Tuesday, May 27, 2014

A College Education is Still a Good Investment

The end of the month is near, and soon I will be making my now-ritual three payments for the debt my wife and I accumulated for our undergraduate and graduate educations.  Though these payments are a burden and have been for the many, many years we have been paying them (and will be for many more years in the future), I have never once regretted the decision to go into debt to finance my education.  I am firm in the belief that it was an exceptional investment both economically and personally.

Which is why I worry a bit about all of the focus on the rising debt that college students are accumulating.  The basic takeaway there is the effects of states dramatically reducing their support for public higher education.  This is something that, as a society, we should be concerned about, but not something that suggests college is no longer worth it.  A college education it is still a good investment even at the much higher tuition rates state universities are charging.

So I was pleased that the exceptional new New York Times blog The Upshot, which is led by the exceptional David Leonhardt (three cheers for getting him back on the economics beat) posted this graph today along with a great write up.  Yes, college is not only still with it, but ever more so as time goes by.

Friday, May 23, 2014

Friday Frivolity

Its Friday afternoon so I'll write about my third favorite subject (behind economics and beer): soccer. There seems to be a lot of consternation among the US Soccer pundit class about the snub of Landon Donovan.

I am a little perplexed.  As a Timbers fan who got to see Landon live and in action two weeks ago, I was stuck by the fact that he had very little impact on the game.  I was also struck by how clearly heavy and slow he was.  He did not look at all like the lithe, fast, skillful Donovan of the past.

Which is all to say that I am not at all surprised by his being dropped.  With the cup thee weeks away there is no hope of his regaining the required fitness he needs in time.  And for those who think he could be a useful sub, it seems to me that what you want from a sub is either someone who can come on and bring some energy and danger when you need a goal, or who can help shut things down.  Neither of these describes Donovan in his current state.

Tuesday, May 20, 2014

Fred Thompson: Capitalism Is Biased In Favor Of Capitalists II

This is the second in a two-part review by Fred Thompson of Thomas Piketty's book: Capital in the 21st Century.  The first part was posted yesterday. 

Given Piketty’s narration of the German case, it’s mildly surprising that he doesn’t give greater attention to corporate governance, which is very much a product of deliberate policy – perhaps because they were products of deliberate policy. As he notes, his theory fails in the German case when he uses stock market valuations instead of book value. Why? Because, under the German “stakeholder model” of corporate governance, shareholder rights to cash flows are relatively weak. German managers/directors have broader obligations than their American counterparts and greater discretion to pursue growth and stability at the expense of profitability. Consequently, they throw off far less of the economic value their businesses generate to shareholders; instead, they retain more of it, presumably in the best interests of the remaining stakeholders. 

Anglo-American shareholder activism, together with various tax policies, seems to have had two effects, a large and sustained increase in the value of publicly traded shares (the main driver of β in the economy) and a decline in the economic weight of publicly traded enterprises, whether measured in terms of output or employment shares, relative to privately-held businesses. Bankers and fund managers aside, more than anyone else, the owners of these enterprises have benefited from the economic growth of the past 30 years or so. Moreover, since the 1986 tax act they have been able to avoid double taxation by extracting profits from their businesses in the form of wages (and precluded from expensing personal consumption to their businesses). Consequently, business owners’ reported (and very likely their real) incomes have soared since the enactment of the 1986 tax act.

Unfortunately, we cannot say for certain exactly how much. The Haig-Simons income (Y) definition – consumption plus the change in wealth (∂K) – is the standard one in the literature – the Platonic ideal if you will of income (i.e., GNY = C+S, where S = ∂K). Wealth (K) is the present value of the future income stream associated with the bundle of property rights comprising one's endowment, which is a stock. The change in wealth (∂K) over a finite period is a flow. We don’t measure any of these things directly, but instead infer their values from data acquired for other purposes: collecting taxes primarily and measuring aggregate consumption.  As a result, exactly how much real income inequality has increased in the U.S. is open to question, and the timing and causes of this phenomenon are even more so.

Nevertheless, most analysts agree that income inequality has increased greatly over the past 30 years. Fortunately, we can fix this via public policy.  Taxing capital income when it's realized, rather than when it is reported, would be a good start. Indexing financial assets to inflation would clearly be better than the current favorable treatment of capital gains. Taxing inheritances (depending upon the property tax regime, perhaps, excluding real property) is also an attractive prospect. But an array of policies aimed at broadening gain sharing ought to be considered, including a rethink of corporate governance policies and practices.

The evidence on wealth inequality is less clear-cut. The fact is that by most measures, including financial, wealth (K) has increased relative to income (Y) but is no more unequally distributed in the US now than in the fifties and sixties. Atkinson and Morelli (2014), for example, conclude that wealth was actually more unequally distributed in the U.S during the great compression than now. One might think that increased income inequality would necessarily lead to increased wealth inequality, since wealth is simply the cumulative excess of income over consumption, but that isn’t the case where the distribution of wealth is more unequal than the distribution of income, which is apparently still the case in America.

