Another Look at Inequality: The Real Problem is Stagnant Wages

Thanks to my father and buddy Dan for pointing out some errors in my Wednesday analysis on inequality. Looking back I think the overall point stands, many/most people without a college degree have not seen wage increases for the last 25 years. I also agree with Dan’s assertion that we should care more about stagnant wages than inequality. So how do we address stagnant wages? That’s tough!

I think the wrong way is the current finger pointing of Barak Obama and Hillary Clinton to Nafta as the cause of stagnant wages. Looks like Greg Mankiw was right and the democrats are going too far left, perhaps now with the audacity of fear.


I think Glenn Hubbard had it right on Market Place last night, he says:

“We should make funds available to workers whose job loss is likely to be long lasting for whatever reason. Placed in a Personal Reemployment Account, such funds could be used for individualized training and income support, letting individuals keep the balance if they find a new job quickly gives a reemployment bonus.
We should also pursue tax reforms that would give all workers access to affordable health insurance that's portable. And, of course, we should redouble our efforts to ensure that all workers have the education and skills to compete in a global economy.”

To address some of Dan's points in his comments. The chart comes from a paper by Frank Levy linked here.

The figure includes health insurance, not sure about EITC and informal economy. But hours worked have not been going down so it is not a trade off for leisure. I'm not sure about specified skills, but that is a good point.

Now is it 70% of the population (or at least working age population). Another figure shows basically the same result for women's wages. But what about people with some college? It appears that women with some college have seen income growth, but not men. From the Economic Policy Institute


"The average hourly wage for men with "some college" education was no higher in 2005 than in 1973. Women's wages in this group rose only 20%, despite a 75% growth in national productivity. Wages for both men and women with "some college" have been stagnant since 2000."

So it may not be 70%, but the data suggests wages have been stagnant for a large part of the population. I do not think that is good. I’m not sure which programs are the right answer, but I think a few might exist. I think Hubbard’s proposal should be examined as a good first step.


On a perhaps less serious note, but why inequality might be important: over at Marginal Revolution there is a link on chimps and their response to inequality.

Wanna Bet! Intrade

Occasionally readers send me subjects to blog about. So for Emily in Minnesota here is a post on Intrade. Intrade is a betting website. Basically you sell someone the right to ten dollars if they are correct. Most of the predictions/bets involve politics. But you can bet on where the next Olympic Games will be, if the US will go to war with North Korea, or if Bird Flu will be discovered.

So for example right now people are paying around $8.25 to win $10 if Obama is the democratic nominee. In the last week that price has gone up from $7.90. The online magazine Slate tracks the price for political candidates. What does this information tell us, well this week people think Obama as an 82.5% chance at winning the nomination up from 79% last week.


So the next question is does this tell us anything meaningful? I think the answer is sort of. The idea of this type of markets is that of Malcom Gladwell’s Blink. That large groups of people with a limited amount of information are pretty decent and a lot of times better than experts at predicting outcomes.

The problem with Intrade as Tyler Cowen at Marginal Revolution are two fold. First, the market is not big enough. By my rough estimate the size of the total shares sold is a few million dollars. As this article in the New York times suggests there sometimes is money to be made betting against unlikely candidates like Ron Paul and Al Gore. Second, you have to keep your money sitting interest free in Intrade accounts so you would lose any interest you would gain from now until the nomination or election.

But, the market seems to be popular with Economist as Greg Mankiw another economist/blogger has cited Intrade in the past.


You want a hot tip, I think good bets right now our McCain at 33% to win the presidency. Really I think democrat or republican is closer to 50/50. And bet against S&P 500 to close above 1750, because if that happens I’ll be hedged with my investments.

But if I knew I was right wouldn’t I bet on it?

US inequality

I was lecturing about inequality in my development economics class yesterday. But it is also worth thinking about changes in inequality in the United States. Over at Dani Rodrik’s blog he uses data from Frank Levy to create the graph that goes along with this post.

What does the graph tell us? If you do not have a high school degree you earn less in real terms then you did 25 years ago (high school wages are the blue line). If you have a college degree you earn about 20% (pink line) more and 50% more if you have a graduate degree (green line) than 25 years ago. This also shows the gap between college educated and non-college educated is growing.

