Category Archives: Economics

Some Brief Thoughts on the Minimum Wage

Here are some brief thoughts on the push for a $15 minimum wage, and particularly Robert Reich’s video in favor of that. After devoting diligent consideration to Reich’s seven points, I have come to the conclusion that he is full of it:

1. Yes, there has been inflation since the 1960s, which erodes the value of the minimum wage. Which side of this debate generally supports inflationary monetary policy?… Also, the productivity in the whole economy has increased, but not in the accommodations and food services sectors. In those sectors, the cost of labor has been outpacing productivity. See graph.

Unit Labor Cost

2. Low-wage jobs are not designed to support families; they are designed to give young, low-skill workers experience. And while a majority of minimum-wage earners are not teenagers, a large plurality of them are. Over half are younger than age 25. http://www.bls.gov/opub/ted/2013/ted_20130325.htm

3. I’ve heard this a lot lately, and it is completely backwards. When we subsidize the poor through those programs, we make not working a better alternative use of their time than before. This pushes wages HIGHER, since employers now have to compete with that better alternative. This doesn’t mean that we should balloon the welfare state, but if you are intent on helping the poor through government, programs like the EITC are a better less economically damaging way to do that.

4. This claim depends on the inelasticity of demand for labor and is automatically suspect, but even if it were true, there would be no real net benefit since the goods and services that the minimum-wage earners purchase would also increase in price. http://www.cato.org/blog/reich-wrong-minimum-wage

5. Before-tax profits for the fast food industry are around three percent. Companies cannot absorb such a drastic increase in labor costs. They will have to raise prices, which will hurt low-wage workers disproportionately. And while it’s true that employers compete for customers, a minimum wage applies to all employers, so each can rest assured that their competitors will face the exact same pressures. http://www.heritage.org/research/reports/2014/09/higher-fast-food-wages-higher-fast-food-prices

6. So, because Republicans will push for a lower-than-$10.10 minimum wage, Democrats should go for the higher $15.00 to compensate… which will ultimately give us 10.10? I though Reich supported a higher minimum wage than that. Shouldn’t he advocate for $19.90 so he can get what he really wants after the GOP forces a compromise?

7. If raising the minimum wage to $15.00 is right, wouldn’t raising it to $30.00 be even more right? If Reich thinks that’s a good idea, he more obviously reveals himself as an economic dunce. If, however, he responds that doing so would be economically infeasible, which it is, then he is saying that economics trumps morality. But if economics trumps morality, why is he even bringing this up as one of his seven points?

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Minnesota’s “Right to Work” Controversy

In response to a newly proposed constitutional “right to work” amendment, labor unions flooded the Capitol in St. Paul to voice their feelings on the matter. Not surprisingly, the general atmosphere is one of opposition, as Megan Bolt from the Pioneer Press reports,

“Union leaders argue a ban on closed shops is just an attempt to weaken unions, and will ultimately drive down wages, eliminate jobs, reduce benefits and deteriorate workplace safety as it has in other right-to-work states.”

“We’re just trying to keep our benefits,” [Jesse] Schultz said. “If they take out the middle class, they take out the backbone of America.”

They’re right about one thing: “right to work” will weaken unions, but don’t they ever wonder why that’s the case? Did it ever occur to them that people may not want to join a union?

More importantly, who is the “we” Schultz is talking about? It’s incredible to me how this union member uses loaded rhetoric like “middle class” when the interest of a union is to protect not the middle class, but the interests of those in the union. Those left outside of the union, the unemployed, are out of luck. How many people could be employed if employers didn’t have to pay highly-inflated wages and benefits to those who have no advantage other than getting there first/being employed the longest?

It may be true that banning closed shops will drive down wages and benefits. However, it might also drive them up, since having wages at the market equilibrium would allow for the hiring of more workers, which would increase productivity, which in turn raises earnings for the company. It might even be more cost effective based solely on the fact that an employee could be free from having their earnings garnished every month for little real benefit.

