rough-and-ready measure of how older generations are doing is to look at the accumulation of national wealth. Here\’s actual household wealth, with the brown line showing the actual pattern and the green line showing a steady-growth trend over time. Notice that wealth went above trend in the dot-com boom of the late 1990s, but at the end of that period wealth returned to more-or-less the long-term trend. However, in the housing bubble of the mid-2000s, household wealth not only went further above trend, but then fell to well below trend and has been slower to rebound.

How do wealth patterns look for near-retirement Americans in particular? This graph shows the ratio of wealth-to-income for four different age groups at three different years. Clearly, those in the 55-64 age bracket were feeling a lot better about their retirement prospects in 2007 than they were in 2010.

Although a quick glance at this figure might suggest that older Americans as a group are just as well-prepared for retirement as they were back in 1983, this conclusion would be too quick. As Henry points out, wealth-to-income ratios for the elderly should probably be higher now than in the early 1980s for three reasons. First, people are living longer, so they need more wealth when they retire. Second, back in the early 1980s, a larger share of the US workforce had \”defined benefit\” pension plans, in which an employer promised to pay them a certain amount that was not counted as part of their own household wealth.  Now more people have \”defined contribution\” plans, where your retirement funds are stored up in your own 401k or IRS account, which does count as part of your household wealth. Thus, retirees are more dependent on their own household wealth than they were three decades ago. Third, interest rates right now are historically very low, so retirees need more wealth to generate the income that they would have expected if interest rates were higher.

Finally, what share of retirees have saved enough to sustain their consumption patterns in retirement. Here, Henry turns to calculations from Alicia H. Munnell, Anthony Webb, and Francesca Golub-Sass at the Center for Retirement Research at Boston College called that they call the National Retirement Risk Index (for example, see here). They seek first to calculate how much income people will need in retirement, and then whether people have enough in savings to meet that goal. As they explain: \”A commonly used
benchmark is the replacement rate needed to allow households to maintain their pre-retirement standard
of living in retirement. People clearly need less than their full pre-retirement income to maintain this
standard once they stop working since they pay less in taxes, no longer need to save for retirement, and often have paid off their mortgage. Thus, a greater share of their income is available for spending.\” Using this measure, Henry presents a figure showing the share of households at age 65 that are at least 10% short of meeting this target. This particular rule is of course somewhat arbitrary, but the results are likely to look much the same for any given rule: that is, those in the 1980s were more likely to be ready for retirement than those in the 1990s; those in the 1990s were more likely to be ready for retirement than those in the 2000s; and those in 2010 were least likely of all to be ready for retirement.

There\’s an argument for another day about how to encourage people to save more for retirement during their working lives, but that argument isn\’t especially relevant to those who are already at the edge of retirement or already retired. Planning for retirement is an especially difficult economic decision because we get just one chance to do it; no one gets to live their life multiple times, trying out different patterns of saving and investment each time. And if you happen to be retiring just when the economy enters an epic slump, it\’s bad luck.

The last five years have brought economic policies that I would not have thought were even remotely possible if you had asked me in, say, mid-2007. The Federal Reserve and other central banks of high-income countries would push their policy-target interest rates to near-zero, and hold the rates there for years on end, while printing money to buy government debt? I wouldn\’t have believed it. The U.S. government would run budget deficits of 10.1% of GDP, 9.0% of GDP, 8.7% of GDP, and 7.0% of GDP in consecutive years, raising the debt/GDP ratio over that time from 40.5% in 2008 to 72.6% in 2012? I wouldn\’t have believed it. An IMF staff team led by Bernardin Akitoby offers some thoughts on how conventional wisdom about fiscal policy has change in the last five years in a September 2013 Policy Paper, \”Reassessing the Role and Modalities of Fiscal Policy in Advanced Economies.\”

What was the consensus view on fiscal policy back in the Stone Ages of 2007? The IMF report reminds us (as usual, footnotes and citations omitted): \”The prevailing consensus before the crisis was that discretionary fiscal policy had a  limited role to play in fighting recessions. The focus of fiscal policy in advanced economies was often on the achievement of medium- to long-run goals such as raising national saving, external rebalancing, and maintaining long-run fiscal and debt sustainability given looming demographic spending pressures. For the management of business cycle fluctuations, monetary policy was seen as the central macroeconomic policy tool. Fiscal contraction was sometimes recommended during periods of economic overheating as a means of supporting monetary policy, for example to take pressure off the exchange rate in the face of persistent capital inflows. However, during downturns, it was deemed that there was little reason to use another instrument beyond monetary policy.\”

But when the Great Recession hit, this consensus wisdom went out the window in a hurry, not just in the U.S. economy but across the high-income countries of the world. Here\’s a figure comparing the usual rise in the debt/GDP ratio after a recession (the blue dashed line) with what has actually happened in advanced economies since the recession (the red line). The U.S. economy, with a rise in the debt/GDP ratio of just over 30 percentage points, is just about on the average of how high-income countries have expanded their government debt since the Great Recession.