Even if one uses Piketty’s rather circular wealth estimates, increasing wealth inequality is a phenomenon that applies only to the top 0.1 percent of households (the top 130,000) and a fortiori to the top 0.01 percent (13,000). It would be interesting to see

who these folks are. It’s my hunch that a majority of them are business owners not the scions of inherited wealth or their corporate minions. Regardless, it seems unlikely that increased wealth inequality is the main driver of income inequality in the U.S.

Moreover, Piketty’s analysis is concerned entirely with private wealth. It excludes all publicly owned assets, the assets owned by nonprofits, and the present value of future social security and the proceeds from defined pension plans. SSI, for example, is indexed to the CPI, which means, other things equal, it has grown faster than the rest of the country's wealth portfolio. But other things are not equal; the population is rapidly aging further increasing its PV. Apportioning that wealth is difficult, but it probably makes sense to do so.

Finally, there is one further question that you are probably asking yourself if you have gotten this far is “won’t r go down too?” This is obviously a soft point of Piketty’s model and the source of the circularity in his wealth estimates. He summons a lot of historical evidence to show that r has generally been stable during the last two centuries despite massive changes in the K/Y ratio. But that doesn’t mean that he is right and he’s clearly challenging one of the fundamentals of economic theory: decreasing returns to a relatively abundant factor of production. 

Clearly, I am not entirely persuaded by Piketty’s every claim. Nevertheless, I was blown away by Piketty’s book. If you want to read something challenging and extremely informative, read this book.

Monday, May 19, 2014

Fred Thompson: Capitalism Is Biased In Favor Of Capitalists I

This is the first in a two-part review by Fred Thompson of Thomas Piketty's book: Capital in the 21st Century.  The second part will be posted tomorrow. 

Thomas Piketty’s Capital in the 21st Century is a marvel without precedent: serious economic scholarship – a dynamic model of economic growth and the distribution of wealth – that is also a runaway best seller.

Piketty’s basic conclusion is that capitalism is biased in favor of capitalists – no big surprise there. His model consists of an identity, two mechanisms, and a mathematical inequality (the same as the modern Darwinian synthesis, probably our best known dynamic model). The identity links the stock of capital (K) or wealth to the flow of income (Y). The stock of capital includes all forms of explicit or implicit return-bearing assets: housing, land, machinery, financial capital in the form of cash, bonds and shares, intellectual property, etc. The identity is expressed by the ratio between K and Y, or β. The share of capital incomes in total national income (α) is equal to the rate of return, in real terms, on capital (r) multiplied by β.

The mathematical inequality links the rate of return (r) and the rate of growth of the economy (g) to income inequality – if r>g, which Piketty argues is the natural state of things, then α increases by definition, driving up the share of capital (wealth) in national income. As Nobel Laureate Robert M. Solow observes: “This is Piketty’s main point, and his new and powerful contribution to an old topic: as long as the rate of return exceeds the rate of growth, the income and wealth of the rich will grow faster than the typical income from work.” Consequently, Piketty concludes that in the long run the economic inequality that matters won't be the gap between people who earn high salaries and those who earn low ones, it will be the gap between people who inherit large sums of money and those who don't.

Over the long span of history surveyed by Piketty, the only substantial period in which g>r was between 1910 and 1970 (in the U.S., 1933-1973, the period Goldin and Katz call the “Great Compression”). Piketty ascribes this to the destruction and high taxation caused by the two world wars and the Great Depression. He is dismissive of deliberate policies: “Neither the economic liberalization that began around 1980 nor the state intervention that began in 1945 deserves much praise or blame. The best one can say is that they did no harm.” Consequently, he is indifferent to most of the literature on the political economy of this era, with its attention to regimes of (capital) accumulation and modes of regulation (the institutions, policies, and practices governing the operation of accumulation regimes). Moreover, the French case matches up with his formulation quite nicely. Capital-income ratios held steady at about seven from 1700 to 1910, fell sharply from 1910 to 1950, reaching a low of a bit less than 3, then began to climb, by 2010 to about 6. Furthermore, Piketty provides pretty compelling evidence that in France increased wealth led increased income inequality.

Certainly, recovery from war and depression, as well as deep structural factors related to demographics and technology, help explain the burst of rapid economic growth following World War II. Nevertheless, it is a mistake to account for the mid-20th Century period of shared growth exclusively in terms of large, impersonal economic forces. Politics and institutions also mattered. Indeed, I would argue that the political and economic arrangements of the postwar era were qualitatively different from those that preceded and followed it and that this distinctive set of policies profoundly influenced the pace and content of economic development and the subsequent distribution of income, consumption, and wealth.

