The typical rich family is a cop married to a nurse
Ryan Avent recently expressed surprise at the fact that a married couple each earning $75,000 were in the top 5% of the US income distribution.
To get into the top 5%, you need to earn less than $150,000. To me, it’s something of a wake-up-call to realise that a couple who make $75,000 each are in the top 5% of American households. I’m curious whether this is surprising to others, too? Would you, like me, have guessed the thresholds were higher? Does this change what you think about who is “rich” in America today?
In Boston, cops make about $110,000. I’m sure some of them are married to nurses making around $80,000, putting them well up into the top 5 percent. I don’t regard this sort of family as rich, but many people I talk to insist the top 5% are rich. If so, there are far more rich families that are a cop/nurse, or accountant/teacher, or engineer/secretary, then there are Donald Trumps.
Why do people find it surprising that so few families make more than $150,000? I think I know, because I used to be surprised myself. Then I realized my mistake. I was assuming “families” were people like me, a middle age guy with a working wife and kids. But then I realized a “family” is any adult household. My first 8 years as an adult I was living on my own, supporting myself with part time work will going to college and grad school. Definitely bottom quintile. I was probably technically “poor,” but not poor in a sociological sense. I was a proto-upper middle class guy. Then I spent one year in the second quintile, before shooting into the third quintile, where I stayed for a number of years. Then I got married, then I got lots of raises and promotions, and presto, I’m rich. (Although my neighbors would laugh, they look down on us plebs living in two-family houses.)
I’ll retire at 62, and live another 15 or 20 years if I’m lucky. During that stretch my “income” will drop sharply, although I am not quite sure how sharply. Probably at 70 it will bump up as I’m forced to take money from my 401k.
I think most people have this vague idea in their mind that if everyone was exactly like Scott Sumner, we’d have a fairly equal income distribution. Not so, it would be less unequal than today, but still highly unequal, as different versions of me would be at different stages of their (my?) life.
People are surprised that only 5% of families make more than $150,000, because they forget that even most upper-middle class people spend the vast majority of their time (between 18 and 80) making much less than $150,000.
Here’s my most recent contribution to The Economist: By Invitation, on the subject of inequality.
Tags: income inequality
25. January 2011 at 12:29
Scott,
I read your contribution to the Economist yesterday. Given my dissertation topic it’s no surprise that by far my favorite part was the following:
“A progressive consumption tax (i.e. payroll tax) can actually make it easier to achieve economic equality, by making the economy more efficient. I don’t know of any country that relies entirely on a progressive consumption tax, but the Nordic model works somewhat along those lines””with relatively heavy taxes on consumption and lighter taxes on capital. This allows the Nordic economies to be relatively productive, despite high levels of taxation. Some of those taxes can be used to subsidise the earnings of lower wage workers, or perhaps help them save for health care expenses and retirement.”
There was a recent post on income inequality by Catherine Rampell and some responses by DeKrugman (borrowing from Morganspeak). The best part was the data she linked to at the Tax Policy Center:
http://taxpolicycenter.org/numbers/displayatab.cfm?DocID=2879
I consider myself savvy with the data and yet was a little surprised to see that the median income of a single household was only $22,300.
P.S. And not to quibble, but $150,000 puts the cop/nurse husband/wife (by the way which is which?) at the 88th percentile among all households, still not too shabby.
25. January 2011 at 12:51
Actually, I see that my quibbling is at odds with the Piketty/Saez data to which Ryan Avent is referring.
The Piketty/Saez data is actual 2008 tax data. The Tax Policy data is based on a 2010 microsimulation and excludes households with negative income. So the Piketty/Saez data is probably more accurate but unfortunately doesn’t provide much information about the distribution of those below the 90th percentile.
25. January 2011 at 12:53
A good number of government workers in California make $100,000 – $200,000 a year AFTER retirement — beginning at age 50.
At age 50 two married firefighters typically would begin pulling down $200,000 — $300,000 a year in retirement.
If they both live to 80, they’d pull down $6 million at a minimum.