Another important factor is that employees may not want to support a political party as a condition of their employment. Trade unions are a major political special interest, and largely support leftist political parties, which in turn pass pro-union laws.

The opposition to “right to work” legislation boils down to an opposition to freedom in general. The people at the Capitol today simply demonstrated their reluctance to cede control of other workers’ lives. Right to Work legislation should be the law so every worker has an equal chance for employment on their terms.

Sources
http://m.apnews.com/ap/db_268748/contentdetail.htm?contentguid=Yqwcz8VQ

Another Reason to Like Rich People

They don’t just create jobs…

One of the most common complaints of a free market system comes from consumers who, while desiring a nascent product, are too in-affluent to buy it. I frequently see this sentiment emerge while reading the various technology and automotive blogs across the internet, where new products are introduced several times each day. Experienced bloggers and commentators are adept at shrugging off their disappointment in these situations; they know that consumers need only wait, and the product will eventually become affordable. Many people, however, don’t seem to understand how this occurs, and their bewilderment too often turns to impatience. To alleviate this problem, let me attempt an explanation of how a good or service becomes affordable.

First, an entrepreneur/producer has an idea for a product, either to create a new one or to improve upon an existing one. Because the product is relatively new and strange, the cost of building it is high. It requires lots of investment, research, time, and labor to create. The high cost of production necessarily translates into a high sale price.

Because the initial sale price of the new product is so high, relatively few people will be able to buy it outright—this small group of people consists of the most affluent among us. However, if the rich buy enough of the product, potential producers will interpret this as evidence of growing demand, and they will enter the market to capitalize on it. The subsequent combination of increased product supply from numerous competing firms, and streamlined production lines, causes prices to fall until profit margins can no longer support a growing number of producers. At this point, the market has reached the equilibrium of supply and demand, and the product is now affordable for the greatest number people.

Rich people are incessantly demonized by the envious and the despotic, but consider how our economy would be different if they were suddenly absent. Without rich people, new and expensive products would never be purchased. This would send a signal to potential entrepreneurs and producers that there is little likelihood for a return on their investments, which would seriously hamper the research and development of new products. It is difficult to imagine a world in which the shelves of our stores aren’t constantly being stocked with new products—a world where a better life is just out of reach—but such a world is possible when affluence is erased.

New products are risky. There’s a substantial chance that a new product will fail upon reaching the market. It is thanks to entrepreneurs and producers, who risk their time and resources on ideas, that we have an abundance of ever-improving tools and technology. However, we also owe thanks to the most affluent consumers who help determine if a product is viable. Because they’re willing to take a risk in buying a new product, the rest of us are eventually able to afford a higher standard of living.

Understanding ’80s Economics

With the resurgence of American conservatism and the advent of the Tea Parties, politics in the United States has become increasingly polarized. Often cited as evidence of superior fiscal/economic policies is the economic record of Ronald Reagan. Ronald Reagan has become a quasi-religious icon of the American conservative movement and on some practical levels he appeals to politicians of all ideologies. Even Barack Obama, considering himself to be like Reagan in manner and appeal, has invoked Reagan in order to garner support for his leftist policies. Nevertheless, Reagan’s popularity makes him a common target for criticism by the left. Unfortunately, too much of that criticism seems to go unanswered, and pundits on the right seem to take the soundness of Reagan’s policies for granted. I hope to give some support to conservative economic policies by providing some simple answers to questions and comments I’ve heard about our 40th president.

Question: Ronald Reagan is often lauded as a staunch fiscal conservative, but is he not responsible for an increase in U.S. debt by two trillion dollars?

It is true that the debt rose by $1.86 trillion under the Reagan administration, and it is also true that the debt ceiling was raised more often under the Reagan administration than under any administration in U.S. history.[1][2]

How was all this debt accrued? Wouldn’t a lack of budgetary restraint of this magnitude suggest fiscal liberalism, not conservatism?