Given this data what would be good policy responses for those with no college degree? Getting more people to go to college would seem to be a good policy solution. This is happening as college attendance is increasing: 30% of adults aged 25-39 had completed college in 2007 compared to 22% in 1980.

Still this means that 70% of the country that did not go to college* has not seen an increase in wages from the economic growth of the last 25 years.


* See my father's note in the comments, Rodrik does not include some college, so my 70% figure is not quite right.

No Two Buck Chuck: Screwy Maryland Alcohol Sale Laws

I was reminded of a Maryland law the other day that grocery stores cannot sell beer or wine except those grandfathered in. This means Trader Joes cannot sell two buck chuck and that I have to go to another store to purchase beer. I guess the side benefit is that there are lots of mom and pop corner stores that sell beer and wine. Some of these places are interesting like the one a few blocks away with Ethiopian dry goods, although the one on my block is basically a glorified keno (video bingo) parlor at least it has Sam Adams.

If you want to buy hard alcohol you have to go to the state liquor store that also sells beer and wine. Only as a local Silver Spring blog points out, you cannot buy a bottle opener, mixers, or cork screws. Currently, a law is being proposed which would allow those items, but to make the local mom and pop lobby happy state liquor stores would have to stop selling pretzels and soft drinks.

As someone who hates to go to multiple stores and likes cold beer and pretzels I oppose this bill. As an economist I would like to see more on if the banning of super markets from selling liquor actually has a positive impact.

Nudge! Nudge! How to Get Americans to Save.

In the New Yorker there is a good article this week on behavioral economics one of economic's newest fields. What makes the field different is it basically assumes people are irrational. For example even though people say and know they do not save enough in their 401k they don’t change their savings rate, because they keep meaning to go to their benefits office, but do not get around to it. One way to fix this problem is to automatically enroll people in a 401k and have their default option be targeted retirement date index funds. If someone wants to change then they go down to the benefits office and opt out. That might just be the nudge they need.

The Federal Government seems to have figured this outt as my wife’s retirement savings provider said the new default option will be target date retirement funds as opposed to a money market.

Austria has taken this nudge in another direction. Now everyone is assumed to be an organ donor until they state otherwise, greatly increasing the amount of donations.

Savings Spree!

I know spending sprees are more fun than savings sprees, but we need to think about some simple economic principles. Any model of economic growth suggests that long term growth is determined by investment. Simply put to make more stuff in the future we need more education and machines, which we get through investment. We cannot invest money if we use it instead for consumption. I have been thinking about this a lot in terms of the proposed fiscal stimulus, which would send everyone a check. My father, also an economist, provides his own take on the stimulus checks [link]. He concludes his article by saying

“The economic slowdown is a more immediate, transitory and solvable problem with the proper medicine having been administered. The longer-run problems await a real response.”

It is unclear if the stimulus is the proper medicine or if we’ll be over the short term dip before the check gets in our pockets. One long run problem is that Americans do not invest enough. The US’s investment rate is 15.6% (CIA FACTBOOK) ranking it 135 out of 148 countries with data. 134th Guatemala and 136th is the Philippines.

Perhaps a graph would also demonstrate the problem. The US is the red dot on the graph of investment as percentage of GDP and GDP per capita (PPP adjusted). The US is below most of Europe with 10 being about where Easter Europe and low GDP Western Europe GDP PPP (ln) fall.

So as the New York Times suggests, perhaps it is time to go on savings spree.


*** I wish I could make the graph bigger, but if you click on it you can look at it closer. I left out a few countries, but it is 110 minus a few where the formatting messed up my conversion.

How much for your Kidney?

Last night and this afternoon I will be lecturing about price ceilings and floors. There is the classic example of the minimum wage for price floors. Rent controlled apartments is the classic example for price ceilings, but my students did not seem to be familiar with rent control. So a new classic example for price ceilings: organ donation.

Right now the price ceiling is zero, you cannot sell your organs but you can give them away. As of 8am this morning there were 98,049 people waiting for a kidney, so there is a shortage of kidneys.
It is not just economist who are advocating kidney sales, but also physicians [link].
As one surgeon put it

"There's one clear argument for sales," Dr. Matas told a gathering of surgeons earlier this year. The practice, currently illegal in the U.S., "would increase the supply of kidneys, save lives and improve the quality of life for those with end-stage renal disease."