Overall, government workers in California make 40% more than private sector workers, doing comparable tasks.
25. January 2011 at 13:19
Who’s rich in America?
Let’s compare a government firefighter with an imaginary private sector Ph.D’d engineer, (who muddled along at average schools with average grades, i.e. he’s someone who didn’t get the very best grade at the very best school and who didn’t land work at the very firms).
The firefighter:
If you started as a firefighter at age 19, you could begin saving and investing at age 19. No debts, and you begin accumulating savings and wealth. You retire at 50 at full salary and continue to save and invest your $100,000 pension.
The engineer:
What you earn between 19 and 25 is not enough to pay for your expensive schooling, and you borrow to pay for college and grad school. Let’s say at 26 you begin earning what the firefighter earns. You begin paying off your college loans, and a small margin in addition. You are already behind the firefighter, and you are not adding savings at the same rate as the firefighter. At age 50 you have finally paid off your student loans, but are still working — and you are way behind the firefighter in savings and investments. You work to 62 and you never catch up, because the firefighter matches you dollar for dollar via his retirement pension. You retire at 62, and live off your savings. And while you’re living off of savings, the firefighter is living off his $100,000 pension AND his superior fund of savings.
25. January 2011 at 13:20
You could also substitute “lawyer” or “doctor” in the above.
25. January 2011 at 13:30
Your posting got me thinking… With my three jobs I posted about $70K last year. My wife is a part-time artist/full-time mom. If she were working with her Master’s degree, we would be easily making over the $150K mark, but as it stands, I lost my house last year and declared bankruptcy. I’m slowly getting back on my feet again, but I’d hardly call myself “rich”.
There is a reason why only 5% of families make over $150K when you consider the number of single-earner households out there.
25. January 2011 at 13:35
@Greg Ransom:
A lot of firefighters don’t get paid at all, so its an odd comparison. The supply of fire fighters is high enough that one doesn’t really have to pay them much, but government follows political demand and supply not economic, so occasionally they get paid a lot.
25. January 2011 at 13:46
I think the vast majority of mistakes in considering these matters (especially in my case) comes from confusing households and individuals. Given that most of the people I know are unmarried, I tend to assume that when someone talks about the “top 5%” that they mean the top 5% EARNERS rather than the top 5% households.
As Thomas Sowell pointed out, one gets the reverse problem sometimes: looking at the income stagnation of households can look scary, unless one considers the difference between households and people, i.e. households are getting smallers, whereas Western individuals are (if anything) getting bigger vertically (and much bigger horizontally).
25. January 2011 at 13:47
* Households are getting smaller.
25. January 2011 at 13:50
Yes, people who make more than $150k are usually well out of touch with those who make $55k, one or both parents working most of the time. Median family income is somewhere south of $50k.
My wife never worked. So I work, and have side business, and I live an an very used Airstream trailer on a parking lot and drive a 1986 Isuzu. This allows me to buy land in Thailand, have been for years. In my neighborhood (Elysian Valley, Los Angeles) $150k a year would be regarded as a king’s ransom. In many of the shops around here you have hard-working guys at $10-$20 an hour. Their wives make $10-an-hour as waitresses etc.
I am not complaining, I chose my lot in life, and it is a good one. I got lucky in real estate (I bought a factory when cheap), plan to retire to Thailand, be a gentleman farmer.
But I get rankled when Congressmen or Supreme Court justices or jackanape intellectuals whine about $150k a year. That is piles of money. You are rich, by any historical standards. You live better than kings of two generations ago. I won’t even mentionm how people in Thailand live.
Jeez, I feel lucky if I can get into six figures, very lucky. Who are these whiners at $150k?
Oh, boo-hoo, you can’t a Mercedes and a second home at the same time.
25. January 2011 at 14:02
Mark, That would be a pretty big error by Saez-Piketty. Are they using old data, or defining income differently?
Oops, I see your second posts answers that.