What lessons have we learned about fiscal policy during this period? Here are a few suggested by the IMF:

1) Of course, one main reason that so many governments raised their debt/GDP ratios so much was that the Great Recession was so ferocious. Advanced economies are apparently more vulnerable to severe downturns than most would have believed five years ago. In particular, financial imbalances, asset bubbles, housing and credit booms, and other risks were more severe that expected. . They write: \”The fiscal risks created by large  (relative to GDP), growing, and interconnected financial sectors were also underappreciated, partly  because of confidence in financial markets’ capacity to self-regulate and the
opacity of cross-border exposures.\”

2) \”[T]here is a need for a more holistic approach to measuring public debt and determining “safe’’ levels of debt.\” During the financial crisis, it became apparent that many governments were offering various guarantees and support to their financial sector that would not have been counted as \”government debt\” back in 2007, but turned into government debt very quickly when the crisis hit. \”For example, in the United
States, potential contingent liabilities stemming from the debt of government-related enterprises is
estimated to exceed 50 percent of GDP …\” Official measurements of debt also don\’t take into account future promises for funding government programs, like providing support to the elderly.

3) In some \”safe havens (Japan and the United States, for example), markets can tolerate much higher debt ratios than previously thought, at least for a time.\”

4) In other advanced economies, high government debt can lead to a  harmful \”soverign debt feedback loop.\” Within a given country, banks typically hold a lot of debt from the government of that same country. If the government piles up so much debt that it begins to look risky, then the banks of that country have a lot of assets that look risky. But if the government is to step in and rescue the banks, it will pile up more debt, which will make the banks look even riskier. See the recent history of Greece for how this story unfolds.

5) \”While debate continues, the evidence seems stronger than before the crisis that fiscal policy can, under today’s special circumstances, have powerful effects on the economy in the short run. In particular, there is even stronger evidence than before that fiscal multipliers are larger when monetary policy is constrained by the zero lower bound (ZLB) on nominal interest rates, the financial sector is weak, or the economy is in a slump ..Earlier research often assumed that the impact of fiscal policy was similar across different states of the economy, but a number of recent empirical studies suggest that fiscal multipliers may be larger during periods of slack. …The crisis has not offered conclusive lessons regarding the relative size of revenue and
government spending multipliers. Some recent studies suggest that spending multipliers are larger than revenue multipliers, while others reach the opposite conclusion … \”

6) Fiscal policy operates through automatic stabilizers and through discretionary policy. The automatic stabiliizers come into being because when an economy contracts, the reduction in  economic activity automatically leads to lower tax revenues and to more people eligible for government spending support–without any new legislation. (For more detail on automatic stabilizers, see here.) Discretionary fiscal policy consists of the additional tax cuts or spending increases that required new legislation. Here\’s the division of automatic and discretionary policy across some high-income countries. In the US, for example, automatic stabilizers were about 2/3 of the deficits in 2009-2010, and discretionary policy was the other third.

7) \”The fundamental challenge facing policymakers today is to reduce deficits and debt levels in a way that ensures stability but is sufficiently supportive of short-term economic growth, employment, and equity. …As mere promises to undertake fiscal adjustment later may not be persuasive, gradual consolidation needs to be anchored in a credible medium-term plan.

The transportation of people and goods is in many ways a necessary evil. You rarely hear any person outside of car company advertisements bemoaning that their commute to work is too short, or that they wish it took a little longer to pick up bread and milk at the grocery. You never hear a business exalting that getting some parts or inputs from a distant location took especially long or required an especially high cost. Of course, there are sensible reasons why not all economic activity happens at one location and most people do not live immediately beside where they work; in effect, transportation is the cost we pay for the benefits that arise from this diversity of locations.  Clifford Winston writes \”On the Performance of the U.S. Transportation System: Caution Ahead,\” in the most recent issue of the Journal of Economic Literature (51: 3, pp. 773–824). (Full disclosure: The JEL is a sibling journal of the Journal of Economic Perspectives, where I work, both published by the American Economic Association. The JEL is not freely available on-line, but many in academia will have access through library subscriptions or through their AEA membership.)

