Macro Roundup

“…If public-school teachers were truly underpaid, we might expect teachers to reap much higher salaries when they switch to nonteaching jobs. They don’t. We also might expect to see public-school teachers paid less than those in private schools. In fact, public-school teacher salaries are roughly 16% higher than in nonreligious private schools. We might expect that teachers would receive lower salaries than people whose jobs had similar skill requirements. The Bureau of Labor Statistics’ National Compensation Survey, which includes job-skill requirements, fails to show a teacher pay penalty….”

Jason Richwine and Andrew Biggs, "The ‘Underpaid Teachers’ Myth,"Wall Street Journal, May 22, 2019, https://www.wsj.com/articles/the-underpaid-teachers-myth-11558565415

The ‘Underpaid Teachers’ Myth

Are public-school teachers really underpaid? It’s a claim often made during teacher pay disputes, but the same data and statistical methods that produce the “teacher salary gap” lead to some ridiculous conclusions—such as that nurses and firefighters are dramatically overpaid, while telemarketers deserve better compensation.

Take the annual reports on public-school teacher pay produced by the Economic Policy Institute—a Washington think tank whose board includes the president of the American Federation of Teachers. The 2019 edition claims the nation’s public-school teachers were underpaid by a record 21.4% in 2018, with state-level teacher-pay penalties ranging from 0.2% in Wyoming to 32.6% in Arizona. The think tank’s figures have been mentioned hundreds of times in media coverage of disputes over teacher pay in states such as Arizona, Kentucky and Oklahoma.

To measure the teacher pay gap, EPI researchers compare teacher salaries with the salaries of people who have the same number of years of education and the same demographic characteristics. This model assumes that education is interchangeable—that a bachelor’s degree in education has the same market value as a bachelor’s in engineering, and a master’s in education is worth the same as a master’s in business administration.

In the real world, employees are paid not only for the number of years they sat in a classroom, but according to the supply of and demand for the skills they developed there—skills that obviously vary across occupations. Nursing, for example, demands both technical knowledge and enormous attention to detail, as even a momentary lapse can endanger a patient’s life. You can’t reasonably conclude that nurses are “overpaid” simply because they earn more than typical college graduates. And it’s just as illogical to assume that teachers are underpaid because they earn less—yet dozens of state and national media sources repeat the EPI figures as fact.

If you accept the Economic Policy Institute’s findings, ludicrous conclusions follow. We used the same census data and the same techniques to figure out if other professions were “overpaid” or “underpaid.” We could just as easily write papers publicizing the 25% “firefighter pay premium” or the 10% “massage therapist pay penalty” based on their methods. We could complain that aerospace engineers are overpaid by 38%, and we could demand justice for telemarketers who are shortchanged by 26%.

If public-school teachers were truly underpaid, we might expect teachers to reap much higher salaries when they switch to nonteaching jobs. They don’t. We also might expect to see public-school teachers paid less than those in private schools. In fact, public-school teacher salaries are roughly 16% higher than in nonreligious private schools. We might expect that teachers would receive lower salaries than people whose jobs had similar skill requirements. The Bureau of Labor Statistics’ National Compensation Survey, which includes job-skill requirements, fails to show a teacher pay penalty.

If any salary gap does exist, it is likely made up through teacher pensions, which are far more generous than private sector 401(k)s. The grass isn’t always greener outside the classroom.

Note Freeman wrote up the 2019 version of the paper, we initially reviewed the 2017 version. The 2019 verison is attached.

"...This column has chronicled significant flaws in the claim that recent decades have seen a massive surge in U.S. income inequality. This already shaky thesis may not survive the upcoming formal publication of a working paper by Gerald Auten of the U.S. Treasury and David Splinter of the congressional Joint Committee on Taxation. They find “there has been relatively little change since 1960” in the income share received by the top 1% of U.S. earners....."

James Freeman, "Collapse of the Inequality Argument?,"Wall Street Journal, August 28, 2019, https://www.wsj.com/articles/collapse-of-the-inequality-argument-11567024434

Collapse of the Inequality Argument?

Leftist politicians have been saying for years that a dramatic rise in wealth and income inequality is the central economic problem of our time. It remains the go-to explanation among Democratic presidential candidates for their myriad schemes to increase federal taxation. But the claim of an inequality surge is getting much harder to make. And even for those who cling to the belief that recent decades have led to record levels of inequality, they will have to explain why wages in the Trump era have lately been moving a little closer to equality.

On the latter point, the inconvenient truth for the inequality-obsessed appears in the most recent employment report from the federal Bureau of Labor Statistics. For the past year, average hourly earnings for employees on private nonfarm payrolls have increased 3.2%. But looking beyond that overall average, we see that wages for production and non-supervisory employees are rising slightly faster. In other words, workers’ wages have lately been rising faster than their bosses’ wages. Don’t expect Bernie Sanders to credit Trumponomics.

But not all Democratic presidential candidates are as ideological as Vermont’s most famous Marxist. This week former Rep. John Delaney (D., Md.) appeared with your humble correspondent on “Deep Dive” on the video streaming service Fox Nation. When asked about recent wage gains during the Trump era compared to an Obama era characterized by rising stock prices but disappointing earnings for the average worker, Mr. Delaney responded:

I think the economy up until recently has done pretty well and I’m happy about that. And I think the Obama dynamic was a little bit distorted because if you think about the situation President Obama walked into, which is the greatest economic disruption since the Great Depression, and we put a huge amount of stimulus into the economy which obviously benefited people who owned assets because that’s really what happened. So it really did create a spike in inequality but there was no other way you had to put stimulus in.

