Income Inequality in the U.S. II. How Do We Alleviate It?

My last post points out that there is a relatively small degree of income inequality in the U.S., not nearly as bad as is commonly portrayed by the media, after taxes and government transfers are taken into account.  Nevertheless, it would represent progress if low-income people could earn higher salaries and not have to depend so much on government welfare programs to boost their disposable incomes.

How can this be accomplished?  A new book, “Unbound” by Heather Boushey makes a number of practical suggestions:

  • Increase early childhood education opportunities. “Children’s test scores at age seven can explain 4 percent to 5 percent of the variation in employment at age thirty-three.”
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  • Increase social mobility. A child is better off in an environment “less segregated by race and income, with a strong middle class, better schools, better test scores, and with fewer single parent families.”
  • Maintain full employment. “One of the best ways to create opportunity is full employment.”  This, of course, is exactly what the Trump economy has accomplished.
  • High degree of market concentration. “One metric of the effects of high market concentration on innovation is the reduction in the number of startups.”  Interestingly, another new book, “The Great Reversal: how America gave up on free markets” by the economic conservative Thomas Philipon, makes the very same case.
  • The economic cycle. “We’re learning from evidence that broad prosperity for those on the bottom and middle rungs of the economic ladder not only reduce inequality but also can create better economic outcomes.”  This is precisely what our currently generous government transfer programs and low unemployment rates are already accomplishing.

Conclusion.  It would be much better to decrease income inequality by increasing market incomes of those on the bottom rather than doing it primarily with government transfer programs. Ms. Boushey has some good ideas for accomplishing this goal, several of which are already being implemented.

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Income Inequality in the U.S. I. How Bad Is It?

Income inequality is a hot political issue in the U.S.  The 400 wealthiest Americans are each worth more than $2 billion.  The top 1% of American families have an annual household income of $422,000 or more.

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But let’s look at income inequality from a different perspective (see chart):

  • The average bottom quintile household earns only $4,908 while the average top quintile household earns $295,904 or 60 times as much. This is a huge difference but it is before taxes and government transfers.
  • The bottom quintile receives $45,389 in government transfers and $3,313 in private and charitable sources. They also pay an average of $2709 in taxes, mostly sales, property and excise, for a net household income of $50, 901.
  • The average top quintile household pays an average of $109,125 in taxes and is left, after taxes and transfer payments, with an income of $194,106.
  • This works out to a net income ratio of 3.8 as opposed to the above gross income ratio of 60. This is, of course, an enormous difference.
  • More generally, there is an annual $1.9 trillion in transfer payments to American households coming from 95 different federal programs such as Medicare, Medicaid and food stamps and dozens of state and local programs.
  • Government transfers make up 89% of resources available to the bottom quintile of households and more than 50% of resources available to the second quintile.
  • More than 80% of all taxes are paid by the top two quintiles. More than 70% of all government transfers go to the bottom two quintiles.

Conclusion.  “Antipoverty spending in the past 50 years has raised most of the households in the bottom quintile into the middle class.  … Any debate about further redistribution of resources needs to be tethered to these facts.”  Next: what more should we do to lessen income inequality?

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The Trump Economy Continues to do Well

As much as possible I try to stick to issues and stay away from personalities on this blog.  But I have occasionally criticized President Trump for various failings such as ignoring our rapidly growing national debt.

Several recent posts have pointed out that the American middle class is thriving and expanding as a proportion of the overall population, see here and here.

The latest news this week about the U.S. economy is also very good. Consider:

  • The overall unemployment rate is now 3.6%, the 20th consecutive month at or below 4%.
  • The average job growth for 2019 is now (as of November 1) 167,000 per month, amazingly good considering how low the unemployment rate is.
  • The employment ratio for prime-age workers, aged 25 to 54, is up to 80.3%, the highest since January 2007 (see chart) and the overall labor participation rate is up to 63.3% as well.Capture74
  • The unemployment rate for African/Americans is now 5.4%, the lowest since records have been kept, and the third month in a row at 5.5% or less.
  • Average hourly earnings are $28.18 per hour, 3% higher than a year ago.
  • According to the Sahm Signal (When the three month average of the jobless rate has risen .5 percentage points from its previous 12 month low, the U.S. is in recession), the U.S. has not entered a recession.Capture75

“All of this bodes well for consumer spending going forward and makes a near-term recession even more unlikely.”