Greg, I share your concern about public employee pensions. I’m opposed to defined benefit pensions. $6 million is a lot of money. I thought I was pretty rich, but when I move to LA there is no way my wife and I will be able to to afford living in neighborhoods with retired firemen.
W. Peden, Good point. Shrinking family size partly explains why per capita GDP has done better than average wages since the 1960s.
Benjamin, I completely agree.
25. January 2011 at 14:07
Tyler Cowen’s latest booklet is a bit of a shocker. If you buy his argument, you might want to target 2% NGDP growth in the future instead of 5%.
25. January 2011 at 14:40
Prof. Sumner,
I would add the problem of price indexes to assessing income growth over time. CPI in the US is estimated to overstate price inflation by about 1% or more, so real wages in the US have been rising significantly faster than the superficial statistics suggest.
25. January 2011 at 14:56
Scott,
Just to be excruciatingly clear, another source of the discrepancy between the Piketty/Saez and TPC data seems to be that the Piketty/Saez data (at least the part to which Ryan Avent is referring) excludes realized capital gains. So clearly Piketty/Saez is much more useful for your purposes.
The TPC data is interesting but needs to be taken in light of the fact it excludes households with negative income and includes realized capital gains, which evidently causes it to be both truncated and upwardly skewed. This also suggests that the median income of a single household, excluding realized capital gains, is probably less than $22,300.
25. January 2011 at 15:02
When you say “progressive consumption tax”, I think of our VAT, which has two rates: 6% for neccesities, 19% for luxuries. But you say that it is a payroll tax. Is a VAT also a kind of progressive consumption tax, or doesn’t it count for some reason?
25. January 2011 at 15:26
That reminds me of the story of equalland: http://www.daemonology.net/blog/2011-01-10-inequality-in-equalland.html
25. January 2011 at 15:51
I’d love to hear your comments on the UK economies “surprising” shrinkage due to fiscal austerity, despite an accommodative monetary policy.
http://www.telegraph.co.uk/finance/economics/8280664/George-Osborne-blames-snow-for-double-dip-threat.html
Expectations were for growth of 0.5%, but instead the UK economy shrunk by 0.5%. Weird right? Blame it on the snow?
Considering you wrote this: ‘So here’s my question to Keynesian readers: What is the Keynesian argument against British austerity? ”
http://www.themoneyillusion.com/?p=7719
I think you know the argument, now we have the facts.
With another quarter, we’ll have a technical recession. If that happens (2 quarters of GDP shrinking), will your reconsider your support for austerity?
25. January 2011 at 16:32
No worries. Lot’s of them retire and move to Idaho, Arizona & Texas.
Scott writes,
“I thought I was pretty rich, but when I move to LA there is no way my wife and I will be able to to afford living in neighborhoods with retired firemen.”
25. January 2011 at 16:34
Doc writes,
“A lot of firefighters don’t get paid at all”
Right. My cousin is a volunteer firefighter.
25. January 2011 at 18:17
Scott, nice piece in the economist. A couple of things.
1) Most of the studies on income in the U.S. are based on IRS AGI data, which are not very good for a number of reasons including: does not measure unrealized gains on assets, doesn’t include employee provided health insurance, doesn’t reflect the fact there is higher tax compliance (IMO) in the higher quintiles than the lower quintiles. Are there better data available.
2) Totally agree on the progressive tax. When you talk about efficiency, I assume you’re referring to reduction of the deadweight loss?
3) Mechanically how would you do the tax? Most of the literature talks about a deduction on your income tax for savings. Whey not make it simpler. Just eliminate the income tax, apply an across the board sales tax, and then give everyone two cards one of which allows you to purchase $15,000 worth of goods tax free and the other allows you to purchase $15,000 worth of goods at half the normal tax rate.
25. January 2011 at 18:52
Greg,
You shoulda been a firefighter. Good pay, awesome friendships, chicks dig you, and lots of time extra time to work as a fire safety consultant on the side. Surpise deaths aside, it rocks!!! Some people just make poor choices….