Winston summarizes some facts about the sheer size of the US transportation sector in 2007 an eye-opening paragraph (as usual, footnotes and references are omitted for readability):

\”[C]onsumers spent $1.1 trillion on gasoline and vehicles commuting to work, traveling to perform household chores and to access entertainment, and traveling for  business and vacations, and spent an astronomical 175 billion hours in transit, which averages out to about 100 minutes per day for each and every American,valued at some $760 billion. Firms spent $1 trillion shipping products using their own and for-hire transportation, while the commodities that were shipped absorbed 25 billion ton-days in transit, valued at roughly $2.2 trillion. Local, state, and federal government spending on transportation infrastructure and services contributed an additional $260 billion,  bringing total pecuniary spending on transportation up to 2.4 trillion, or 17 percent of  GDP in 2007, which is as much as Americans spent on health care, and total annual money and time expenditures to more than $5 trillion! Finally, transportation looms large in American life because both the public and private sector have made huge investments in the transportation capital stock, which (after deducting depreciation) is valued by the U.S. Department of Commerce at nearly $4 trillion …\”

Many of these costs are not immediately apparent. After all, the transportation costs of firms are not costs that most of us see directly, but instead costs that are wrapped into the final cost of goods and services. The costs of time spent in traffic are not monetary costs. The link from transportation capital stock paid for in is government budgets and the tax revenues that ultimately support such spending is not especially clear.

Our public conversation about transportation policy often boils down to a claim that more government spending is good: fix and expand the road system, fix the bridges, build more mass transit, and so on. The transportation legislation that emerges from Congress every few years is perhaps the classic case of pork-barrel spending, usually with juicy tidbits for almost every legislative district. As one might expect, Winston takes a disciplined perspective: how can we set up institutions so that the transportation system works more efficiently, and so that additional infrastructure spending occurs when benefits are balanced against the costs, in a way that makes society more likely to focus on projects that have a higher payoff.  Some of the possibilities that go beyond pouring more concrete include:

• Cars should be charged for driving during times when traffic is congested. When you drive during a time when congestion is high, you of course experience the costs of having lots of other drivers on the road. But you also play a role in imposing those costs of time and delay on others. 
• Most big cities charge too little for street parking, at least during peak times For economists, when street parking is all taken for blocks around, and people are cruising the streets looking for a spot, it seems clear that the quantity of parking demanded is exceeding the quantity supplied at the existing price–and so the price should rise. 
• \”The gasoline tax that truckers are charged for highway travel does not adequately account for their damage to pavements because that damage depends on a truck’s weight per axle (for a given weight, trucks with more axles inflict less pavement damage) and for their stress on bridges, which  depends on a truck’s total weight.\” Higher charges would provide an incentive to use trucks with more axles, which would save wear and tear on roads and bridges. 
• \”The charge that an aircraft pays public airports to land (they are not charged to take off) is based on its weight and generally does not  vary by time of day. But the volume of aircraft traffic, which determines the length of time that a plane must wait on the ground or in the air, does. Efficient takeoff and landing (marginal cost) congestion charges that vary by time of day could significantly reduce air travel delays, generating a $6.3 billion annual welfare gain, accounting for the time savings to travelers and reduced operating costs to airlines …\”
• \”[U]sers of urban bus and rail transit pay fares that are set by transit authorities below marginal cost, some even ride at discounts from those fares, and some federal employees ride free. As pointed out later, such subsidies are hard to justify on distributional grounds because transit users generally live in households with incomes that are above the national average …\”
• \”Most highways in major metropolitan areas operate under congested conditions during much of the day, yet highway design standards are based on free-flow travel speeds. Policymakers could therefore reduce the cost of delays by expanding the range of alternative highway designs that, for example, could raise speeds during peak travel periods by increasing the number of lanes, although speeds during off-peak travel periods may be slower because lanes and shoulder widths would be narrower. Technology exists to install lane dividers that can be illuminated so that they are visible to motorists and that can be adjusted to increase or decrease the number of lanes that are available in response to traffic volume.\”
• \”[I]nvestments in highway durability—that is, pavement thickness—should minimize the sum of initial capital and ongoing maintenance costs. They determined that building roads with thicker pavement at an annualized cost of $3.7 billion would generate an annualized maintenance saving of almost 4 times as much—$14.4 billion—for a net annual welfare gain of $10.7 billion. Roads could also be made more durable by implementing innovations such as tack coats between pavement levels and thicker bottom layers of asphalt to avoid buckling, both of which can extend the functional life of a highway at little extra cost. But state departments of transportation award construction contracts on the basis of the minimum bid, not on the technological sophistication of the contractor …\”

Back when I was in college in the late 1970s and early 1980s, it was typical to hear that women earned 59 cents for every $1 earned by men. The figure below, taken from the September 2013 Census Bureau report on \”Income, Poverty, and Health Insurance Coverage in the United States: 2012,\” by Carmen DeNavas-Walt, Bernadette D. Proctor,and  Jessica C. Smith, shows why 59 cents had such force. Looking back for 20 years through the 1960s and the 1970s, the ratio of median earnings for a full-time female work to that of a full-time male worker had hovered at around 59 cents–despite what seemed to be enormous changes in the role of women in the workforce during this time.