Summary.  The U.S. economy is now humming along quite nicely, even if GDP has returned (as of Nov 1) to 2% annual growth.  As long as the prime-age and overall labor force participation ratios continue to grow, consumer spending should continue to be strong enough to keep the economy out of recession.

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Should the U.S. Withdraw from the Middle East?

In this blog I discuss mainly economic and fiscal issues because it is in this area where the U.S. is in the greatest long term danger.  However our national welfare depends on good policy in many other areas as well.  For example, our best friends internationally are other democracies and so the spread of democracy around the world is in our best interest.
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But more specifically what should we be doing in the Middle East which is such a big mess?  To what extent should we take sides in the ongoing wars in this part of the world?  Should we rather withdraw completely?

Here are the stakes for the U.S. in the Middle East:

  • We want Turkey to remain an ally. It is a democracy and the only majority Muslim member of NATO.  It occupies a strategic position between Europe and the Middle East.  Over three million Syrian war refugees now live in Turkey and are straining the Turkish economy. Turkey is not our enemy.
  • Russia and Iran are our enemies and, unfortunately, this will probably not change in the near future. Russia is in demographic and economic (because of low oil prices) decline and Vladimir Putin is a troublemaker.  Iran wants nuclear weapons and considers the U.S. to be the Great Satan.
  • The brave Kurdish people, spread out between Syria, Turkey, Iraq and Iran, are caught in the middle. They want their own country of Kurdistan but they are not nearly strong enough to make this happen.  Turkey President Erdogan views the Kurds as terrorists.

Something has to give.  We don’t have a stake in the Syrian conflict and we can only do so much to protect the Kurds.  By withdrawing U.S. troops from Syria, President Trump is moving in the right direction even if doing so clumsily.

Conclusion.  We should coordinate with Turkey in trying to end the Syrian war, protecting the Kurds as much as possible.  We cannot realistically completely withdraw from the Middle East.

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The Dematerialization of the American Economy

In my last post, I described several different ways in which the American economy is producing more from less: corn production has dramatically increased even as corn acreage has leveled off; the use of basic commodities in the U.S. is shrinking; U.S. water withdrawals have plateaued; carbon emissions are dropping even as GDP continues to increase.

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What causes all of this dematerialization?  Andrew McAfee makes a persuasive case that dematerialization is driven by both capitalism and technological progress.  Here are several examples:

  • Fertile Farms. In 1982, 380 million acres of the U.S. was under cultivation.  In 2015, total farm acreage had dropped by 45 million acres.
  • Thin Cans. In 1959 a Coors beer can weighed 85 grams.  By 2011 this was reduced to 12.75 grams.
  • Gone Gizmos. Today a single pocket sized iPhone contains an altimeter, atlas, barometer, calculator, camcorder. camera, clock radio, compact discs, compass, GPS device, mobile telephone, tape recorder, etc., etc.
  • Taking Stock of Rolling Stock. In the 1960s major railroads owned thousands of railcars, only 5% of which moved on any one day.  If that could have been increased to just 10% per day, only half as many rail cars would have been needed.  Today each piece of rolling stock has a radio-frequency identification tag and the country’s 450 railroads have real-time visibility over their rolling stock.

What is going on?

  • We want more all the time but not more resources. Economic growth has become decoupled from resource consumption.
  • Materials cost money that companies would rather not spend. Competition forces companies to operate as efficiently as possible.
  • Innovation is hard to foresee. Neither the fracking revolution nor the world-changing impact of the iPhone were forseen in advance.
  •  As the Second Machine Age progresses, dematerialization accelerates. The Industrial Era allowed us to overcome the limitations of muscle power.  Our current era of great progress in computing allows us to overcome the limitations of mental power.