Joe
25. January 2011 at 19:41
Dirk, Not really, as I don’t care about inflation, only NGDP growth.
W. Peden, Maybe, but I don’t trust any price indices, even the corrected ones. Indeed no one yet has even offered a plausible definition of what the term “real income” means. Is it how much you’d need now to buy the goods bought in 1965, or how much someone would have needed in 1965 to buy the goods bought now?
Mark, Thanks for that info.
Woupiestek, Yes, that is probably sightly progressive. Both VATs and payroll taxes are consumption taxes.
Bill Mill, Just one more confirmation that there are no original ideas in economics. I’ll add an update.
justanothereconomist, You are confusing real and nominal GDP. Interestingly, I just wrote a paper for a British think tank that discusses this confusion. Hopefully I’ll be able to link to it soon.
I warned that it’s a huge mistake to criticize the BOE for letting inflation soar (it’s up to 3.7% in December), and also criticize fiscal policy for being too austere. The focus needs to be on NGDP. My post you linked to warned of exactly this possibility–high inflation and low real growth, but alas there is nothing stimulus can do about the problem. Not monetary stimulus, and certainly not fiscal stimulus. Indeed the Brits just raised the top rate to 50%, which is part of the (real) problem in Britain.
If people are calling on the BOE to tighten because inflation has risen to 3.7%, then there is certainly no liquidity trap in Britain. And even Krugman admits that without a liquidity trap there is no case for fiscal stimulus.
BTW, my own view is that the BOE should ignore the inflation threat and continue to ease, as it’s likely to fall short of its NGDP target.
Greg, Yes, if you think about it it’s obvious they’d want to retire in states like Texas. Affluent people are better off leaving LA unless something ties them to it.
dtoh, Good questions:
1. Consumption inequality is a much better metric.
2. Partly deadweight losses, but also horrible administrative costs. I spend 1000 times as much time doing my income tax as doing my payroll tax.
dtoh I like that sales tax idea, I had never thought of it. I was thinking of a progressive payroll tax. But we should do both. Do your sales tax idea, and a progressive payroll tax. Two taxes are more efficient.
25. January 2011 at 19:55
The 10 most dangerous jobs
Occupation Fatalities per 100,000
Timber cutters 117.8
Fishers 71.1
Pilots and navigators 69.8
Structural metal workers 58.2
Drivers-sales workers 37.9
Roofers 37
Electrical power installers 32.5
Farm occupations 28
Construction laborers 27.7
Truck drivers 25
25. January 2011 at 20:53
According to Census data (http://www.census.gov/hhes/www/income/data/historical/inequality/index.html), the lower limit of the top 5% of household income in 2009 was $180,001 (Table H-1). So Ryan Avent’s couple making $150,000 would not be in the top 5%, nor would a couple making $180,000 be “well up into the top 5 percent”.
Is that not the right data to look at?
25. January 2011 at 23:45
To add to dtoh’s point about AGI being a poor metric for comparison, here are a few reasons that spring immediately to mind:
1. AGI is often reduced by net operating losses carried forward from prior years.
2. AGI can be reduced by a number of line items that have little or nothing to do with actual income earned. Items such as moving expenses, alimony, student loan interest, etc. are drains on cash flow, but do not speak to the amount actually earned. I’m not saying these items should or shouldn’t reduce taxable income. Mostly these items reflect the costs of choices, of one sort or another.
3. AGI obviously doesn’t capture any income that is not subject to income tax. Good examples of tax-free income would include certain types of military (or civiian military contractor) pay, certain types of insurance annuities, tax-free municipal bonds, etc.
4. AGI doesn’t reflect any earned income which is deducted pre-tax, such as retirement contributions, many types of health-care spending, etc.
5. AGI doesn’t capture any income which you don’t choose to report on your 1040. Sounds simple, but this is a huge issue at the lower margin, for a lot of different reasons.
