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 ThingBut 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 ThingBut 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 characteristicsregion, race, age, household compositioneducation, education, education

Contributing Factors

• individual characteristicsregion, race, age, household, education

• labor market opportunitiesU.S. manufacturing & technological changeindustry & occupational shifts, earningsreward-based pay & other compensation issues

• tax policyhistorically low rates on top marginal income

And Now . . . Some Really Bad News

• opportunities across generationsincome mobility & national self-imagehowever . . . recent international comparisonsU.S. inferior mobility across generations

• conditions for recessionincome on main street, spending on main streetextreme inequality vs. reliable consumer spendingdemand-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 nettransfer income or purchasing power(recession surge vs. upcoming budget plans)

• human capitalexpand access, not family income, multi-dimensions(ongoing trends and upcoming budget plans)

• jobsSR-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

Dec 2009 58.2%

here’s that 1980’s recession again

note on age composition

and gender LFP

robust job growth will be slow to reduce the unemployment

ratelost production in short term,

reduced capacity in long term?

The job seekers ratio (number of unemployed workers per job opening)Dec. 2000–Feb. 2012

Source: Author's analysis of Job Openings and Labor Turnover Survey data and Current Population Survey data. Note: Shaded areas denote recessions.

this is my happy slide

Economics of Unemployment• frictional, structural, demand-deficient

• frictionalimperfect information, labor market flowssearch, distribution of opportunities, imperfect match

• public policyUI policy goals – promote productive searchIL-ES efforts – improve search outcomeslabor market information (IDES, ALMIS, ISU)

Economics of Unemployment• structural

industry & occupation change, labor market transitionschanges in consumer demand, technology, trade, etc.mismatch of worker skills & employer requirementsobserved by industry-occupation-region-localconsider required adjustments & constraints

• public policylabor 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 policyminimize 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) )

a

k

U.S. GDP in 2009about 8-10% below potential

with similar drops incapacity utilization and

employment/population ratio (still 5-7% below potential)(eventual impact on PPF)

m

g

Consumption Goods

Capital Goods(and other sources of econ growth)

Recession and Stimulus

underutilizedresources ina recession

a

k

stimulus throughdeficit spending(school repairs,

bridge construction,UI & food stamps,

tax cuts, etc).

m

g

Consumption Goods

Capital Goods(and other sources of econ growth)

Recession and Stimulus

underutilizedresources ina recession

a

k

does nature of stimulus matter?

(consume vs investand future growth)

m

g

Consumption Goods

Capital Goods(and other sources of econ growth)

Recession and Stimulus

underutilizedresources ina recession

GDP Would Have Been Lower Without the Recovery Act...

...And Unemployment Would Have Been Higher

Sessions & Topics

• Income Inequality & Jobless Recoveriescompeting views on how to strengthen the recoveryactivists: TARP, automatic stabilizers, ARRA, AJA, moreausterians: overtaxed job creators, disincentives from over-regulation, uncertainty from deficits & debt

• Public Goods & Sustainable Social Contractsrole of government, about deficit spending & debt,concerns going forward, work the problem (hands-on)