Macro Roundup

John Early measure of say relized income (post taxes/post transfers) finds“…When measuring income inequality, however, the Census Bureau doesn’t reduce household income by the amount paid in taxes. Had it done so and counted all transfer payments as income, inequality from 1967 to 2017 would have increased by only 2.3% instead of the reported 21.4%. That’s a difference of almost 90%—a rather large error….”

Phil Gramm and John Early, "Incredible Shrinking Income Inequality,"Wall Street Journal, March 23, 2021, https://www.wsj.com/articles/incredible-shrinking-income-inequality-11616517284

Incredible Shrinking Income Inequality

The refrain is all too familiar: Widening income inequality is a fatal flaw in capitalism and an “existential” threat to democracy. From 1967 to 2017, income inequality in the U.S. spiked 21.4%, and everyone from U.S. senators to the pope says it’s an urgent problem. Yet the data upon which claims about income inequality are based are profoundly flawed.

We have shown on these pages that Census Bureau income data fail to count two-thirds of all government transfer payments—including Medicare, Medicaid, food stamps and some 100 other government transfer payments—as income to the recipients. Furthermore, census data fail to count taxes paid as income lost to the taxpayer. When official government data are used to correct these deficiencies—when income is defined the way people actually define it—“income inequality” is reduced dramatically.

We can now show that if you count all government transfers (minus administrative costs) as income to the recipient household, reduce household income by taxes paid, and correct for two major discontinuities in the time-series data on income inequality that were caused solely by changes in Census Bureau data-collection methods, the claim that income inequality is growing on a secular basis collapses. Not only is income inequality in America not growing, it is lower today than it was 50 years ago.

While the disparity in earned income has become more pronounced in the past 50 years, the actual inflation-adjusted income received by the bottom quintile, counting the value of all transfer payments received net of taxes paid, has risen by 300%. The top quintile has seen its after-tax income rise by only 213%. As government transfer payments to low-income households exploded, their labor-force participation collapsed and the percentage of income in the bottom quintile coming from government payments rose above 90%.

In 2017, federal, state and local governments redistributed $2.8 trillion, or 22% of the nation’s earned household income. More than two-thirds of those transfer payments went to households in the bottom two income quintiles. Remarkably the Census Bureau chooses to count only $900 billion of that $2.8 trillion as income for the recipients. Excluded from the measurement of household income is some $1.9 trillion of government transfers. These include the earned-income tax credit, whose beneficiaries get a check from the Treasury; food stamps, which let beneficiaries buy food with government issued debit cards; and numerous other programs in which government pays for the benefits directly.

Twice over the past 50 years, the Census Bureau has significantly changed how it collects and records income statistics. In 1993 and 2013 the Census Bureau changed its methods in an effort to collect better information from high-income households. These changes created two major discontinuities and distorted the time-series so that the change in measured income inequality in those years was as much as 15 times the average annual change found for the entire 50-year period. At the time, the Census Bureau explained in detail what it had done. It also explained the limitations the changes imposed on the use of its income-inequality measure to look at changes over extended periods. In subsequent use of the data by the Census Bureau and others, however, those warnings have been neglected.

The simple solution would have been to isolate the distortions caused solely by the changes in data-collection techniques and adjusted the previous years’ measures to reflect the effect of the changes. We made these adjustments and they are shown in the nearby figure. The blue line is the actual reported Census Bureau measurement of income inequality. The yellow line eliminates the effects of the 1993 and 2013 discontinuities caused solely by changes in measurement technique. The black line shows income inequality when the value of all transfer payments received is counted as income, income is reduced by taxes paid, and the two technical corrections are made.

Lo and behold—income inequality is lower than it was 50 years ago.

The raging debate over income inequality in America calls to mind the old Will Rogers adage: “It ain’t what you don’t know that gets you into trouble. It is what you do know that ain’t so.” We are debating the alleged injustice of a supposedly growing social problem when—for all the reasons outlined above—that problem isn’t growing, it’s shrinking. Those who want to transform the greatest economic system in the history of the world ought to get their facts straight first.

