Download Economics on Main Street: Concepts for American Voters

Economics on Main Street:
Concepts for American Voters
May 2012
note: course website
Income Inequality
& Jobless Recoveries
Reconsidering Income Inequality
Economic Growth is a Good Thing
But It’s Not the Only Thing
• quantity of goods vs quality of life
(environmental sustainability, nature of work,
traditions, nature of communities, happiness)
• assigning value to household production
(GDP ignores non-traded goods and services,
pursuit of measured growth may be misguided)
• distribution of gains
(how are the gains from growth distributed? why
important as a societal goal? what are implications?)
Market Efficiency is a Good Thing
But It’s Not the Only Thing
• markets are not always efficient
(monopoly, asymmetric information,
third party costs or risks, third party benefits)
• efficiency measures total gains
(makes no promise as to distribution of gains)
• income matters
(command over goods & services)
(part of consumer response to price changes)
Regulate Prices to Achieve Equity?
• beware of unintended consequences
(price gouging laws – winners but shortage of ice)
(minimum wage – potential tradeoff with jobs)
• whose definition of equity?
(alternative non-price allocation mechanisms)
• letting prices move freely
(probably more effective to redistribute income)
(taxes & transfers, vouchers, public provision)
Income Redistribution Concerns
• government as a leaky bucket
(taxing productive activities, quantity distortion)
(disincentives for recipients, AFDC vs EITC)
• inequality as an incentive system
(return to invest in education, innovation, effort)
(but . . . how much inequality is sufficient for this?)
• equal outcomes vs equal opportunity
(willing to accept inequality if “income mobility”)
What Do the Numbers Say?
• recall economic growth patterns
(nearly 2.5% post WWII through 1979,
less than 2.0% from 1979 to present)
• have those gains been broadly shared?
(labor productivity vs labor compensation)
(distribution of income gains over time)
(share going to top 1%, historical context)
• an uncomfortable reality check
Contributing Factors
• individual characteristics
region, race, age, household composition
education, education, education
Contributing Factors
• individual characteristics
region, race, age, household, education
• labor market opportunities
U.S. manufacturing & technological change
industry & occupational shifts, earnings
reward-based pay & other compensation issues
• tax policy
historically low rates on top marginal income
And Now . . . Some Really Bad News
• opportunities across generations
income mobility & national self-image
however . . . recent international comparisons
U.S. inferior mobility across generations
• conditions for recession
income on main street, spending on main street
extreme inequality vs. reliable consumer spending
demand-deficient core of slow recovery
General Policy Implications?
• tax policy
increase taxation of high income individuals
(wasn’t this on the table in 2008 election?)
• safety net
transfer income or purchasing power
(recession surge vs. upcoming budget plans)
• human capital
expand access, not family income, multi-dimensions
(ongoing trends and upcoming budget plans)
• jobs
SR-LR key to sustainable approach (more after break)
Income Inequality
& Jobless Recoveries
Where are the jobs?
Unemployment Rate for U.S.
monthly, seasonally adjusted, 1968-2010
Prof Rich graduates
from college
My Dad
between jobs
Oct 2009
10.1%
notice “jobless recoveries”
sometimes there’s just
no need for words
Employment to Population Ratio for U.S.
monthly, seasonally adjusted, 1968-2010
note on age
composition and
gender LFP
here’s that 1980’s
recession again
Dec 2009
58.2%
robust job growth will be slow to
reduce the unemployment rate
lost production in short term,
reduced capacity in long term?
The job seekers ratio (number of unemployed workers per job opening)
Dec. 2000–Feb. 2012
this is my happy slide
Source: Author's analysis of Job Openings and Labor Turnover Survey data and Current
Population Survey data.
Note: Shaded areas denote recessions.
Economics of Unemployment
• frictional, structural, demand-deficient
• frictional
imperfect information, labor market flows
search, distribution of opportunities, imperfect match
• public policy
UI policy goals – promote productive search
IL-ES efforts – improve search outcomes
labor market information (IDES, ALMIS, ISU)
Economics of Unemployment
• structural
industry & occupation change, labor market transitions
changes in consumer demand, technology, trade, etc.
mismatch of worker skills & employer requirements
observed by industry-occupation-region-local
consider required adjustments & constraints
• public policy
labor market information (employment projections)
education (K12, CC, HE, CE), training (public, firm, indiv)
mobility (LMI, portable HCI, relocation, public transit)
Economics of Unemployment
• demand-deficient
labor markets over the business cycle, fluctuations in
aggregate demand, employment loss, limited wage
flexibility (various causes), unemployment outcomes
jobless recoveries from recent downturns (1990-present)
• public policy
minimize fluctuations in aggregate demand
(monetary – manage interest rates to balance activity)
(fiscal – stimulus spending (pyramids, tanks, schools) )
(automatic stabilizers (ex: income tax, UI, FS, GS) )
Recession and Stimulus
Capital Goods
(and other sources
of econ growth)
m
U.S. GDP in 2009
about 8-10% below potential
with similar drops in
capacity utilization and
employment/population ratio
(still 5-7% below potential)
(eventual impact on PPF)
k
underutilized
resources in
a recession
a
g
Consumption Goods
Recession and Stimulus
Capital Goods
(and other sources
of econ growth)
m
k
underutilized
resources in
a recession
a
stimulus through
deficit spending
(school repairs,
bridge construction,
UI & food stamps,
tax cuts, etc).
g
Consumption Goods
Recession and Stimulus
does nature of
stimulus matter?
Capital Goods
(and other sources
of econ growth)
m
(consume vs invest
and future growth)
k
underutilized
resources in
a recession
a
g
Consumption Goods
GDP Would Have Been Lower Without the Recovery Act...
...And Unemployment Would Have Been Higher
Sessions & Topics
• Income Inequality & Jobless Recoveries
competing views on how to strengthen the recovery
activists: TARP, automatic stabilizers, ARRA, AJA, more
austerians: overtaxed job creators, disincentives from
over-regulation, uncertainty from deficits & debt
• Public Goods & Sustainable Social Contracts
role of government, about deficit spending & debt,
concerns going forward, work the problem (hands-on)