Is the Economy Great or Terrible, and Who Did It?

Is the Economy Great or Terrible, and Who Did It?

Is the Economy Great or Terrible, and Who Did It?

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Alan Murray
10:14 a.m.  Thursday  9/12/96 

       Moderator Stein's summary of the discussion so far is such a model of clarity and fairness that I can see why SLATE chose him for his role. However, Stein's article on inequality, which appeared in the Wall Street Journal on May 1, 1996, seems designed more to muddle than to clarify the inequality debate.
       Is there greater inequality of income and living standards today among significant sectors of the population than there was two decades ago? My reading of both the statistical and anecdotal evidence leads me to believe the answer is yes, although I haven't parsed the numbers as many ways as Mr. Stein would like.
       Does it matter? Again, I think, yes. Mr. Stein suggests the inequality problem is an aesthetic one; some people find it "unlovely." I contend that a great many people find it unlovely, and therein lies the problem.
       One theory I find intriguing argues that this is the result of a more "efficient" labor market. It may be that two decades ago, for social and institutional reasons, American auto workers were paid more than their global market value, while good chief executives were paid less. Today, the markets for both auto workers and CEOs operate more efficiently, causing auto workers to be paid less and good CEOs to be paid more. Hence, more inequality. (One problem with this argument is that BAD CEOs also seem to be making much more money today, but we'll let that pass for now.) Similarly, the rise in self employment may mean that far more workers today receive compensation that is directly tied to their actual output than it was in the past, and therefore more unequal.
       Underlying this theory, of course, is the notion that people and their skills and talents are inherently unequal, and that in the past, social and economic institutions served to moderate this inherent inequality. But over time, the competitive pressures of a global labor market have required that people be paid something closer to their market value.
       Is this theory valid? That's for the economists to figure out. The fun of being a journalist is you get to ask more questions than you answer.

Peter Passell
10:34 a.m.  Thursday  9/12/96 

       A few things I expect we all agree about. The top fifth of the income pecking order--those with marketable skills, investment portfolios and substantial equity in houses--have done very well since the mid-1970s. The bottom four-fifths have made modest or no gains, widening standard measures of income inequality. The elderly have done far better than the young. There is some mobility between income classes, but not nearly enough to give the vast majority a realistic hope of joining the elite.
       On the other hand, gaps in consumption have not widened as much as gaps in income. Indeed, properly accounting for biases in the consumer price index and consumption of services provided directly by government, it is likely that virtually everyone's level of material consumption is higher.
       No one has pinned down the causes of the drift toward inequality with any precision. The prime candidates in descending order of importance:
       (a) technological change that has increased the demand for skilled workers far more rapidly than the demand for unskilled (b) changes in wage setting practices, notably de-unionization, that have increased inequality within skill groups--everyone from lawyers to carpenters (c) more international trade, which allowed the substitution of foreign goods made with unskilled labor for domestic goods made with unskilled labor (d) immigration of unskilled labor (e) gains in profits that have outpaced gains in total income.
       Most of this is driven by market forces. Tinkering--for example, slowing globalization of manufacturing production or taxing the daylights out of corporate profits--would probably have been counterproductive from almost everyone's perspective. But Washington could have made a difference.
Some unradical possibilities:

  • Sustaining accessibility to college for the poor with generous loans.
  • Leaning against the wind by making taxes more progressive--notably by relying less on payroll taxes.
  • Subsidizing wages at the low end, through expanded tax credits.
  • Getting serious about immigration--specifically, changing to a Canadian-style policy that strongly favors immigrants with skills.
  • Socializing basic medical care with funding from general revenues.

       Clinton gets major points for expanding the earned income tax credit in 1993 and fighting the Republicans' dastardly effort to roll it back last year. And, I suppose, he should get minor points for raising the minimum wage, which probably will helps low-end workers more than it hurts them. But while he's talked the talk in other areas, he has yet to walk the walk.
       Of course he does have the all-purpose (and largely credible) excuse of having no money to play with. Such is the reality of contemporary budget politics in the world's richest nation.

Herb Stein
11:13 a.m.  Thursday  9/12/96 

       Murray & Passell raise the issue of how immigration and imports have contributed to the lag in the earnings of the least-skilled Americans. Do the other panelists think these have been significant factors? If so, does this imply the need for a different policy? (The immigration question was discussed by the "Committee of Correspondence" the week of Aug. 19.)

William Niskanen
11:59 a.m.  Thursday  9/12/96 

       Several Points about the productivity record:

  • Productivity growth has been only 0.3 percent since 1992: fourth quarter. Blinder's 0.6 percent rate is measured from the temporary low in 1993: first quarter.
  • The moving average productivity growth rate has been declining since 1964, well before the conventional focus on 1973.
  • We have not paid enough attention to the possibility that productivity is significantly underestimated (the mirror image of the overestimate of inflation). Unless this estimation bias has increased in recent years, however, we still have a declining productivity trend.
  • A reduction in the deficit due to tax increases does not increase domestic private investment and productivity. Congressional Republicans did not support Clinton on tax increases, but Clinton has provided almost no support for spending reductions.
  • By my standard, Clinton rates a D on productivity. The actual growth rate on Clinton's watch has been the lowest in many decades. And some of the measures that Clinton proposed but were not approved by a Congress controlled by his own party--such as the proposed health plan and the BTU tax--would have compounded the problems of slow productivity growth and stagnant real wages.