I also have to put emphasis on dtoh’s assertation that tax compliance is generally inversely correlated with level of income. A high earner has more to lose by fudging, is likely operating in a higher-visibility area of the economy (better chance of being audited), and is also more likely to be using a tax accountant who has certain professional obligations requiring a degree of honesty.
I work with a guy who maintains that if not for income tax, 95% of small businesses wouldn’t keep financial records at all. Unfortunately he’s far closer to right than wrong, and that doesn’t begin to address individuals. AGI is an awful way to measure income, however you want to define the term. Unfortunately it is probably the only semi-homogenous metric available for comparison, which is a shame.
25. January 2011 at 23:51
Scott,
You have made this point before and while I find it very interesting, I fail to see why it should have any bearing on tax policy.
If you take a person such as yourself, the average tax you pay over your lifetime is far less than you currently pay.
In fact, that’s something I like about progressive/flat taxation (as opposed to a head tax). It is inherently countercyclical, both business cycle and life cycle.
(1) During a recession people earn less and pay less tax.
(2) I’m 26 now (in western europe) and pay almost no taxes at all. Yet I benefit from the good infrastructure, health care and, perhaps biggest of all, free education (we don’t have student debts here). I even get to vote.
And people here get generous retirement paid by the government.
So over my lifetime I pay my dues when I can afford to, and get subsidized when I can’t.
It is not a heavy burden to bear: the wife and I manage on $20K, I can surely manage on $150K ten years down the line, even if I pay 50% income tax on everything above $60K.
Anyway, I prefer the nordic model: 25% VAT + 50% marginal tax on income + 1% wealth tax on all capital (above a threshold).
25. January 2011 at 23:54
@dtoh,
I once suggested to Scott that we institute a cash-flow or expenditure style progressive income tax (much like the USA Tax proposal) but he pooh-poohed it as far too complicated. You should feel honored that he likes your idea.
@justanothereconomist,
I thought Scott addressed your comment effectively but let me add a slightly different nuance.
My impression is that weather *did* play a significant role in the fourth quarter UK RGDP report. And given the inflation rate in the UK I agree with Scott that it is doubtful that they are in a liquidity trap, so fiscal stimulus is unnecessary even by Krugman’s standards.
However it is interesting to note that UK NGDP slowed down from over a 5% rate (the BOE’s supposed recent target rate) in 2009 Q3 through 2010 Q2 to only 3.6% in 2010 Q3 just as fiscal austerity kicked in. We won’t know how much NGDP rose in the fourth quarter because for some stupid reason the UK Office of National Statistics waits a whole month after releasing the RDGP numbers before releasing the NGDP numbers, but my guess is it was about 3.5%.
To borrow a Scott metaphor, in my opinion the UK national government yanked on the steering wheel six months ago but the BOE neglected to correct for it. The BOE Bank Rate has been fixed at 0.5% since March 2009 and there’s been no increase in its asset purchase program since November 2009. Despite a 3.7% yoy CPI they should be easing right now because it’s clear they’re not keeping up with their supposed goals for NGDP. (And whatever is holding the RGDP growth rate down right now should be addressed by some sort of supply side reforms.)
@Russ Anderson,
It’s my understanding that the Census Bureau income data includes nontaxable money income that neither Piketty/Saez nor the TPC include. However, they exclude realized capital gains as Piketty/Saez (in that particular series) and count households with negative income unlike the TPC. Scott can answer for himself but I suspect the Piketty/Saez data is of the most use for making his point concerning the relative standing of the hypothetical combined salary of a cop and a nurse.
26. January 2011 at 00:18
Scott, you say
QUOTE
dtoh I like that sales tax idea, I had never thought of it. I was thinking of a progressive payroll tax. But we should do both. Do your sales tax idea, and a progressive payroll tax. Two taxes are more efficient.
UNQUOTE
Could you explain why two taxes are more efficient? It seems to be me, it would be a lot easier to have just one tax with the tax discount cards, eliminate the IRS and bid the administration of the tax collection/payment and card issuance out to VISA or someone like that. If you have a payroll tax, a) you need an IRS and as you note income tax preparation is a huge wasteful burden on the economy, b) with a payroll tax, you’re taxing production rather consumption, and c) politically I think there is a lot greater risk of taxes going up on payroll than on consumption.