A standard explanation for the seeming stability of the 59 cents during the 1960s and 1970s was that there were two opposing patterns at work as women entered the paid workforce in large numbers. The labor force participation rate for women rose from 38% in 1960 to about 51% by 1980. Many women were gaining experience and credentials in the paid workforce, which should have tended to push up the ratio of female/male wages, but many of the women who were entering the paid workforce for the first time were taking low-paid entry-level jobs, which tended to pull down the ratio of female/male wages. During the 1960s and 1970s, these factors largely offset each other.

I can report that this argument was not a popular one for a male economics major to make during  his college days in the early 1980s. (And yes, I was careful to point out that the story of counterbalancing forces had no particular implication for how much gender discrimination continued to exist.) But the story did have a testable implication: after the process of women entering the paid workforce for the first time had largely run its course, then the effect of women having more experience and credentials should dominate and the female/male wage ratio would rise. Indeed, the female/male earnings ratio did start rising right around 1980, and now stands at 77%.

Thus, the good news in terms of pay equity is that at least it\’s still not 59 cents for every $1. The ongoing issue is how to explain the remaining wage gap, and there\’s considerable controversy on this point. For example, if one adjusts for the industry in which people work, or the kinds of jobs they do, the female/male wage gap looks smaller. But what if those industries and jobs and the pay levels in those industries and job choices are themselves, at least to some extent, the result of patterns of unequal treatment by gender?

It does seem clear that a substantial share of the remaining gender gap is due to women\’s taking a greater share of responsibility for children in particular. For example, here\’s a 1998 article  by Jane Waldfogel in the Journal of Economic Perspectives (where I\’ve been the managing editor since 1987) looking at this \”family gap.\”  Of course, this then leads to an argument over the extent to which women are choosing these responsibilities and the extent to which these responsibilities are being forced upon them. Perhaps scarred by my college exposure to these issues, I\’ll duck that question here, and just note that other countries have far more extensive parental leave rules than does the United States. The evidence on the female/male wage gap seems consistent with an overall pattern that outright discrimination by employers in labor markets has diminished, and today the larger reason underlying the female/male wage gap are social expectations and pressures from both men and women about industry and job choices, and about how the tasks of child-raising will be divided.

One statistical  note here: The figure shows the ratio of median wages, not average wages. For the uninitiated, the median is the number where half have more and half have less. If those at the top of the income distribution get more, while everyone else remains the same, then the average income level will rise, but the median will not. The median is often more useful for getting a sense of the \”typical\” worker in the middle of the overall income distribution, which is why it is used here, but it would be incorrect to look at the median and conclude that average wages have not risen. Indeed, I assume that men substantially outnumber in the top 1% or the top 10% of the earning distribution, and so the focus here on median earnings will in that way understate the amount of gender inequality remaining.

A couple of years ago, I found myself standing in a grocery store in Boston, waiting for the person behind the counter to make me a cheesesteak hoagie. I noticed that I was near the meat section of the grocery, and as a Minnesota person, I wandered over to sightsee the seafood. The seafood was quite reasonably priced by Midwestern standards, but when I looked more closely at the labels, the scallops and shrimp and a lot of the fish it had been imported from China and the far East.

Have you ever found yourself in an area which is well-known for some local product, but that local product–at least in its highest quality version–doesn\’t seem available in local stores or restaurants? Here\’s an economic explanation for that phenomenon taken from the World Trade Report 2013 from the World Trade Organization, based on the effects of per-unit transportation costs. The report discusses:

The mysterious case of the missing delicious red apples

\”Before it became associated with corporate behemoths like Amazon, Boeing, Microsoft and Starbucks, as well as the cultural phenomenon that was grunge music, the US state of Washington was famous for its apples. To some irate state residents though, it appeared that only the small and old-looking ones remained in the state, while all the red and delicious apples were being shipped out of state. To the state residents who wrote to their local newspaper the Seattle Times expressing their disappointment, it was a mystery that had no obvious explanation.