Alan Blinder
1:50 p.m.  Thursday  9/12/96 

       Before moving on to inequality, I'd like to make a few final remarks on growth and productivity:
       1. As I said previously and as Niskanen reminds us, upward bias in measuring inflation implies downward bias in measuring productivity. Very likely, these biases have grown larger in recent years, but no one can be precise about that.
       2. Stein is right that it is hard to quantify certain growth effects. But we should not, therefore, devolve into nihilism. For example, we can make a pretty good guess that zero is a fair estimate of the growth-effect of certain policies.
       3. One prominent exception to Stein's rule is deficit reduction. Here's my estimate: $100 billion (annual rate) of deficit reduction leads to $50-$60 billion more in private investment--+ or - $15 billion, say. With capital's share of output around 0.25, it is then a straightforward exercise to calculate the impact on labor (not total factor) productivity. Such calculations made at the CEA at the beginning of the Clinton administration led us to claim a "growth dividend" of 0.1-0.2 percent, depending on the year.
       4. Stein expresses doubt and Niskanen answers "no" to the question of whether tax-financed deficit reduction would boost private investment. My answer is: almost certainly yes. The qualifier is to indicate that particularly foolish ways of raising taxes could deter investment.
       Regarding inequality, my own view is that it is a terribly serious social and economic problem--much more than being "unlovely." But I admit that this view derives from ethical judgments that others may not share.
       We can/should return to this tomorrow, but my "quickie" answer to causes and remedies is that (a) government policies were only a minor contributor to the rise in inequality; the private market did most by widening wage disparities; but (b) as viewed through my ethical prism, it is singularly inappropriate for the government to be shredding the social safety net just when the market economy is turning ferociously against the unskilled and uneducated.

William Niskanen
2:30 p.m.  Thursday  9/12/96 

       First, let's be clear about the facts. People who are poor now have a lower real income (at measured inflation) than people who were poor in the 1970s. How much poorer depends on whether income or consumption is the basis for comparison, which price index is used, and any bias in the price index. These comparatives static measures show a substantial increase in the variance of income since the 1970s.
       Over the same period, however, most of the people who were poor in the 1970s now have a higher income. Income mobility is much higher than suggested by Passell, as indicated by the following table:
       Editors Note: The table shows the percentage of people in each income quintile in 1975 who were in each quintile in 1991. The first quintile is the poorest, the fifth the richest. Thus only 5.1 percent of the poorest in 1975 were still in the bottom quintile in 1991, while 29 percent of them had moved to the top quintile.

Income Quintile in 1975Percent in Each Quintile in 1991
12345
15.114.621.030.329.0
24.223.520.325.226.8
33.319.328.330.119.0
41.99.318.832.637.4
50.92.810.223.662.5

       These comparative dynamic data show a substantial reduction in the variance of income (among the same people) over this same period.
       Second, it is not self evident that either or both of these conditions is a problem that merits a policy response.
       Third, my professional colleagues have very little understanding of what has caused the increase in static inequality and very little agreement on what to do about it.

  • Economists tend to attribute some condition to changes in technology (or taxes) when they don't have a good explanation. As far as I know, there is no direct evidence that recent changes in technology have measured the relative demand for skilled labor.
  • There has been no significant change in the labor compensation share of national income. The redistribution has been within the labor share, not a reduction of labor compensation relative to the income from capital.

       Fourth, if the measures necessary to reduce a condition are not themselves acceptable the condition should not be considered a problem. I would not support any of Passell's proposed measures. Clinton was correct, I suggest, to extend the EITC but not to increase the minimum wage; I fail to understand how denying our least skilled the opportunity for a legal job is in their (or our) interest.

Herb Stein
4:58 p.m.  Thursday  9/12/96 

       To return briefly to the productivity question, I can hardly believe that the difference between Blinder and Niskanen in assessing Clinton's record depends on whether one starts counting in the first quarter of 1993 or the fourth quarter of 1992. The quarterly figures are too volatile to support any such judgment. I can imagine a Clinton vs. Dole debate on whether to start counting in 1992 fourth quarter or 1993 first quarter.
       I am sorry that Murray thinks that my Wall Street Journal article on inequality was "designed to muddle." That may have been the effect, but it was not the design. The design was to show that the subject was more complicated than the ordinary reader, even of the WSJ, might think. That is easy to show about almost any subject, and I would be ashamed to engage in it except that someone has to do it and there are few volunteers besides me.
       But I think it is relevant to note that sine dimensions of inequality have diminished in the past generation--between blacks and whites, between men and women, and among sections of the country.
       Although I consider myself a "bleeding-heart conservative" I think that people like Blinder who bemoan the fraying of the safety-net)and how real that is remains to be seen) must confront the argument that the safety-net in any form we have yet been able to devise creates the conditions against which it is supposed to safeguard.
       I note that Niskanen dismisses all the measures proposed by Passell to deal with the low-income problem. I wonder whether he distances himself from the more general proposition that is the favorite of all intellectuals, especially present and past professors, that the sovereign remedy is education. It seems to me that it might be possible to accept that prescription and still not accept any of Passell's suggestions about how to inject more education into the population.
       I wonder what Niskanen thinks about the immigration question. That seems to me an especially awkward one for free-traders.
       I welcome Niskanen's observation that, "Economists tend to attribute some condition to changes in technology (or taxes) when they don't have a good explanation."I especially welcome the parenthesis.
       I will throw one wild card into the discussion. What are we to make of the high level of the stock market? Does it show a lot of confidence in the future growth of the economy?