New York Times asked a few prominent economists what overheating would look like, though Mankiw and Furman’ comments were worth noting:

Furman, "Ultimately we’re worried about an outcome in the real economy, which is rapid growth in 2021 followed by a significant reversal in 2022 or 2023 with anything like a recession, negative growth or a sizable increase in the unemployment rate. Much of what we call “overheating” is mostly a concern insofar as it triggers that outcome. But some more proximate measures: Inflation in the second half of 2021 or the four quarters of 2022 at an annual rate of 2 to 2.5 percent would be desirable; 2.5 to 3.5 percent would cause more worries than it objectively should, but those worries could create self-fulfilling problems; and above 3.5 percent would create a substantial risk of macroeconomic reactions that create genuine instability and problems in the economy. The 10-year nominal interest rate going above 3 percent in 2021 should give us some pause, and going above 4 percent should raise the possibility of a meaningful course correction for fiscal policy. Finally, not a proximate measure, but a fear (and this is not my central guess), is that overheating could happen without a large decline in the unemployment rate. If, for example, people don’t return quickly to the labor force and it takes a while for the unemployed to find jobs, then you could have overheating even with an unemployment rate of 4.5 or 5 percent. That would be the worst scenario because it would really discourage policy activism for some time to come. Not my main prediction and maybe a risk worth taking, but is the gnawing fear that keeps me up at night...."

Mankiw, "I would say the economy is overheated if G.D.P. rises above potential G.D.P. (as estimated by, say, C.B.O.), and core inflation (P.C.E. price index excluding food and energy) rises above 3 percent over a 12-month period. (Inflation has not broken that threshold anytime during the past quarter century.)Such an overheating could be temporary. I would say we have an ongoing overheating problem if, in addition, five-year break-even inflation — a gauge of inflation expectations — rises above 3 percent...."

Blanchard very honest, “…I have no clue as to what happens to inflation and rates, because it is in a part of the space we have not been in for a very long time.Uncertainty about multipliers, uncertainty about the Phillips curve, uncertainty about the dovishness of the Fed, uncertainty about how much of the $1.9 trillion package will turn out to be permanent, uncertainty about the size and the financing of the infrastructure plan. All I know is that any of these pieces could go wrong…”

Neil Irwin, "How 10 Prominent Economists Think About Overheating,"New York Times, March 24, 2021, https://www.nytimes.com/2021/03/24/upshot/economy-inflation.html

Goolsbee“…If you are impatient to get an idea before having to wait four years, you would expect this to show up in the TIPS implied inflation expectations. Compare the five-year TIPS to the 10-year TIPS, and it will tell you whether they expect a heavy, sustained inflation. Right now the five-year is 2.5 percent, and the 10-year is 2.3 percent, so they don’t expect high inflation and they don’t expect rising, sustained inflation. It’s as simple as that….”

Caroline Hoxby, "Advanced Cognitive Skill Deserts in the U.S.: Their Likely Causes and Implications," Brookings Papers On Economic Activity, March 25, 2021, https://www.brookings.edu/wp-content/uploads/2021/03/BPEASP21_Hoxby_conf-draft_updated.pdf

Note the children’s scores aren’t based on

Her takeaway, “…What are we to make of these findings?They suggest that a child's cognitive skills in the third grade are not destiny. Even a child's skills in the fifth grade are not destiny. It is only as we look at the map for grade eight that we begin to see patterns that mostly resemble those for adults. By twelfth grade, the resemblance to the adult map is quite strong though of course imperfect…”

Where are advanced cognitive skills not prevalent?“…. The most obvious pattern is Appalachia, the area that follows the Appalachian mountain range through several states starting in northeastern Alabama and northwestern Georgia, running though eastern Tennessee and eastern Kentucky, encompassing all of West Virginia, continuing through southeastern Ohio, proceeding through Pennsylvania, and finally ending in New York.Although Appalachia is the most obvious desert, within it there are numerous counties, often in small clusters, in which advanced cognitive skills are prevalent. I show in the next figure that these are often counties in which a major university is located. Before examining the next figure, however,also note that advanced cognitive skills are not prevalent in the Ozarks (a mountainous plateau mainly in Missouri, Arkansas, and Oklahoma) and in some inland areas of the South—for instance, inland Louisiana, inland Mississippi, and an inland stretch that begins in north Florida, runs through northeastern Georgia, through inland South Carolina, and ends in inland North Carolina….”