However, the answer to this mystery had long been part of the lore in the economics department at the University of Washington and was even part of classroom discussions and exams. The answer to the mystery relied on the fact that a per unit transportation charge applicable to both high-quality and low-quality products lowers the relative price of the high-quality product at the point of destination. This leads consumers at the destination to purchase a greater proportion of the high-quality product than consumers in the place of origin. The explanation provided by the economists of the University of Washington to the readers of the 28 October 1975 edition of the Seattle Times is reproduced below:

“Suppose, for example, a good apple costs 10 cents and a poor apple 5 cents locally. Then, since the decision to eat one good apple costs the same as eating two poor apples, we can say that a good apple in essence costs two poor apples. Two good apples cost four poor apples. Suppose now that it costs 5 cents per apple (any apple) to ship apples East. Then, in the East, good apples will cost 15 cents each and poor ones 10 cents each. But now eating two good apples will cost three, not four poor apples. Though both prices are higher, good apples have become relatively cheaper, and a higher percentage of good apples will be consumed in the East than here. It is no conspiracy, just the law of demand.”

The reference to \”economists at the University of Washington\” refers to an 1978 article by Thomas E. Borcherding and Eugene Silberberg, “Shipping the Good Apples Out: The Alchian and Allen Theorem Reconsidered,\” which was published in the Journal of Political Economy (February, pp. 131–38). As their title implies, Borcherding and Silberberg were drawing on a classic examples from the 1964 University Economics textbook by Armen Alchian and William Allen. That book offers a parallel example of high-quality grapes at 10 cents per pound, low-quality grapes at 5 cents a pound and a shipping cost of 5 cents per pound. The overall hypothesis is that when a fixed cost (like a per unit transportation cost) is added to two substitute goods, the user will tend to substitute toward the higher-quality good. (In the jargon, adding the fixed cost to both goods means that the opportunity cost of consuming the high-quality good, expressed in terms of the low-quality good, is lower.)

This thesis has been good fodder for argument ever since. For example, good restaurants in Boston do have excellent lobsters. Borcherding and Silberberg argued that this tends to support the Alchian and Allen hypothesis, because \”it does not matter if the goods are shipped to the consumers or the consumers are shipped to the goods.\” The key distinction here is whether natives and those buying at roadside stands or local groceries typically end up with lower-quality lobsters than those eating at restaurants that cater to tourists.

If you\’re interested in delving into the more recent research literature here, a useful starting point is the paper by David Hummels and Alexandre Skiba, \”An Empirical Confirmation of the Alchian‐Allen Conjecture,\” published in the December 2004 issue of the Journal of Political Economy (112:6, pp. 1384-1404).

I\’ve posted a couple of times recently about the fact that the labor share of total income has declined in recent years, both in the U.S. economy and around the world. But interest in the topic seems strong, and there\’s an intriguing new paper out on \”The Decline of the U.S. Labor Share,\” by Michael Elsby, Bart Hobijn, and Ayşegül Șahin in the latest issue of the Brookings Papers on Economic Activity.  Here, I\’ll list some of the overall themes that come up both in this paper and in previous posts, together with new insights from this paper.

1) The fall in labor share of national income in the last couple decades is quite a remarkable change, because for most of the 20th century, the labor share of national income could be thought of as pretty much a constant. Back in 1939, John Maynard Keynes was writing that the “remarkable constancy” of the aggregate labor share is “a bit of a miracle.” Paul Samuelson made a similar comment in a 1949 article. Nicholas Kaldor documented a similar result in the late 1950s. When I was first learning economics in the late 1970s and early 1980s, the labor share of national income was typically viewed as more-or-less constant, with some variation over the business cycle Indeed, I spent a certain proportion of time in my college years pointing out that the facts at that time did not support the claim that capital was receiving an ever-greater share of national income.

2) The seeming consistency of the labor share of national income up until the mid-1980s was actually the result of trends that counterbalanced each other. The shift from manufacturing to services tended to push down the labor share over time, but the growth of the health care industry tended to push up the labor share over tiem.

3) The decline in labor share is not the same as the rise in inequality of incomes. All of labor income is included in labor share, including what is earned by the top 1% as compensation for labor.  Elsby, Hobijn, and Șahin write: \”[T]he labor share in the United States has in fact been buoyed up increasingly by the rising income shares of very rich workers, like CEOs for example. Thus, the decline in the labor share conceals, rather than exposes, most of the large increases in inequality that have emerged in recent decades.\”

4) The decline in the labor share of national income is occurring, but is also probably overstated in the commonly used statistics.  Elsby, Hobijn, and Șahin point out that the usual statistical approach has no easy way of estimating the income of those who are self-employed, and as a result an assumption buried in the data is to assume that the hourly compensation of payroll employees and the self-employed has changed in the same way over time. However, they believe that the pay of the self-employed has probably increased in the last couple of decades relative to the pay of payroll employees, and so the labor share is a little greater than the official statistics show. They find that \”around a third of the decline in the headline measure   is a symptom of the method used to impute self-employment income.\”

5) One potential explanation for the declining labor share is that an increased rate of capital investment substituted for labor. However, Elsby, Hobijn, and Șahin find that the evidence does not support this explanation; specifically, the amount of capital/output wasn\’t rising over this time.