Even accounting for the Obama inequality spike, it seems the distribution of wealth and income really hasn’t changed all that much. This column has chronicled significant flaws in the claim that recent decades have seen a massive surge in U.S. income inequality. This already shaky thesis may not survive the upcoming formal publication of a working paper by Gerald Auten of the U.S. Treasury and David Splinter of the congressional Joint Committee on Taxation. They find “there has been relatively little change since 1960” in the income share received by the top 1% of U.S. earners.

After a draft of the paper was released last year, Paul Solman of the PBS NewsHour of all places wrote:

You thought income inequality was rising dramatically, right? Well, so did I. In fact, maybe you thought so in part because I and journalists like me have been reporting it as fact, for decades. But maybe we’re wrong — all of us.

Mr. Solman reported that the Auten-Splinter draft paper enjoys widespread respect in the economics profession—even if not everyone is willing to admit it. According to Mr. Solman:

One tax professor friend considered the question so politically sensitive that he asked not to be quoted by name after having put it to me this way in an email when I asked if the research held up:

“There is a widespread public perception that the distribution of income and wealth has become so much more unequal, a consensus so strong that no one is really allowed to question it in public.”

This is why my friend prefers to remain anonymous. But he is hardly alone in his opinion, if not his diffidence. As University of Michigan economics professor Jim Hines wrote, regarding his tax researcher colleagues, not only is the paper “rather famous in my world; people think it is basically right — and I might add that I think it is right.”

As for wealth inequality, economic historian Phillip Magness recently reported that based on data from the Federal Reserve, the richest 1% of Americans today own only a slightly higher percentage of the nation’s wealth than the one-percenters of the early 1960s.

Will this message penetrate the Democratic debate bubble? Mr. Delaney for his part still insists that inequality has been rising and is a serious problem. But he made clear in our discussion that he’s most concerned with allowing people in the bottom half of the income ladder to grow their wealth and incomes, which should be a priority for all lawmakers.

The truth is that at least some economic inequality is necessary for our prosperity—inventors and entrepreneurs have to know they will be rewarded for their creations. Mr. Delaney, who founded two public companies before entering politics, responded to this point by saying:

I’m a capitalist at my core. I believe the U.S. private economy has been the greatest innovation and job creation machine ever created. And we should not be throwing that out the window. But we always make capitalism more just. That’s what we do. We used to let kids work in factories and we stopped that. And a continued evolution is the way I think about it.

So far Mr. Delaney isn’t a polling success, but that doesn’t mean he isn’t influencing the Democratic presidential debate. His attacks on single-payer health care have forced even Bernie Sanders to rewrite his plan.

Perhaps Mr. Delaney can now help Democrats focus on expanding opportunities for all Americans to succeed as capitalists, rather than punishing those who do.

James Freeman, "Do the people who bought Piketty’s famous book realize how much of it has been debunked?,"Wall Street Journal, December 12, 2019, https://www.wsj.com/articles/u-s-income-more-equal-than-advertised-11544574351

U.S. Income More Equal than Advertised

Remember the 2014 bestseller “Capital in the Twenty-First Century” by French economist Thomas Piketty? Beachgoers in the Hamptons couldn’t be seen without it tucked under an arm if they wanted to be regarded as serious people concerned about the plight of the less fortunate. The dismal tale of exploding inequality and capitalist failure has been a recurring theme in political chatter ever since. But a new report highlights just how poorly Mr. Piketty’s thesis has held up under further study.

This column should note that some scholars saw problems right from the start. In a 2014 Journal op-ed, Harvard economist Martin Feldstein ticked off a series of fundamental errors, including those related to Mr. Piketty’s practice of comparing the incomes of top earners with total national income. “National income excludes the value of government transfer payments including Social Security, health benefits and food stamps that are a large and growing part of the personal incomes of low- and middle-income households,” wrote the Harvard prof.

Then Chris Giles of the UK’s Financial Times examined Mr. Piketty’s work and found that “the rock-star French economist appears to have got his sums wrong.” He added:

The data underpinning Professor Piketty’s 577-page tome, which has dominated best-seller lists in recent weeks, contain a series of errors that skew his findings... The central theme of Prof Piketty’s work is that wealth inequalities are heading back up to levels last seen before the first world war. The investigation undercuts this claim, indicating there is little evidence in Prof Piketty’s original sources to bear out the thesis that an increasing share of total wealth is held by the richest few.

Now a new report from the Urban Institute goes back further, to Mr. Piketty’s influential research with University of California, Berkeley professor Emmanuel Saez published in 2003. Stephen Rose writes:

Piketty and Saez’s findings garnered tremendous attention and were cited repeatedly. But many researchers eventually found problems with Piketty and Saez’s approach and developed income inequality measures that led to different findings.

Phil Magness of the American Institute for Economic Research writes today:

In short, the widely reported explosion of inequality in the past three decades is likely a myth, built upon outdated and flawed statistics... Whereas Piketty and Saez show a massive century-long swing of almost 20 percentage points in the income share of the top 10 percent, the adjusted figures show a much flatter curve with a little over half the variation. Inequality still falls and rises under the revised numbers, but at a comparatively subdued rate. Under the adjustments, the top 10 percent income share seldom strays more than 5 percentage points away from a century-long average of about 35 percent.

Perhaps instead of assuming that we’re in the midst of a surging inequality crisis, we should first settle more fundamental issues affecting the accuracy of our measurements over the past century.

Perhaps we should also focus on ensuring an abundance of opportunity, rather than regarding it as a problem when some people inevitably make more than others.