Conclusion.  “We are now lightening our total consumption and treading more lightly on our planet.  We’re accomplishing this because of the combination of technological progress and capitalism, which let us get more from less.”

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More from Less: There is Hope for Planet Earth

It is impossible to comprehend the world (in my opinion) without a coherent theoretical framework.  As my readers know, I am an economic conservative and a social moderate.  I am also an eternal optimist.  I am naturally attracted to ideas which fit into this general framework.
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For example, I am impressed by a number of recent authors, see here and here, who provide convincing evidence that the world is gradually getting better in many different ways: more affluence, less poverty, less violence, better sanitation, more equality, etc.

Furthermore I have just recently become aware of the work of two authors, Jesse Ausubel and Andrew McAfee, who provide strong evidence that humanity has started to become a better steward of planet earth.  Mr Ausubel, “The Return of Nature: how technology liberates the environment” and Mr. McAfee, “More from Less” give many examples of the “dematerialization” of the American economy.  For example:

  • U.S. corn production has dramatically increased in recent years even as corn acreage has leveled off (see chart).

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  • The amount of land worldwide used for agricultural production is shrinking (see chart).
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  • The use of basic commodities in the U.S. is shrinking (see chart).

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  • Total U.S. water withdrawals have plateaued in absolute terms and are shrinking dramatically relative to GDP (see chart).

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  • U.S. carbon emissions are dropping even as GDP continues to rise (see chart and also here).  Of course, it is well understood that global warming is a huge threat to human civilization and we have to continue to shrink carbon emissions far more than we have already.

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Conclusion.  The world’s leading economy has turned the corner on the use of many raw materials and is now “post peak”.  As other countries become more affluent their economies will likely behave in a similar manner.  This trend will continue for fundamental economic reasons, mostly without onerous governmental regulation.  Why is this?  Stay tuned!

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Controlling the High Cost of American Healthcare II. What are the Options?

As the readers of this blog know, I focus on what I consider to be our country’s biggest problems.  Right now the biggest problem of all is our rapidly growing and largely out-of-control national debt.  The only way we will solve our debt problem is to control the growth of entitlement spending, especially for public healthcare programs such as Medicare and Medicaid.  But the basic problem with these programs is the overall cost of healthcare in the U.S. which is far more expensive than in any other developed country.

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What are our options for controlling healthcare costs in the U.S.?

  • In “Overcharged”, the authors claim that $1 trillion of the total annual cost of U.S. healthcare of $3.5 trillion, is due to fraud, waste and abuse. There are thousands of whistleblowers in the healthcare industry who share in funds recovered from fraud but recovered funds are just a drop in the bucket to what is lost.
  • The price of new drugs can be outrageous. For example, the drug Soliris, to treat a rare blood disease affecting 10,000 people in North America and Europe costs $440,000 per patient per year for the rest of their lives.  Clearly at least some government regulation of drug prices is justified.
  • “Healthcare is expensive because it is insured.” If individuals paid directly for routine healthcare, costs would go way down.  Medical tourism and retail clinics such as Urgent Care would flourish, doctors would compete on price, and cost of treatment would drop dramatically. Of course, we would all still need high deductible catastrophic insurance for major health problems such as heart attacks and cancer.

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  • There are a variety of different models for healthcare systems in other developed countries but they all have one thing in common: “What other countries have learned is that without some form of price regulation, there is no effective check on prices.”

Summary.  There are various ways to lower the cost of healthcare in the U.S. such as cracking down harder on fraud and abuse, doing a better job of regulating new drug approvals and encouraging direct payment for routine healthcare by increasing the use of catastrophic health insurance.  But these approaches are all hard to implement and the only practical alternative is for government price regulation of some sort.  Healthcare prices must be dramatically lowered and if the free market can’t get the job done, then government price regulation will inevitably result.

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