This view of the postwar era assigns a key role to organized labor, which was then at the apex of its power, not only in the social-democratic states of Northern Europe, but throughout the industrialized West. Organized labor was politically decisive in its support the welfare state, Keynesian full-employment policies, high inheritance and income tax rates, heavy reliance on payroll taxes, and capital and foreign exchange controls. The upshot of these policies included a vast expansion of mass production and consumption, widely-shared wage gains and “profitless growth” – what Michel Aglietta calls the Fordist regime of capitalist accumulation in A Theory of Capitalist Regulation: The US Experience (2000). 

Mass production thrives on economies of scale. Consequently, as Robin Marris explained in The Economic Theory of Managerial Capitalism (1964), under mass production, most output is supplied by a smallish number of large enterprises, usually publicly held corporations, where managerial control is separate from ownership. Marris argued that in the immediate postwar era managers exercised considerable discretion, which they used primarily to grow their enterprises rather than to maximize shareholder wealth, since they generally got higher salaries and greater status from running bigger businesses – hence, profitless growth. He also argued that this was socially desirable: growth-seeking firms make countries grow faster (g up, r down).

Obviously the postwar boom couldn’t go on indefinitely. Declining population growth, satisfaction of long stifled wants, and catch-up on the part of Europe’s capitalist economies and Japan to the technological frontier would have probably curbed economic growth in any case. The problem of integrating baby boomers into a workforce, which was already beginning to shed manufacturing jobs, further stressed the Fordist system of accumulation, leading to wholesale changes in its characteristic modes of regulation: fiscal policy was subordinated to monetary policy or, perhaps more accurately full employment subordinated to price stability, inheritance and income tax rates slashed, capital controls eliminated, and exchange rates floated.

Arguably, the demise of the Fordist accumulation regime followed, in part, from its success. Increasing mechanization and computerized production hollowed out the blue-collar workforce in the industrialized West and led, thereby, to the marasmus of labor movements. Mass production shifted to the developing world where wages are low and environmental quality standards lax. Both developments reduced political support for policies aimed at broad-based gain sharing. Moreover, activist investors, especially in the English speaking world, increasingly found ways to use the market for corporate control to discipline hired managers and stock options and bonuses to align managerial interests more closely with theirs – away from growth and toward maximization of shareholder wealth. As Solow put it, in his respectful review of Piketty’s book: “It is pretty clear that the class of super-managers belongs socially and politically with the rentiers, not with the larger body of salaried and independent professionals and middle managers.”[1]

[1] One ought not push this conclusion very far, however. At any point in time there are only 500 Fortune 500 CEOs in the U.S., 0.5 percent of the 0.1 percent.

Tuesday, May 13, 2014

Oregon Unemployment Steady at 6.9% With Addition of 6,100 Jobs in April

Another good month for Oregon jobs in April.  Oregon added 6,100 jobs in April on a seasonally adjusted basis following a robust 8,900 in March.  This means the Oregon job market is growing at a 2.6% clip, substantially faster than the US average of 1.7%.  The Oregon unemployment rate remains unchanged from March at 6.9%.

As you can see from the graphs above, we have still not recovered all the ground we lost in the great recession but we are close.  The takeaway here is that hiring is pretty robust right now after years of no to very slow growth, this is a welcome change.

Picture of the Day: NBA

I know I have been AWOL lately, many many pressing things in real life has left me without time to blog.  So today I make it all up with useless content!

From the NY Times:

The NBA fandom map.  Really Washington, the Lakers?!?

Thursday, May 1, 2014

Inflation v. Productivity

This graph is from a very nice article by Annie Lowrey of The New York Times.  The article is about what it means to be poor in the 21st Century USA.

But what I like about this graphic is that it shows you that inflation is an average of a basket of goods and that some goods, whose productivity has far outpaced the average across the industries in the basket, have rapidly declining prices while others, who have not seem much productivity gains at all see very steep relative price increases.

Take computers and college tuition.  The latter is often used as an example of Baumol's Cost Disease, and you can see the point very clearly above: for industries such as education, where the process of learning is still very similar to what it was 100 and 200 years ago, the relative price has shot up.  Why?  Because the other industries, like computer manufacturing, have seen massive productivity increases.  The price of big TVs today is shockingly low.  And thus the number of fancy TVs you have to forgo to pay for college is going up all the time.

But this shows the danger of such comparisons which is essentially Baumol's point: we should not expect all industries to increase productivity similarly. It is, in fact, quite natural for some industries to see little productivity increases (like in his classic example, a symphony orchestra).  They are not doing anything wrong which is why the term 'disease' was used - it is something natural.

Which does not mean, of course, that these prices don't hurt - they do.  But my little Macintosh SE I bought as an undergrad cost about 1/5th of my private college tuition.  Now a student at the same college can buy in infinitely more nice, colorful, powerful Mac for about 1/20th of a year's tuition.  The notion that one price has gone 'up' while the other 'down' is a purely relative statement and only reflects the rate at which you can trade one for the other.

I wonder, though, if there is any correlation between the relative accessibility to consumer electronics and similar consumer good and the declining support for unions and other former champions of the 'middle class.'  No idea...just a thought.