It might suggest that, if we only look at total spending; but not all spending is created equal, and it is necessary to examine the components of federal spending as well. Federal outlays increased by $466 billion during the Reagan years—from $678 billion in 1981 to $1.1 trillion in 1989.[3] “Human Resources” spending (which includes spending for Social Security, Medicare, Medicaid, and other entitlement programs) accounted for 44 percent of the increase; defense spending accounted for another 31 percent; and every other form of spending (infrastructure, government payroll, general operations, etc.) took up the remaining 21 percent.[4] As we can see, entitlement spending was the primary driver of all federal outlays (a trend consistent with previous presidencies). Spending on the largest entitlement programs is not discretionary, meaning such spending is not affected by the government’s annual budgets, and fundamentally reforming these programs is extremely difficult without a unified government, something America did not have during any years of the Reagan presidency.[5][6] Ultimately, Reagan’s credentials as a conservative will be determined by your view on the effectiveness and necessity of the military buildup which he advanced. We should not lose our sense of perspective, however: Even if defense spending had remained at 1980 levels throughout Reagan’s presidency, the country would still have been running a $6.6 billion deficit in 1989 due to the increase in entitlement spending, something over which Reagan had minuscule control.[7]

Question: Setting aside the country’s fiscal status, what were the economic outcomes of the 1980s?

Under the Reagan administration, the United States began the longest sustained peacetime economic expansion in its history, and the second-longest during either peace or war. Real GDP grew by 33 percent from 1981 to 1989, averaging 4.13 percent annual growth.[8] Real per capita income grew by 22 percent over the same period.[9] There was a net gain of 16.2 million jobs, slashing the unemployment rate from 7.5 percent in January of 1981, to 5.4 percent in January of 1989.[10] The rate of inflation was cut from 11.82 percent in 1981 to 4.67 percent in 1989.[11] Private sector savings increased by $85 billion, and domestic private investment surged by a magnitude of $369 billion.[12] In short, Americans were working more, producing more, earning more, and benefiting from monetary appreciation, all at a faster rate than any other peaceful time in U.S. history.

How was all of this brought about?

From 1981 to 1989, Ronald Reagan signed a series of bills that lowered taxes overall and simplified the tax code. These bills, known collectively as the “Reagan Tax Cuts”, lowered the marginal rate on all income tax brackets—including a drop in the top marginal rate from 70 percent to 28 percent—reduced the capital gains tax from 28 percent to 20 percent, and indexed for inflation marginal tax rates at every income level.[14] They also reduced the Alternative Minimum Tax rate from 25 percent to 21 percent, and they repealed the Add-On Minimum Income Tax altogether.[15] Lastly, they cut the number of income tax brackets from fifteen to four, expanded personal exemptions, and limited deductions to make the tax code flatter and more fair.[16][17] In addition to the significant changes in the tax code, Ronald Reagan also heavily curbed the regulatory reach of the federal bureaucracy. Since its creation in 1936, the Federal Register—which annually chronicles the publication of all new federal regulations—has grown by thousands of pages. These executive edicts, which carry the force of law, saddle Uncle Sam with tens of billions of dollars per year in administrative costs alone, and they produce manifestly detrimental effects for the economy.[18] Up until 1980 this growth was exponential, but under Ronald Reagan the Federal Registry actually shrank from almost 90,000 pages to about 50,000 pages.[19] Although the steep upward trend resumed after Reagan left office, the vast combination of tax cuts and regulatory relief produced an economic climate of unprecedented strength throughout the decade.

Question: It seems that tax cuts of this magnitude would bankrupt the U.S. Treasury. Are these the policies that contributed to the huge amount of added U.S. debt accrued during the Reagan years?

