Friday, November 16, 2007

US Income Mobility and Growth

Conflicting data and interpretations are confusing our understanding of personal income growth over the decade of 1996-2005. Politicians are using the data and analyses that support their agenda: are we surprised? My view of the overall media and political landscape is that they are being overly influenced by data and analysis suggesting that US society is becoming more unequal in regard to income and that only certain individuals, generally the already-rich, enjoyed income gains over the last decade.

My colleague Matt Slaughter, recently with the Council of Economic Advisers, likes to point to US Census data from 2000 to 2005 that purportedly shows, in Matt’s words: “income growth has been extremely skewed, with relatively few high earners doing well while incomes for most workers have stagnated or, in many cases, fallen. Only 3.4% of workers were in educational groups that enjoyed increases in mean real earnings from 2000 to 2005…: mean real money earnings rose for workers with doctorates and for workers with professional graduate degrees (i.e., MBAs, JDs, and MDs) and fell for all others.” Surprisingly, the set of workers with just undergraduate degrees had no real income growth between 2000 and 2005.

That sounds pretty bad, and a lot of politicians are using the data to support their claims of rising inequality and the need for some redistributive policies. However, let us be clear about what the data actually show – or more important, what the data do not show. The earnings of workers who had doctorate or professional graduate degrees in 2005was higher than for workers who had doctorate or professional graduate degrees in 2000. Yes. But this does not say anything about any particular individual’s earnings. The people who were in the workforce with doctorate and graduate professional degrees in 2005 were different from the set of workers with doctorate and graduate professional degrees in 2000. The same goes for the set of workers that did not have such degrees – the people in that category in 2005 were not necessarily in that category in 2000. In fact, it is very likely – a certainty – that some of the people without doctorates and graduate professional degrees in 2000 had such degrees in 2005!

So what I have always argued in the face of these data is that they do not say anything about any specific individuals, in regard to changes in their incomes.

This kind of analysis and data can be useful. For instance, if we think the economy is in a steady state, with equal cohorts of people moving through the age and education ranks, then a decline in earnings for, say, undergraduate degree holders would suggest that something is happening to the value of undergraduate degrees. But I don’t think this is the world we live in. The set of people with undergraduate degrees is very different today than it was even five years ago: the mix of degrees is different, the age and experience of the workers is different, and even the gender of the workers is different (and we know there are income differences by gender). The data may only be telling us about the makeup of the set of workers with professional graduate degrees (or undergraduate degrees) and how that makeup differs between 2000 and 2005.

Suppose, for example, that folks with graduate professional degrees were just hitting their peak earning years in 2005, while those with only undergraduate degrees had been hitting their peak earning years in 2000. Then it would be natural to see earnings growth for graduate degrees between 2000 and 2005 and earnings declines for the undergraduate set between the same years (as in 2006, the undergraduate set would have relatively more “early career” workers).

A different study tells a very different story. I first saw the story
reported on the editorial page of the Wall Street Journal, and Matt Slaughter sent me the actual study, “Income Mobility in the US from 1996 to 2005,” which was done by the Treasury. I have not seen any other media references to this report!

The Treasury study tracks the same taxpayers between 1996 and 2005. This analysis is relevant if we are interested in how specific individuals change their income levels, both absolute and relative to others, as they age and gain experience. It is not an answer to the question of “how do people with undergraduate degrees in 2000 compare to those with undergraduate degrees in 2005” but instead to the question of “how much does an average or median worker’s income change over a ten year period?” I think this latter question is extremely important, as to a great extent it is people’s ability to improve their relative and absolute standing that governs their perspective on the overall fairness and justice of the society in which they live.

So what does the Treasury study say? First, that the median taxpayer saw a 24% increase in real income over this period. Second, that about half of all taxpayers who were in the lowest 20% of income earners in 1996 moved to a higher income quintile within 10 years. Third, that the degree of mobility between this decade and earlier decades is basically unchanged. Four, taking the very highest income earners, those in the top 1/100th of one percent, 75% of those were in that category for 1996 fell out of it by 2005 – and the real earnings of that category actually FELL over the period.

The overall picture of the US society from the Treasury study is one of significant movement between income classes, with a general increase in earnings for all classes. This is what we should expect. Ten years ago someone entering the workforce with an undergraduate degree in computer science might be making $30,000. Today they would likely be in the top couple percent of the income distribution.