Dr. Matas and others will be speaking at the Cato Institute at noon today on this very subject [link].

There may be other unintended consequences of selling kidneys that should be considered, but the standard economic theory holds price ceilings can create shortages.

HD DVD and Economic Development

Those of you who follow the electronics industry probably already know that HD DVD lost the format war to Sony’s blue ray disk. Like the classic VHS vs. Beta battle having one standard format was the likely outcome. This makes it easier for movie studios to put a movie on high def. DVD, since they only have to choose one format, it means video stores and Netflix only have to carry one format, and you only need one player.

This format battle is nicely juxtaposed with a recent article in the Economist on technology adoption in the developing world. Like the new DVD players a new technology in a developing country needs to reach a critical mass, before it becomes widespread. Think about a telephone, it is only useful if others have one two. One reason developing countries have a difficult time implementing technology is that many people can’t afford the initial cost of a telephone, TV, electricity, or internet. Perhaps the most telling quote from the article is that

The World Bank's researchers looked at 28 examples of new technologies that achieved a market penetration of at least 5% in the developed world, and found that 23 of them went on to manage a penetration of over 50%. Once early adopters latch onto something new and useful, in other words, the rest of the population can quickly follow. The researchers then considered 67 new technologies that had achieved a 5% penetration in the developing world, and found that only six of them went on to reach 50%. That suggests that although new technologies are often adopted by a small minority of people in poor countries, they then fail to achieve widespread diffusion, so their benefits do not become more generally available.

As the article concludes the study shows yet again to go high tech (internet and computers) you need low tech (running water and roads) so that people can afford and support the technology.

Brewer and Patriot: Sam Adams saves the hops crises

With a current shortage of hops, beer prices are likely to rise! But Sam Adams (the brewery) has come to the rescue. On their website they are offering craft brewers the option to purchase below cost hops. Why would Sam Adams do this? Perhaps it is because the company feels a need to help the rest of the brewers in the industry.

Perhaps though if people enjoy craft beer, they will purchase more Sam Adams. This may be the opposite of the Starbucks effect, where Starbucks promote coffee drinking at local coffee shops by increasing the demand for coffee through advertising in a local market (see a recent slate article).

Lets all raise a Sam Adams to Jim Koch, brewer and beer patriot.

h/t to Yumsugar

Obama believes that trade with foreign nations should strengthen the American economy

I e-mailed Greg Mankiw the other day in response to his blog post about Obama's anti-trade stance. He was kind enough to e-mail me back. I agree in some sense with Dr. Mankiw response that in some cases it is hard to tell if Obama is listening to his advisors to playing or to the farther left wing part of the Democratic party.

I wish Dr. Mankiw would post a more balanced discription of Obama's stance on free trade, instead of posting only his possibly anti-trade quotes. As I said in my last post I think Obama is really not that far off main stream economist beliefs. Below is text from Obama's campaign website on his belief in trade.

But first a quote from nobel Prize winner Joeseph Stiglitz from his book Globalization and its Discontents “No one said there wouldn’t be losers, but the assumption was that there would be enough winners to compensate the losers,” Stiglitz said. But this has not happened, he added. “If we are to make globalization work, we have to recognize that there are losers and that we have to design policies that respond to this.”

Obama seems to propose ways to compensate the losers of free trade.

Obama's trade platform

Trade

Obama believes that trade with foreign nations should strengthen the American economy and create more American jobs. He will stand firm against agreements that undermine our economic security.

Fight for Fair Trade: Obama will fight for a trade policy that opens up foreign markets to support good American jobs. He will use trade agreements to spread good labor and environmental standards around the world and stand firm against agreements like the Central American Free Trade Agreement that fail to live up to those important benchmarks. Obama will also pressure the World Trade Organization to enforce trade agreements and stop countries from continuing unfair government subsidies to foreign exporters and nontariff barriers on U.S. exports.

Amend the North American Free Trade Agreement: Obama believes that NAFTA and its potential were oversold to the American people. Obama will work with the leaders of Canada and Mexico to fix NAFTA so that it works for American workers.
Improve Transition Assistance: To help all workers adapt to a rapidly changing economy, Obama would update the existing system of Trade Adjustment Assistance by extending it to service industries, creating flexible education accounts to help workers retrain, and providing retraining assistance for workers in sectors of the economy vulnerable to dislocation before they lose their jobs.