26. January 2011 at 00:33
Just one other thing on realized versus unrealized capital gains. It potentially makes a big difference to any conclusion about income distribution. If you assume (and IMO it’s a correct assumption) that a large majority of the tax payers making up the top percentile (or top few percentiles) of the highest income earners (per IRS data i.e. realized gains) have made a lot of money on gains on assets they have held for a long period of time (say 20 years), then you get what looks like a very skewered distribution. If on the other hand you only attribute to them that portion of the realized gain that accrued in the year the income was realized and you accrue to everyone else gains on assets even if they were not realized that year then you have a big share of income spread out amongst the top quintile instead of the top percentile.
26. January 2011 at 00:58
“Dirk, Not really, as I don’t care about inflation, only NGDP growth.”
Then I’m guessing you haven’t yet read Tyler’s very pessimistic view of the state of current affairs. He suggests that 3% real growth is a thing of the past and that the near term future will be more like 1%. If we can’t hope for more than 1% real growth why should we shoot for 5% NGDP growth?
26. January 2011 at 07:14
[…] A 95th percentile in income household is a cop and a nurse. […]
26. January 2011 at 07:34
Mark A. Sadowski,
That’s a good point about the BoE not adjusting for austerity. My hope is that, if the slowdown persists into Q1 2011, the BoE will engage in further quantitative easing. People will go ape, but the alternative is a double-dip.
26. January 2011 at 08:37
I think you’re overstating the life-cycle effect on inequality, and you’re ignoring the regional price parity angle, which, speaking of money illusion, no ever seems to talk about. The PPP deflator for Boston is about 1.25 according a recent BEA study, so your cop and nurse only make 152,000 in “real” terms.
Via wikipedia:
The highest median household income was found among households headed by working baby-boomers.[25] Households headed by persons between the ages of 45 and 54 had a median household income of $61,111 and a mean household income of $77,634.
http://en.wikipedia.org/wiki/Household_income_in_the_United_States
http://www.bea.gov/papers/pdf/aten_estimates_state_metro_2005.pdf
I’ll be interested to see your Britain paper. Obviously the UK example offers some interesting economic and political economy challenges. You say you don’t care about RGDP only NGDP, but I’ve always assumed your theory invovled some feedback between steady NGDP growth and more stable RGDP, even if delayed. For example, maintaining steady NGDP should allow labor markets to clear more quickly and ameliorate financial crisis, leading to less severe and shorter recessions. How long of a delay should one expect? And how would one frame the counter factuals to measure those effects?
26. January 2011 at 08:57
I read somewhere that a sales tax will be unable to capture 16-19% of GDP.
The cash transfer part for the poor is easy, how does a huge sales tax not get evaded?
26. January 2011 at 09:40
Do you have a 401k rather than a 403b?
26. January 2011 at 10:01
Why not compare households based on after-tax income? First, almost all households work (yes, even in the top groups), suffer withholding and never see the money anyway. Its odd to attribute income to a person who never touches or has use of it. Second, negative income tax increases a recipient’s wealth, but doesn’t always appear in AGI.
With these few changes, our nation could seriously flatten income disparity.
26. January 2011 at 11:18
Ugh, fun with statistics. OK, try this…
Please complete the following sentence:
“The typical dollar owned by families in the top 5% is owned by a…”
26. January 2011 at 13:24
Stats Guy:
rich person.
26. January 2011 at 20:08
Morgan, Economists didn’t make the list? How about lion tamers?
Russ, They were only looking at wage income, not total income. Same with me.
Charles, I agree, indeed I’ve argued that income is such a misleading concept as to be almost useless.
JL, I don’t think I claimed this post had any bearing on tax policy. I don’t think it does.
The Nordic system cannot be implemented in the US, but it does offer some lessons to us.