6)  Another possible explanation for declining labor share is the decline in private-sector unionization rates in recent decades. owever, Elsby, Hobijn, and Șahin find that the evidence does not support this explanation; specifically, the fall in labor share across industries doesn\’t seem much correlated with the changes in unionization rates in those industries.

7) Yet another possible explanation for the declining labor share is increased global competition.  Elsby, Hobijn, and Șahin write: \”Our analysis identifies offshoring of the labor-intensive part of the U.S supply chain as a leading potential explanation for the decline in the labor share.\” More specifically, they document a close connection between which industries are exposed to greater import competition and which industries saw the biggest fall in labor share during the last 25 years or so.

The slow phase-in of the Patient Protection and Affordable Care Act of 2010, widely known as \”Obamacare,\” is supposed to kick into a higher gear on October 1 when open enrollment begins in the \”exchanges\” that are one of the tools for expanding the share of the U.S. population with health insurance.  As law comes into effect, it\’s perhaps useful to take a step back from the day-to-day kerfuffles over the mechanics of implementation and look at the big picture. Why was it so widely perceived that a major reform of the U.S health care sector was needed?

There have been two main concerns about the U.S. health care sector for the last few decades. First, tens of millions of Americans lacked health insurance, which in turn raised concerns that they were receiving too little health care, or receiving it too late, or receiving it at costs that led to severe household financial stress. Second, the cost of health care had been rising faster than the size of the U.S. economy for decades. In the private sector, firms paying more for health insurance meant that less money was available for raises in take-home pay. In the public sector, the rising costs of Medicare, Medicaid, and health care costs for retired government workers were creating pressure in all the other parts of public budgets.

Sure, there were other concerns about the health care sector, like making health insurance companies play nice, or providing support for medical education and biomedical research. But addressing those sorts of concerns didn\’t require sweeping legislation to shake up the health care sector. How is the Affordable Care Act likely to perform on the two main issues of covering the uninsured and constraining the rise in costs?

Since well before the passage of the Act, it has been clear that it would not provide universal health insurance coverage. For example,here\’s a White House announcement in September 2010 predicting that the act would reduce the number of Americans without health insurance from about 50 million to about 18 million.
The Congressional Budget Office estimated last spring that the implementation of the Affordable Care Act would reduce the number of Americans without health insurance from 55 million in 2013 to 31 million in 2016, with most of that drop coming from people signing up for the new insurance \”exchanges\” and some coming from an expansion of Medicaid. But by 2023, there would still be 31 million uninsured. Here\’s a recent Washington Post story about those 31 million. So after all the tumult and the shouting over the Affordable Care Act, both, during and after its passage, its supporters optimistically expected it to solve about 60% of the problem of Americans lacking health insurance, and in fact it now seems likely to solve about 40% of that problem.

Those lacking health insurance are not primarily the elderly, because they are covered by Medicare, and not primarily the poor, who are covered by Medicaid. They are also not primarily children, who are often eligible for coverage under programs like the Children\’s Health Insurance Program. Instead, the uninsured are mainly those in the 19-34 age bracket who don\’t get health insurance through an employer, aren\’t eligible for a public health insurance program, and either can\’t afford private health insurance or–given that many of them are relatively young and healthy–don\’t think it\’s worth the cost to buy health insurance. Here\’s a figure from
a recent Census Bureau report showing those who lack health insurance by age group:

On the subject of restraining the rise in health care costs, the bottom line is that when a piece of legislation is promising to expand substantially the amount of health care that people will be able to consume, it is going to increase costs, at least in the short run. Again, this was openly admitted by those who advocated the act. Their argument was that although health care costs would rise in the short run, various cost-controls built into the legislation would help constrain the rise in costs in the longer run. As one example of such claims, here\’s Jonathan Gruber making this case in 2010 in the New England Journal of Medicine. But while the Affordable Care Act does include many pilot projects and experiments that seek to hold down health care costs, the effect of these projects is not yet known. But not much is known along these lines so far. As a report earlier this summer from the Institute of Medicine at the National Academy of Sciences reports, \”the ACA [Affordable Care Act] generated a thousand pilot demonstrations of new payment models. It is too early to know which of these models will prove to control health care costs and improve quality.\”