The Economics of Bumping (Plane Tickets)

Sometimes planes are over sold. Like my flight tonight to Madison. I was offered a free round trip plane ticket anywhere in the US if I gave up my seat and would come tomorrow morning. In the past I was always ready to jump on these kinds of deals, but I had an 8am meeting in Madison. But there was a bus that left for Madison and would get me in at midnight or one am instead of 11:00 on the plane. So I opted for the free ticket. But as I was getting the ticket another woman asked if I was going to Madison, she offered me a ride. Pulled into my friend's place at 11:30 pm about the same time I would have had I kept my seat on the plane.

Now I offer you this quick thought before I go to bed. You take the free plane ticket if the opportunity cost is low or someone can drive you to Madison just as quick. In this case I bet I got to the house quicker, so there is such a thing as a free plane ticket.*

*(except for all the time I will waste waiting for that flight to leave)

Obama and Free Trade

I never posted a review of my trip to the Obama rally on Tuesday. I have to say that while I thought his speech was very good, I did not think it was great. Although it is still pretty impressive he can fill a college basketball arena.
I was listening to his speech with careful attention to his economic policies. Not that he was going to reveal anything strongly. I do recall him specifically saying he supported lower trade barriers. He similarly on his website says

“In the end, I believe that expanding trade and breaking down barriers between countries is good for our economy and for our security, for American consumers and American workers.” – Barak Obama

Greg Mankiw today questions Obama’s support of free trade. Mankiw sites text from a recent Obama speech that sounds more anti-free trade, with rhetoric of supporting renegotiating labor standards for NAFTA. Mankiw then contrasts that speech with Larry Summers who typical of most economists is pro-free trade.

As Mankiw suggests like most economists I agree with Larry Summers, but many economists including Mankiw’s colleague Dani Rodrick might not disagree with Obama. When discussing issues of labor and environmental standards in free trade agreement Rodrik says “These are all difficult questions, without clear-cut answers.” (pg 21).

Given that it is not so simple I think Obama might not be that far off the right path. There are not easy answers or us economists would be out of job.

Bienvenido Presidente Calderon! and Return Migration

Mexican President Felipe Calderon is currently on a visit to the United States. Cleary one of the big issues for his visit is immigration. Like President Calderon many Mexican immigrants both legal and illegal stay here temporarily. In fact before increased border protection nearly half of Mexican migrants returned to their home country in less than a year.
When President Calderon returns back to Mexico next week he will (likely) still have the same job. However, after staying months in the US as temporary workers will typical Mexican migrants who return have the same job or one just as good when? Does migration hurt a worker's ability to find jobs since they are not in contact with other people or could they learn new skills in the United States?

{SHAMELESS SELF PROMOTION ALERT}

Well in a recent paper I co-authored with Robert Gitter, my father, and Douglas Southgate. “The Impact of Return Migration in Mexico” published in this month’s Estudios Economicos the economic journal of the Colegio de México. We find that working age male return migrants, those who left Mexico and came back, had similar employment rates and incomes to those who never left. More simply those who left and came back did about as well in terms of jobs as those who never left.

If you would like to read the article here is the link.

Oh and welcome to America Senor Presidente!

Bravo Grinnell!

It sure has been a good week for my alma mater, Grinnell College. First, 1960 alum Herbie Hancock wins the Grammy for album of the year. Then College President Russell Osgood announces that financial aid will be increased by 4.5 million dollars. This is exactly the kind of move I wanted Grinnell to make. Some highlights of the announcement.

The complete restructuring of financial aid packaging, some of which was adopted last year and the year before, includes:
• Capping need-based loans at $2,000 per year
• Significantly increasing funding to reduce loans at graduation
• Omitting any student's required financial contribution for one summer if he or she engages in a socially worthwhile or educationally relevant activity
• A more generous definition of demonstrated need
• Improving aid for international students
• Increasing expense allowances
• Indexing merit aid awards by the percentage of comprehensive fee increases while enrolled

BRAVO!