You said:
“Anyway, I prefer the nordic model: 25% VAT + 50% marginal tax on income + 1% wealth tax on all capital (above a threshold).”
Close. All taxes on capital, including the income tax, should be abolished. Then you can have a 25% VAT and a 50% top marginal rate on payroll taxes. That’s pretty close to the Nordic model, and more efficient.
Mark, That’s a good point about the UK’s NGDP, but again just goes to show how much we need NGDP futures. I follow the US pretty closely, so I have a sense of roughly where NGDP expectations are, but don’t follow the UK. It’s possible that the BOE has allowed NGDP expectations to fall below 5%, in which case we have monetary policy incompetence. Now I suppose someone could argue that monetary policy incompetence is less likely if you have fiscal stimulus, but I don’t quite see why that would be the case.
dtoh, Mark can correct me if I am wrong, but I believe tax cheating and distortions rise with the square of the tax rate. Thus a 20% VAT and a 20% payroll tax will lead to less cheating that a single 40% rate. But I may be wrong.
You said;
“If you have a payroll tax, a) you need an IRS and as you note income tax preparation is a huge wasteful burden on the economy,”
This confuses income and payroll taxes. Each year I spend about 30 hours doing income taxes, and about zero hours doing my payroll tax.
dtoh, That’s a good point about cap gains, indeed I’ve argued that income itself is an almost worthless concept, as there is no theoretical justification for combining capital and wage income. It’s like adding the number of blueberries and watermelon, and calling it the total number of fruit.
Dirk, You said;
“Then I’m guessing you haven’t yet read Tyler’s very pessimistic view of the state of current affairs. He suggests that 3% real growth is a thing of the past and that the near term future will be more like 1%. If we can’t hope for more than 1% real growth why should we shoot for 5% NGDP growth?”
You are still missing the point. The optimal rate of NGDP growth is the one that maximizes society’s welfare. It will not depend at all on what the inflation rate is. I don’t favor 5% NGDP growth because RGDP growth has been 3%, I favor it because wage and debt contracts have been signed on the expectation of 5% NGDP growth. It’s very hard to get out of the habit of thinking inflation matters, because we are constantly told it matters. But it is NGDP growth that actually matters. So any revision in trend RGDP growth should have no impact on the optimal rate of NGDP growth.
W. Peden, You said;
“People will go ape, but the alternative is a double-dip.”
In my recent article on the UK I pointed out that people are complaining about the BOE causing high inflation, and they are complaining about the fiscal austerity reducing growth, not realizing that both complaints CAN’T BE RIGHT.
OGT, You said;
“I think you’re overstating the life-cycle effect on inequality, and you’re ignoring the regional price parity angle”
How can I have overstated it, when I didn’t provide any numerical estimates?
I agree about regional disparities, but my post wasn’t intended to describe all the problems with income distribution numbers—there are literally too many to list.
You said;
“I’ll be interested to see your Britain paper. Obviously the UK example offers some interesting economic and political economy challenges. You say you don’t care about RGDP only NGDP, but I’ve always assumed your theory invovled some feedback between steady NGDP growth and more stable RGDP, even if delayed. For example, maintaining steady NGDP should allow labor markets to clear more quickly and ameliorate financial crisis, leading to less severe and shorter recessions. How long of a delay should one expect? And how would one frame the counter factuals to measure those effects?”
Yes, I’d expect feedback, and indeed with no lags at all. The questioner who I responded to was raising a different issue. He wasn’t saying more NGDP failed to boost growth, he was saying monetary policy was failing to boost RGDP. Both fiscal and monetary policy are supposed to boost RGDP by boosting NGDP. So if the problem is structural, fiscal stimulus will be just as ineffective as monetary stimulus–it will boost NGDP but not RGDP. I don’t know enough about the UK to comment, but the counterfactual that would disprove my demand side explanation of our recession in the US is fast price rises with slow RGDP rises. Say 4% inflation and 1 or 2% RGDP growth. If that happened in the US I’d have to conceded Tyler Cowen was right about the problem being mostly structural.