It does seem that the rate of increase in health care costs slowed down in the United States, and in a number of other countries around the world, starting in about 2003. But a paper just published in the most recent Brookings Papers on Economic Activity by Amitabh Chandra, Jonathan Holmes, and Jonathan Skinner asks \”Is This Time Different? The Slowdown in Healthcare Spending.\” They \”predict that health care costs
will grow at GDP plus 1.2 percent for the next few decades; lower than previous estimates but
still on track to cause serious fiscal pain for the U.S. government and employees who bear the
cost of higher premiums in the form of lower wages.\” Thus, even with the recent slowdown in health care costs taken into account, the most recent Congressional Budget Office report looked at future health care costs this way: \”Although the growth of health care spending has slowed recently, CBO projects that spending per enrollee in federal health care programs will continue to increase at a faster pace than per capita GDP. However, the difference between those two growth rates will be smaller than its average of recent decades, CBO projects.\” Here are the estimates from the CBO projecting continued rapid growth in federal spending on health care programs as a share of GDP.

In short, the Patient Protection and Affordable Care Act is going to be only a partial success in expanding health insurance coverage and in constraining the rise in health care costs. As this reality becomes clear, the fallback case for supporting the legislation, and the disruption and uncertainty that it is creating, is that something needed to be done, the law was at least a partial step in the right direction, and because of political opposition from the Republicans, this plan was the only one on offer. This defense seems to me disingenuous. Yes, something needed to be done. But the Affordable Care Act was not the only health care proposal floating about. Indeed, President George W. Bush proposed a far-reaching health care reform in his State of the Union address back in 2007, and the Democrats who controlled Congress at that time were emphatically not willing to accept the argument that something needed to be done and it was at least a partial step in the right direction.


One main aspect of Bush\’s plan was based on the idea that instead of having some people get health insurance tax-free, through their employer, while others need to buy insurance out of pocket, everyone who purchased health insurance would get the same standard deduction. As the plan was explained:

• Families With Health Insurance Will Not Pay Income Or Payroll Taxes On The First $15,000 In Compensation And Singles Will Not Pay Income Or Payroll Taxes On The First $7,500. 

• At the same time, health insurance would be considered taxable income.  This is a change for those who now have health insurance through their jobs.

• The President\’s proposal will result in lower taxes for about 80 percent of employer-provided policies.

• Those with more generous policies (20 percent) will have the option to adjust their compensation to have lower premiums and higher wages to offset the tax change.

The notion of Bush\’s was that treating health insurance as taxable income, while providing a limited the deduction, would tend to put downward pressure on more expensive \”Cadillac\” insurance plans. It would also mean that those who get insurance through an employer would not be favored over those who need to buy their own insurance. In addition, Bush\’s plan included a planned reallocation of federal income to states, so that states could subsidize health insurance for those with low incomes. At least by some admittedly partisan estimates, Bush\’s plan could have outperformed what the Affordable Care Act is likely to achieve in terms of reducing the number of uninsured and slowing the growth of health care costs. Here\’s an overview of what happened with the Bush proposal, which garnered supportive comments from some unexpected places like the Urban Institute and the Washington Post editorial board, but was pronounced \”dead on arrival\” by Congressional Democrats.

My point isn\’t to carry water for the Bush plan, which had its own set of issues, and probably would have had even more issues if it has been masticated by Congress. My point is that political obstruction on health care policy is a bipartisan habit. But for better or worse, America\’s efforts to reform its health reform system are in fact beginning with the Patient Protection and Affordable Care Act. Additional health care legislation is virtually certain to be needed; indeed, the air is already thick with waivers and missed and postponed timelines. My hope is that at least some supporters of the bill can admit that parts of it badly need changing or even expunging, and at least some opponents can admit that parts of it are worth keeping.

I sometimes struggle when teaching about unemployment to explain just why work matters. It\’s straightforward enough in  class about economics to note that elevated unemployment leads to loss of economic output, lower tax payments, and greater need for government welfare benefits. I can refer to evidence on  how unemployment is connected to social ills like bankruptcy, divorce, depression, and even suicide. But this listing of consequences, while a necessary part of teaching the economics of unemployment, doesn\’t touch the human heart of the issue. The poet Marge Piercy, in her 1973 poem \”To be of use,\” gives a more concise and powerful sense of why useful work matters so much.

Each September, the U.S. Census Bureau releases its annual estimates of the U.S. poverty rate, and even when the news isn\’t worse, it\’s hasn\’t been good for a long time. The essential problem, as shown in the figure below, is not so much that the poverty rate bumped up during the Great Recession, bur rather that the official poverty rates has been stuck at about the same level of about 13-15% since the early 1980s.