An Economist's Take on the Potomac Primary

After leaving Iowa in 2002, I thought my potential impact on primaries was over. Then when I was in Wisconsin, Kerry dealt Dean the knock out blow in 2004. Now the primaries have come to the Potomac. While, my vote might not have the impact of the average Grinnell College student. I still like giving who I’m going to vote for some thought. I have a tough time voting for John McCain who seems to still believe in the Laffer Curve “Tax cuts, starting with Kennedy, as we all know, increase revenues.” via Greg Mankiw, Havard Economist and former Romney advisor. Also Greg Mankiw gave Obama a gold star for his answer on cap in trade in a debate

So for this economist it comes down to Obama and Clinton. However, deciding on economic belief it is hard to support one over the other. As Brad DeLong put it when comparing the two “But what policy differences there are are insufficient to push anybody toward one rather than the other.” DeLong wound up voting for Obama based on his speaking abilities.

Perhaps deciding on the relative Economic policies of Obama and Clinton is not the right way to go. As Robert Frank, Cornell Economist, put it this way“some economists seem similarly baffled by the exuberance inspired by the Obama candidacy. But while homo economicus may be unresponsive to calls for sacrifice for the common good, the plain fact is that many people find such calls compelling.”

I'm just about ready to declare myself an Economsit for Obama (which has its own blog). I'm going to go to the Obama rally at University of Maryland to see if I agree with DeLong and Frank.
-------------------------------------------------------------------------------
note political opinions are those of solely of Seth Gitter. This entry used no State of Maryland resources.

Mac & Cheese

I was teaching basic Supply and Demand curves yesterday. One thing this basic lesson would teach us for something to be bought and sold their must be someone willing to purchase a product. You have to wonder who are these people that want Budweiser and Clamato or Bacom Flavored Mints (notice the mints are on stupid.com). I guess a meal of those could only be wiped away with a life sized toothbrush.

Another thing I taught about what changes (or shifts) the relationship between how much people are willing to purchase at a given price. One thing clearly is income, at least that is what the government is hoping with the stimulus package. However, some things you buy more of when you have less income (these are called inferior goods) think Ramen Noodles, Mac & Cheese or other cheap foods. My students suggested 1 ply toilet paper is also a product like this. The Freakonomics blog pointed to a news story that sales of Kraft Mac & Cheese are way up. If Mac and Cheese is an inferior good could it be sign of a recession as their link title suggests? However as a commenter named Jesse pointed out most of the sales spike is due to easy Mac (the new microwavable version), I like his/her final thought on Easy Mac.

“They buy Easy Mac because they’re busy, lazy, or more likely, so their kids can feed themselves.”

So perhaps Easy Mac is a good where as income goes up and we have higher costs of cooking time, we purchase more.

One final claim from the mac and cheese article “one-third of the U.S. population and half of the country's children will feast on macaroni and cheese at some point during the next two weeks.”

So that’s your Friday random thought. Have a good weekend!

Password Protection and Economics:

On a recent blog post Tim Harford’s, The Undercover Economist, answers a reader’s question:

Dear Economist,
I use the same password for all my e-mail and internet-portal accounts (online shopping, etc). Now I am worried about losing it to an identity thief. What should I do?
Confused Kid

Hardford gives some good suggestions for password creation (acronyms, song lyrics), but warns against writing passwords down. I think you can write your passwords down, you just need to put them in a code you understand. So for example if your password is (jenny8675309) on a piece of paper you put in your wallet write

369jenny86743097272

What the heck does this mean? It’s a password but jammed between a phone number that I know well (Papa John’s in the town I grew up in). Given the chances that someone finds this card in my wallet and can decipher it is really low, but now I can easily pull out the password.

Back to the economics of passwords. As passwords become more and more complicated, people are more likely to forget their password and need a reminder. They then have to call someone to reset their password, but that costs the company money. So instead they have invented security questions to recover passwords “What City did You Honey Moon in?” and “What is the name of your favorite pet”, with enough googleing these answers might be on the web. Josh Levin at Slate has an excellent article on the problems with these security questions.

Happy Birthday Marie!

So today is my wife’s birthday. I thought I would give her a blog entry today (yes I got her something else). So I thought I would share some economic lessons from people who were also born today.

Babe Ruth was once asked why he got paid more than President Hoover, Ruth replied “I had a better year than the president.” Well the President is still my wife’s boss, but I bet I know who had the better year. For what it is worth Hoover was paid more than Bush, adjusted for inflation (see the bottom of the link).