Morgan, Yes, That’s a problem.
Philo, 403b, but I didn’t want to have to explain what those were to people—and now you’ve made me do it!
bababooey, Good point.
Statsguy, This is strictly a sociological exercise. What does the typical rich family look like?
27. January 2011 at 09:21
Sumner- You said: “How can I have overstated it, when I didn’t provide any numerical estimates?”
Technically, yes. But your examples are atypical, indeed if the example involves a college graduate it is atypical as only 30% of American adults have a 4 year degree much less a PhD from a prestigious (if hopelessly misguided) program in his discipline.
Also, if the issue is whether the statistical growth in inequality in the last 30 or so years is a relavent concern (and that may not be your issue, but it the topic du jour), then one should point to reasons the life cycle effect is more pronounced now than in 1978 such as demographic changes.
On the other hand, geographic distribution has changed, with college graduates becoming significantly more clustered in high earning/high cost metro areas. I believe the overall geographic cost differentials have increased as well, though I am less sure there.
More importantly, on the UK. I think the current results point to the political need for any NGDP targets to be explicit. While it appears the that the BOE has perhaps pursued implicit NGDP targets they are being heavily criticized for overshooting on inflation, making the target much harder to maintain, especially if real growth continues to disapoint for any length of time.
I assume that counterfactual is based, in part, on your estimates of the magnitude of needed wage/debt adjustments in the US? I would assume in a country where 15-20% adjustments were needed a NGDP growth of 4% inflation and 1% real for a couple of years would be considered a vindication compared to the likely result if inflation and NGDP were allowed to fall.
29. January 2011 at 10:24
OGT, You said;
“Technically, yes. But your examples are atypical, indeed if the example involves a college graduate it is atypical as only 30% of American adults have a 4 year degree much less a PhD from a prestigious (if hopelessly misguided) program in his discipline.
Also, if the issue is whether the statistical growth in inequality in the last 30 or so years is a relavent concern (and that may not be your issue, but it the topic du jour), then one should point to reasons the life cycle effect is more pronounced now than in 1978 such as demographic changes.”
A few comments. Any real world example is atypical. I could have used farmers or construction wrorkers, who also often have very irregulat incomes. Ditto for realtors, or small business people.
Demographic changes are exaggerating the increase in wage inequality. People spend more years at low levels of income when young (extended adolescence) and many more years retired.
In any case, income distribution numbers are pretty much worthless, for all sorts of reasons. They certainly aren’t useful in showing economic inequality.
I agree that the NGDP target in Britain should be explicit, and it should be level targeting too.
I’m afraid I don’t understand your last paragraph.
BTW, the Chicago program of the 1970s was perhaps the best in the world at teaching people how to be good bloggers. I owe most of my success in blogging to what I learned at Chicago. We had a student come over from MIT, and he told us MIT didn’t teach students how to think intuitively about econ, that a Chicago student could almost always out-debate an MIT student. I’d guess that has totally changed, but the advantage in the 1970s was pronounced.
31. January 2011 at 12:04
“[W]age and debt contracts have been signed on the expectation of 5% NGDP growth.” They have also been signed in the expectation of 2% (or 2.3%) inflation (and, no doubt, all sorts of other expectations). Why think that the NGDP expectation is more important than the inflation expectation (or any of the other expectations)?
1. February 2011 at 07:40
Philo, When NGDP growth and inflation sharply diverge, it is due to supply shocks. But supply shocks should not be reflected in nominal wages, as they affect real income. Thus NGDP growth is what determines wages. For instance, in mid-2008 inflation was very high due to energy prices, but NGDP growth was low. And sure enough, wage growth was modest.
1. February 2011 at 07:51
Scott: And that´s why the “Great Inflation” came about. Burns would “compensate” a fall in real income from the supply shock by reving up NGDP. Wage-price spirals were the result.
1. February 2011 at 16:58
Marcus, Exactly.
23. September 2012 at 12:30
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