What would be most distressing to me would be data showing that folks in the lowest income category in one year were extremely likely to still be in that category ten years later. This is definitely not what we see.

Another study worth looking at is the Pew Charitable Trusts study on the Economic Mobility of Families Across Generations. This study looks at the movement across income classes from one generation to another. I will leave readers to look at this on their own, but when I read it, I was very comforted to see the kind of movement from poor to rich and from rich to poor that I think characterizes a truly great society.

Sunday, November 11, 2007

Vermont's Pot Paradox

Here's a problem to test our principles -- or to force us to choose which one is more critical.

In nearby Vermont, a 61-year old woman -- a defense lawyer, no less -- called the Vermont Fish and Game service to help remove a dead deer from her yard (some details are here.) Upon looking around her yard, they discovered numerous marijuana plants (at this time of year, probably nice and ripe!) as well as some dry ganja. Such actions -- growing and possession of relatively large amounts -- qualify as serious felonies, with up to 30 years in prison.

The local prosecutor declined to charge the woman with felonies, opting instead for misdemeanor charges and then even dropping those in favor of a court-supervised "diversion" program -- kind of like what teenage kids might get for possession of alchohol.

It is relevant that this local prosecutor, Robert Sand, has in the past spoken out against our country's drug laws, saying they are not working and arguing for decriminalization of drugs like marijuana. Hallelujah!

Ah, but...The law is the law, is it not? For a prosecutor, elected to enforce the laws of the State, to turn his head on what the State currently considers a serious that right? And did the prosecutor go easy because it was a 61 year-old woman, and a peer, in that she was a lawyer?

If Mr. Sand thinks that marijuana should be legal, I agree 100% with him. But I am not sure that given his job, he can do what he did. If he cannot enforce laws that he thinks are bad, then I guess he needs to resign.

Or is a little civil disobedience on the part of public prosecutors OK?

Thoughts anyone?

Friday, November 02, 2007

Economists Writing on Climate Change

A colleague passed on to me the link to a special issue of The Economists' Voice, an e-journal from the Berkeley Electronic Press. The special issue is on climate change, and features some notable economists -- Kenneth Arrow, Joseph Stiglitz, Thomas Schelling, among others (three Nobel winners there!). The link for the journal is here but I think you need to register to read the full article.

At least some of the articles refer to the Stern report, and the reviews of that report that I wrote about in my latest post. Arrow, for example, explicitly mentions critics of the Stern report, and their main critique (insufficient discounting of the future) but he does not mention them by name.

Unfortunately the articles in the BE Press do not live up to my expectations for the authors and they do not match the rigor and clarity of the Nordhaus and Weitzman articles in the Journal of Economic Literature. Go read the BE Press for yourself and compare it to Nordhaus' article, or Weitzman's, in the JEL. If you don't see the obvious differences, let me know.

Stiglitz does not address any of the economics of climate change but plows ahead with major policy recommendations anyway. Great economics!

Arrow mentions the discounting problem, and agrees with much of it, but at the end of his article he does some back of the envelope calculations and concludes that the benefits of stabilizing CO2 are worth the costs. I wish he had made his calculations more consistent with, for example, Nordhaus and Weitzman so that we could compare the assumptions and see where they are different. Arrow does some things for ease of calculation that strike me as questionable: he converts a loss of 20% of output beginning in the year 2200 with a lower growth rate of output between now and then. While the growth rate calculations work out, I am not sure that the utility/welfare of the different time paths are the same: the second scenario has output lower in all the years up to 2200.

Schelling, as usual, is rather good; I am a fan of his (read The Strategy of Conflict, his classic on game theory). Schelling is open about uncertainties, including those of water vapor and clouds, and he even mentions favorably the ideas of geoengineering. He also mentions that the "precautionary principle" has been likened to the principle of "never do anything for the first time." I like that! But the article is also marred with jabs at the Bush administration (come on, guys); he mentions extreme bad outcomes such as the sea level rising by 20 feet but does not mention extreme good outcomes such as little climate change, favorable effects on agriculture and low mitigation costs; and he ends with this oddity: "How should we respond to that kind of uncertainty? Wait until the uncertainty has been resolved completely before we do anything, or act as if it’s certain until we have assurance that there’s no such danger? Those two extremes are not the only alternatives!" (p. 5, Economists’ Voice July, 2007).

All in all, I remain very impressed with the Journal of Economic Literature articles and will look at the BE Electronic Press, at least this one journal of theirs, somewhat differently.