Axl Rose, lead singer of Guns and Roses, also shares a birthday. The opening lines of Welcome to the Jungle suggest that the market can provide “Whatever you may need” of course “If you got money honey.” Axl and his band mates claim “We got your disease”. In other words the market can provide the needs of consumers.


A few more quick ones:
Aaron Burr: duels can decrease your utility
Bob Marley: Those who are treated unequally should band together to get up and stand up for their rights.
Ronald Reagan: Jelly beans do not have decreasing marginal utility and when it is Bed Time for Bonzos it is best to put your monkey to bed.
Happy birthday!

I'm listening if you are paying.

Yesterday on Marginal Revolutions feature “Markets in Everything” there is a link to a new website called NotchUp. The website pays people to interview for jobs. There is some sound economic theory behind, but is it search costs or imperfect information.

Let’s start with search costs. In simple job search economic models a person decides to look for a new job based on the potential other jobs out there that might be better than their own. But they also have to factor in the opportunity cost of their time searching. Interviews take time and time is money so pay people and they interview more. Notchup suggests this helps set up interviews more quickly making up for lost revenue of not having an employee. By using Notchup, companies avoid the cost of a recruiter, which they claim is typically 20% of a jobs salary.

So what is to stop someone from trying to take as many interviews as possible and never accept a job? Can Notchup prevent this problem of imperfect information, where the candidate know if they are serious and the interviewer does not? Notchup will try to do this with a similar function to Ebay where the interviewer and interviewee rate each other. You can also see how many interviews a person has taken. Interviewees are not paid if the company thinks they do not take them interview seriously (although there needs to be checks they don’t claim all failed interviewer were with non-serious candidates).

My guess is this will work best for executives or IT jobs, given their larger salaries and greater movement between positions.

I also wonder if the interviews are phone or in person. But after arranging visits for job candidates visiting Towson, I’m not sure you could pay me enough to do another interview.

Paper or Plastic: Changing the Incentives

I have a confession to make, I have probably about 100 plastic grocery bags in my pantry closet. They are handy for small trash bins or carrying lunches, but I still have way too many. I do own enough tote bags to bring to the grocery store to carry stuff home. But I don’t bring them because of a combination of forgetting and it seems like it would be harder to carry the two blocks home (I walk to the grocery store). But honestly I have not tried using my totes. Perhaps this sheds new light on some attempts to regulate plastic bag usage through bans or taxes. For example, the New York Times article highlights Ireland's new 33 cent tax on plastic bags. Perhaps using cloth bags would not be that bad and I just have not tried it. Another twist on the tax is it seems to have changed perceptions about plastic bags

“[after the tax] Within weeks, plastic bag use dropped 94 percent. Within a year, nearly everyone had bought reusable cloth bags, keeping them in offices and in the backs of cars. Plastic bags were not outlawed, but carrying them became socially unacceptable — on a par with wearing a fur coat or not cleaning up after one’s dog.”

I just hope no one is cleaning up after their dog with reusable cloth bags.

Friday Roundup: Stickk, Grinnell, and Credit Card Denial

Sorry for the lack of a posting yesterday. I thought I would do a Friday round up of some updates to previous stories.

The website Stickk.com is now functional (see previous post). The premise of the website is you put up some amount of money, which you lose if you do not complete your goal (losing weight, quit smoking, or grow a pony tail) So perhaps to make sure I do not miss another day of posting I should take a contract out on myself to post on my blog.

I have also been writing a lot about Grinnell College's endowment. This has lead to being interviewed by the Des Moines Register and a nice e-mail from Mickey Munley, Grinnell’s VP of College and Alumni Relations. Mickey Munley wanted me and my blog readers to know that Grinnell and other Posse host institution fund the full tuition scholarship for the Posse Program. Currently, Grinnell hosts about 80 Posse students from two different cities. I applaud Grinnell’s efforts and will try to applaud them more with my check book.

Finally, I have been trying to think of ways I can tie this blog into the personal finance blogosphere. Its hard linking personal finance decisions and economics, because people make personal finance decisions with incomplete information and sometimes non-rationally. This was driven home, when I read a recent article in Salon about a woman who did not even know what her credit card debt was until her card was maxed out. Her story is all too common, how do we as economist take that into account is a difficult question.