The Rich Get Richer and The Smart Get Smarter

James Heckman, the University of Chicago Economist, won his Nobel for his work on econometric techniques to estimate various possible influences of wages. Over the last few years he has turned his focus to explaining the difference in skills and wages based on a worker’s education. Generally, he’s finding that skill gaps that exist at ages as young as 3 years old explain most of the difference. He describes his recent work over at Voxeu

To further complicate the problem those with low skills and income are not able to provide the environment to have their 5 year olds have the same level of skills as high skill and income 5 year olds. So the skill differences remain and it is harder to catch up.

Heckman is becoming a stronger advocate for pre-kindergarten education for disadvantage children. In terms of Presidential candidates Obama starts his education platform with a discussion of Zero to 5 year olds education. McCain discusses head start a policy aimed at 3-4 year olds in his early education policy, which Heckman suggests may be too late.

Clinton and McCain are out of the Pigou Club: Cutting Gas Tax Helps Producer Profits Not Consumers!

So the latest political news is that Hilary Clinton is attacking Obama on his refusal to decrease the federal gasoline tax over the summer. John McCain has made a similar proposal (see article here).

This proposal does not make economic sense. When supply is relatively fixed like oil (i.e. inelastic) removing a tax will only increase the price received by producers instead of decrease the price for consumers. In other words, lowering taxes will not lower prices to consumers as much as it will increase profits for oil companies.

This result has been well highlighted by Greg Mankiw, Econ blogger/Text book writer/Harvard Econ Prof, through his pet cause the Pigou Club. The club is named for those who support higher gas taxes and Dr. Mankiw has even written a Pigou Club Manifesto. Why support higher taxes? Because driving creates a negative externality, you drive and it hurts me through pollution and highway congestion. A Pigovian tax is a corrective tax on negative externalities, that is charge people more to do stuff that is bad overall for society. Take a look at the list of members of the Pigou Club from Gore to Greenspan to Krugman to Arthur Laffer and this blog writer. Will Obama add his name to the list?

update: Mankiw's reaction

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.

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.

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.