Where are advanced cognitive skills prevalent? Where you would think, but also the Lutheran Belt ie the upper Midwest which was largely settled by Scandinavians ““…Figure 3 maps advanced cognitive skills by county for the U.S., based on the PIAAC numeracy data. The percentage of adults with advanced cognitive skills is divided in 10 deciles. In the bottom decile, only 0 to 17 percent of adults have advanced cognitive skills. In the top decile, 42.8 to 67.2 percent of adults have these skills... Observe the areas where advanced cognitive skills are most prevalent: most of southern New England but especially the area centered around Boston; scattered counties in New York and New Jersey but especially the area centered around New York City; coastal Washington and Oregon but especially the area centered around Seattle; coastal California but especially the areas centered around San Francisco, Sacramento, Los Angeles, and San Diego; the Salt Lake City area; and the Washington D.C. area including parts of Maryland and Virginia. None of these findings is surprising. A finding that may surprise some readers (although not those familiar with statistics on American education) is the overall dark shading of the so-called "Lutheran Belt" which occupies southern Minnesota and parts of Wisconsin, Iowa, and the Dakotas. The Lutheran Belt has long had a reputation for strong educational outcomes and explanations vary. While the area does not contain an advanced cognitive skills concentration like Boston's, say, most of its counties fall into the top four deciles of prevalence. (Remember to ignore some of its large, sparsely-populated counties.)…”

What are advanced cognitive skills for the purposes of the paper, "Advanced cognitive skills are generally defined to be those that require higher order reasoning. They require a capacity to solve problems through logic, think in the abstract, engage in critical thinking, and derive general principles from a set of facts. They are also often described as integrative or synthesizing. Advanced cognitive skills can be meaningfully differentiated from skills such as memorization, summarization, organization of facts, and other methods of acquiring concrete information...Long division, long multiplication, addition of fractions: these are all exercises that require a person to follow an algorithm that can even be fairly complex. They differ from algebra because algebra requires a person to translate a problem into equations, which are then solved to find the solution. Algebra thus requires abstract thinking. Proof-based mathematics is even more distinct because it requires logical reasoning that can extend over many steps. In short, algebra and the mathematics that typically follows it in the curriculum can be characterized as advanced cognitive skills….”

Core of the paper, “…attempts to test whether there is much variation among U.S. counties in the prevalence of adults with advanced cognitive skills. Being interested in areas where advanced cognitive skills are especially non-prevalent, I label such areas "deserts" as a shorthand. This exercise is not the same as testing whether there is much variation in the share of adults employed in skilled occupations. Such occupational variation could be caused by any number of supply and demand factors that vary among areas: regulations, tax policies, natural resources, place-based policies that favor certain firms. Rather, I am interested in variation that is a layer deeper: cognition. Understanding how the variation in the supply of advanced cognitive skills arises might reveal ways to improve such skills. It might also have consequences for economic policies such as trade and consequences for political economy. Second, this paper attempts to provide enough age-related evidence on the three explanations to help us parse them. Specifically, are advanced cognitive skill deserts associated with early-age factors that can be difficult to affect with policy? Are they associated with adolescent-age factors more likely to be influenced by policy? Finally, are they associated with individuals migrating towards areas where other people have advanced cognitive skills similar to their own?...,my measures of advanced cognitive skills depend only on the percentage of people with the skills, not the physical density of people with the skills. That is, I do not show advanced cognitive skills per square mile. This is a deliberate choice because I wish to avoid maps that mechanically predict that rural, low density areas are skill deserts. However, the consequence is that the viewer must consciously avoid focusing on sparsely populated counties with a large land mass: the skill measures might be based on relatively few people. The implications of a county’s having only 800 people, all of whom have advanced cognitive skills are very different from the implications of having 50,000 or 300,000 people with such skills. Generally speaking, the more sparsely populated a county is, the larger its land mass. It takes self-discipline on the viewer's part to ignore vast counties in Nevada, Arizona, Utah, New Mexico, south-eastern California, Montana, and the Dakotas…Third, the only nationally representative measure of cognitive skills among adults in the U.S. comes from the Program for the International Assessment of Adult Competencies (PIAAC). It measures 16 to 65 year olds’ numeracy (mathematics) and literacy. PIAAC has six levels of skill for each test, and its tests can identify very advanced skills. For instance, its top level in both numeracy and literacy contains only 1 percent of adults and its second-to-top numeracy level contains only 9 percent of adults. See Table 1. Also, PIAAC data can in theory be broken down by age which would be interesting even though it would not be longitudinal data.....For mapping, all of the adult ages are consolidated, only county level statistics are possible, and PIAAC aggregates the top three levels of skill for each test.16 Unfortunately, this makes only the numeracy test useful for mapping advanced cognitive skills. Its top three levels contain 37 percent of the adult population—already a coarser definition of advanced than I would prefer....PIAAC describes adults with the top three levels of numeracy skills as "proficient at working with math information and ideas. They have a range of numeracy skills from the ability to recognize math relationships and apply proportions to the ability to understand abstract representations of math concepts and engage in complex reasoning about quantities and data...”

