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?

VIEW ALL ENTRIES

Peter Passell
7:07 a.m.  Friday  9/13/96 

       I find it striking how little enthusiasm anyone in the group can muster for decisive policy change. In part, I suspect, it's because times are not so bad--especially for us, the chattering classes. In part, though, it reflects the intellectual disarray in economics.
       Economists have gotten better at making the case for skepticism than the case for action. Productivity growth is way down, but it is easy to dismiss all the proposed remedies as either ineffective or counterproductive. There is greater income inequality: High school dropouts, in particular, face a dead end. Again, though, it is hard to imagine cost-effective remedies. And beside, if you really work at it a la Niskanen-Stein, you can slice the inequality problem into oblivion.
       We all apparently agree that government can have only a modest role in fixing what ails (whatever that might be). No wonder, then, that Bob Dole, long the champion of thinking person's conservative economics, has decided to plunge off the cliff in the supply-siders' bus. And no wonder that Bill Clinton has abandoned activist government in order to concentrate on his highest calling--winning elections.
       None of this makes me feel that policy-oriented economists are doing their jobs very well. On the other hand, this water glass may be half-full: Inspiration usually only comes with dire need.

William Niskanen
8:29 a.m.  Friday  9/13/96 

       Blinder acknowledges that some types of tax increases could deter investment, but he seems to analyze the effects of deficit reduction as if the composition of spending changes and tax changes is not important. My own simple studies of the effects on net domestic saving and investment of changes in total government spending and tax revenue find no significant effects of revenue changes. A commitment to deficit reduction should not blind us to the very different effects of different ways to reduce the deficit.
       Changes in the distribution of income look very different depending on the standard selected. The common focus of attention and concern has been the increased variance of income by income class. As I pointed out, however, the variance of income over time for a representative sample of people exhibits a "regression toward the mean" effect. And Stein pointed out that the difference in income by sex, race, and region has declined. All of these are facts. What is the basis for insisting that the combination of these facts is a basis for a change in policy?
       I conclude that my economist colleagues have little more to offer than a web of conjecture about what has caused the increased variance of income by income class. And I will add my own conjecture with as little supporting evidence: My sense is that the level of job skills and attitudes in the lower half of the income distribution has declined over the past few decades. This shifts the attention from the demand for skills to the supply of skills. The problem is not inadequate investment in education; real spending per student in the primary and secondary schools has increased about 40 percent per decade for a century, and there is little evidence that more money would increase the outcomes. I agree that more education would help; it is not clear that more schooling would help.
       Stein is also correct that I am uncomfortable with the trade and immigration explanations of the increased variance of income, primarily because I favor free trade and nearly open borders. Maybe a little tension will help me sort out this issue.
       I don't have a clue about how to interpret the stock market.
       I am not yet convinced that this fancy new technology facilitates communication.

Alan Blinder
1:59 p.m.  Friday  9/13/96 

       Conservatives are fond of pointing out--correctly--that income inequality over long periods of time (e.g., a decade, a lifetime) is less than income inequality over a year. It's true because of (among other things) lifecycle effects (i.e. 45-year-olds normally earn more than 25-year-olds) and the substantial year-to-year income mobility that Niskanen mentions. But the fact is that data from the past two decades or so display a clear and dramatic trend toward higher levels of annual inequality and no indication whatever of any increase in mobility that might compensate. So the ineluctable conclusion is that "lifetime" income inequality has risen. No reasonable person can dispute this.
       That leaves two critical questions, however. 1) Is this a matter of ethical concern? 2) Is there anything policy can do about it? I have already answered the first question in the affirmative, but noted that others may make different ethical judgments. As to the second, Stein seems dubious and Niskanen seems quite negative. My own answer is "yes," but it's a quiet yes rather than a resounding yes because the policy levers available have only modest and/or slow-acting effects.
       Passell's list, which Niskanen rejects, seems a good place to start. I'd emphasize education and training (both!) for the disadvantaged--and not just college education. The estimated (private) rate of return to education is probably in the 8-10 percent range in real terms, and the social rate of return is probably a bit more. That's quite a bit higher than the government's cost of funds--which suggests, yes, underspending, but certainly does not give a license to just "throw money at" the problem.
       Like Passell, but unlike current political fashion, I think we should fight vigorously against current efforts to render the tax-transfer system (we really should think of them together) less progressive than it is (which is not very progressive). The EITC is a prime example of what I mean; so is the minimum wage, although that's a regulation (the R word!) rather than a tax or transfer. Stein repeats the mantra that the welfare state encourages bad behavior. There is surely a little truth in this, but far less than is popularly believed. The empirical evidence does not support the horror stories.
       Finally, let me end the week on a possibly cheerful note. Data for 1994 (the latest year available) show a decrease in the poverty rate and a small increase in the income shares of the lowest 20 percent and 40 percent of families. In addition, data for recent months suggest some progress toward higher real wages. It's just a hint that things may be improving a little bit. Let's hope it continues.

Alan Murray
3:52 p.m.  Friday  9/13/96 

        Even though he works for the competition, I like Peter Passell's observation that "economists have gotten better at making the case for skepticism than at making the case for action." I guess that's a more articulate way of getting at what bothered me about Herb Stein's piece on inequality. The world needs skeptics; but if we all become skeptics, we are lost.
       The political world has become increasingly divided by partisanship and ideology. It would be nice if economics could do more to bridge that gulf, rather than simply provide ammunition to those in the ramparts on either side of the ravine. Economic "science" can't answer whether the government should be 21 percent of GDP or 18 percent of GDP. But it ought to be able to tell us something about the effects of large and pervasive public borrowing. It can't answer the question of whether taxpayer dollars ought to be used to send children to church-run schools. But it can offer us an understanding of how to use market forces to improve public schools. There are things we know we should do. Balancing the budget is one. Reforming our K-12 education system is another. Improving the affordability of post-secondary education is still another. How much any of these will do to raise long-term productivity is open to debate. But there's enough agreement here that we ought to plow ahead, and stop letting partisanship, cynicism and skepticism grind everything to a halt.
       The last four years have been very frustrating for any serious minded person watching policy debates in Washington. Bill Clinton took on a tough problem--health care--but he paid too much heed to his liberal advisers, refused to compromise, and then watched the whole effort go down in flames. Newt Gingrich made the most serious attempt yet to get the deficit under control, but he also overreached, refused to compromise, and crashed and burned. The nation badly needs to find some goals it can agree on, and then work together to achieve them. And if it's going to continue to claim itself a "science," economics ought to contribute to that effort.