This pattern would seem to require endorsing some combination of the following dispiriting views: either government anti-poverty policies are ineffective in reducing poverty, or any effectiveness of anti-poverty programs in reducing poverty is being counterbalanced by other economic or demographic factors that are creating an offsetting rise in poverty.

However, in a paper published in the Fall 2012 issue of the Brookings Papers on Economic Activity, Bruce D. Meyer and James X. Sullivan present some alternative interpretations and more cheerful conclusions in \”Winning the War: Poverty from the Great  Society to the Great Recession.\” They conclude: \”Despite repeated claims of a failed war on poverty, our results show that  the combination of targeted economic policies and policies that support  growth has had a significant impact on poverty. … Noticeable improvements have been made in the last decade; although not as big as the improvements in some earlier decades, they are comparable to or better than the progress made in the 1980s. We may not yet have won the war on poverty, but we are certainly winning.\”

To understand how Meyer and Sullivan get from a flat-looking official poverty rate to an optimistic conclusion, you need to understand how the official poverty rate is measured. There is an official poverty level of income, which is adjusted for the number of people in a household, and anyone who lives in a household with less income is officially in poverty. The Census Bureau Report explains: \”The official poverty definition uses money income before taxes and tax credits and excludes capital gains and noncash benefits (such as Supplemental Nutrition Assistance Program benefits and housing assistance). The thresholds
do not vary geographically. … The official poverty thresholds are updated annually for inflation using
the Consumer Price Index (CPI-U).\”

Meyer and Sullivan offer a number of different ways of adjusting these official poverty measures. For example, many low-income people receive support through the Earned Income Tax Credit, which isn\’t counted in the official poverty line, as well as getting support from food stamps, Medicaid, and other programs. Economists have also long argued that the Consumer Price Index overstates the true rise in the standard of living (for example, by not adequately taking new goods and inventions into account), and so by increasing the poverty line each year using the CPI inflation rate, the poverty line actually is creeping a little higher in terms of actual standard of living each year. This effect is quite small in any single year, but over the last half-century, it adds up.

Here\’s one of their illustrative calculations. The official poverty line is in blue. They then calculated income in a way that included taxes and the value of noncash benefits. They set up the calculation so that the two measures would have the same poverty rate in 1980, and then adjusted the poverty rate over time using the inflation rate. But when after-tax income is used in the calculation, the poverty rate falls more sharply over time, including during the last 30 years.

But perhaps their most striking result uses data on consumption, rather than data on income, to calculate the change in poverty rates over time. Consumption data comes from a different national survey than does income data (the Current Expenditure Survey rather than the Current Population Survey). Meyer and Sullivan point out that at the bottom of the income distribution, the answers about income on the Current Population Survey clearly understate the amount of income received. For example, only about half of welfare payments seem to be reported in the Current Population Survey. The proportion of economic activity that goes unreported to the tax authorities–and to the government survey–is probably higher at the bottom of the income distribution, too. In addition, when we talk about poverty what we are really worried about is more accurately captured by consumption rather than by income.

Meyer and Sullivan used consumption data, and again they set up the calculation  so that the poverty rate for consumption data is the same as the poverty rate for income data as of 1980. Again, the blue line shows trhe official poverty rate. The red line shows the poverty rate with a broader definition of income, adjusted for after-tax income. The green line shows the change in the poverty rate if consumption is used to measure poverty. By this measure, the poverty rate almost reaches zero percent in 2007, before the Great Recession.

Thus, they write: \”The results in this paper contradict the claim that poverty has shown little  improvement over time and that antipoverty efforts have been ineffective.  We show that moving from traditional income-based measures of poverty to  a consumption-based measure, which is arguably superior on both theoretical and practical grounds—and, crucially, accounting for bias in the cost-of-living adjustment—leads to the conclusion that the poverty rate declined by 26.4 percentage points between 1960 and 2010, with 8.5 percentage points  of that decline occurring since 1980.\”

Just to be clear, the notion that the consumption-based poverty rate nearly reached zero percent does not mean that the war on poverty is won. After all, the poverty rate was originally set back in the early 1960s, and although the poverty line has been adjusted upward by the rate of inflation over time, it has not been adjusted for the amount of economic growth that has occurred. All poverty lines are set in the context of the society\’s overall level of income: thus, a very low-income country the poverty rate per person might be set at $1.25/day or $2/day, while in the United States, the  poverty rate for a family of 3 is around $16-$17 per person per day. One can argue that because the U.S. economy has grown dramatically in the half-century since the poverty level was set, the poverty line should be higher. But still, it\’s worth knowing that the U.S. has made progress in terms of the existing poverty line–when using more appropriate standards of well-being like consumption or broader definitions of income,