Here’s her map, specifically the percentage of adults with advanced cognitive skills is divided in 10 deciles. In the bottom decile, only 0 to 17 percent of adults have advanced cognitive skills. In the top decile, 42.8 to 67.2 percent of adults have these skills.

Great data from Research being presented at BPEA today. Caroline Hoxby attempts to map what I’ll call the cognitive topography of the United States using the numeracy PIAAC data we’ve looked at. Her measure is the top 37% of the adult population which is the most limited run possible as PIAAC aggregates the top three levels of skill. Note she also does the same exercise for children at different age levels which ~ mirrors the adult population but uses SAT and State level test scores and does suggests some sorting, as does the clustering around college towns in the “Advanced Cognitive Skill Deserts”

Of course the underlying genetic topography isn't mentioned as a possible explanation.

Post ed board on the cumulative impact of suggested state and federal tax hikes for high earners in NYC, "...As we reported, state lawmakers want to hit New Yorkers with $7 billion in new taxes, including whopping spikes in income-tax rates for millionaires. The top rate, for example, would go from 8.82 percent to 11.85 percent. Add the city’s 3.876 percent top rate, and a wealthy taxpayer will be handing over nearly 16 percent of his income before the feds even come into it. President Biden, meanwhile,wants to pump up the top federal rate to 39.6 percent, so a rich Gothamite is looking at a more than 55 percent total income-tax squeeze.Now fold in theMedicare tax — 2.35 percent, for those earning more than $200,000 — and you’re up to more than 57 percent.And all that doesn’t include another heavy hit that Biden has mentioned:applying the 6.2 percent Social Security tax employees pay to all earnings above $400,000. (Under current law, only the first $142,800 is subject to this levy.) If Biden gets his way, an executive making $10.4 million would pay a full $620,000 more in Social Security taxes alone. It would put the total cumulative tax rate on high incomes in the city at more than 63 percent...."
Post Editorial Board, "Those tax hits from Washington and Albany are even worse than you think,"New York Post, March 22, 2021, https://nypost.com/2021/03/22/those-tax-hits-from-washington-and-albany-are-even-worse-than-you-think/

Those tax hits from Washington and Albany are even worse than you think

Anyone not thoroughly shocked by The Post’s examples Sunday of planned tax hikes from Albany and Washington should consider this: Our illustrations didn’t even include Social Security and Medicare taxes, which would increase the total tax bite on the rich to ridiculous levels. The wealthy will flee, and with them the money to rebuild New York.

As we reported, state lawmakers want to hit New Yorkers with $7 billion in new taxes, including whopping spikes in income-tax rates for millionaires. The top rate, for example, would go from 8.82 percent to 11.85 percent. Add the city’s 3.876 percent top rate, and a wealthy taxpayer will be handing over nearly 16 percent of his income before the feds even come into it.

President Biden, meanwhile, wants to pump up the top federal rate to 39.6 percent, so a rich Gothamite is looking at a more than 55 percent total income-tax squeeze. Now fold in the Medicare tax — 2.35 percent, for those earning more than $200,000 — and you’re up to more than 57 percent.

And all that doesn’t include another heavy hit that Biden has mentioned: applying the 6.2 percent Social Security tax employees pay to all earnings above $400,000. (Under current law, only the first $142,800 is subject to this levy.) If Biden gets his way, an executive making $10.4 million would pay a full $620,000 more in Social Security taxes alone.

It would put the total cumulative tax rate on high incomes in the city at more than 63 percent. Do progressives truly believe this won’t push top earners and their companies to flee and stall any post-COVID economic recovery?

A very small group of taxpayers provides a disproportionate amount of New York’s revenue — a dozen leave, and there goes the budget.

Partnership for New York City Executive Vice President Merrill Pond estimates that a single city taxpayer pulling in $5 million a year would see his taxes jump from $2.6 million to $3 million. One making $35 million would pay $22 million in taxes, instead of $18 million — a mind-numbing $4 million jump.

Add to that the innate hostility to corporations and the wealthy from the political establishment, and the exodus will be massive. These are the people who can afford to live most of the year somewhere else.

To his credit, Gov. Cuomo said Monday that New York taxes don’t need to increase. The state has plenty of money. But for a lot of progressive pols, it’s not just the money — it’s the punishment. Let’s hope, for the sake of the state, that Cuomo can hold the line on their vindictiveness.