No, in fact, the opposite is true: total federal tax receipts grew drastically, from $599 billion in 1981 to $991 billion in 1989.[20] If the economic growth of the 1980s hadn’t occurred as rapidly or persistently as it did, it’s safe to say that the debt would have been much greater than it was.

Question: How do we know that the economic growth is not attributable to well-timed monetary policy along the Keynesian vein of economics, rather than broad-based tax cuts?

Some have argued that Paul Volcker, Chairman of the Federal Reserve from 1979-1987, is chiefly responsible for the economic boom of the 1980s because of his monetary policies: Specifically, they claim that Volcker’s raising of the Federal Funds rate in the late 1970s reduced inflation, and although this policy caused a recession in 1981 and 1982, the eventual lowering of interest rates in 1982 allowed the economy to take off in 1983. While it is true that Volcker’s actions, which were actually endorsed by Reagan in 1979, greatly helped to curb inflation and the cycle of stagflation characteristic of the 1970s, it is incredible to say that these monetary policies caused the post-1982 boom. Interest rates actually fell twice between the summer of 1979 and the implementation of any of Reagan’s fiscal policies, but contrary to what Keynesian monetary theory would suggest, employment and gross private investment never rebounded to above-1979 levels until 1983 when the Economic Recovery Tax Act had almost been fully implemented (inflation never rebounded to 1979 levels during Reagan’s presidency, which also contradicts Keynesian economic theory because the increased demand should have caused inflation).[21][22][23][24] While it’s safe to say that Volcker’s monetary policies facilitated the economic growth of the 1980s, it’s erroneous to conclude that those policies spurred the growth.

Question: One of the most significant of the Reagan Tax Cuts was the Tax Reform Act of 1986, which decreased the marginal income tax rate for the highest income bracket and increased the rate for the lowest income bracket. Did the subsequent tax relief and economic growth only benefit the rich?

No. If anything, the poor benefited more than the rich. Between 1981 and 1989, the second-lowest and lowest income quintiles saw a drop in effective tax rates by 39.6 percent and 420 percent respectively.[25] This is only possible due to a doubling of personal exemptions and a tripling of the earned-income tax credit, which would have been impossible without the vast new revenue generated by economic growth. These changes effectively abrogated the tax liability of over 4 million low-income taxpayers. Conversely, the middle, second-highest, and top income quintiles saw more modest drops in their effective tax rates of 27.7 percent, 25.2 percent, and 6.3 percent respectively.[26]

We see similar trends when we look at the distribution of the federal income tax burden over the period. In 1981, the bottom 50 percent of income earners paid 7.45 percent of all federal income taxes, but in 1989, they paid only 5.83 percent.[27] By contrast, the top 1 percent of income earners paid 17.58 percent of federal income taxes in 1981, but by 1989 they paid 25.24 percent.[28] Clearly, the poor benefited demonstrably more than the rich in terms of tax liability.

Question: The change in the distribution of the federal income tax burden seems to outright contradict the change in nominal and effective income tax rates. How is this possible?

There are only two ways such a change in tax liabilities could occur after the aforementioned tax acts of 1981 and 1986: one way is if there were more people within the highest group of income earners in 1989 than 1981; the other is if the people in that group were making more money in 1989 than in 1981. The fact is that both occurred: from 1979 to 1986, the real average family income of the bottom income quintile rose 77 percent, 37 percent for the second-lowest quintile, 20 percent for the middle, 10 percent for the second-highest, and 5 percent for the highest.[29] In addition to the benefits of rising real incomes, individuals also benefited from huge amounts of economic mobility: according to a 1992 U.S. Treasury study, 86 percent of individual income tax filers in the lowest income quintile in 1979 had moved to a higher quintile by 1988, and 15 percent of them had moved to the top quintile. For the second-lowest quintile in 1979, 61 percent moved up, and 11 percent moved to the top. For the middle quintile, 47 percent moved up, and a little less than one-third of them moved to the top. For the second-highest quintile, 35 percent moved to the top, and in the top quintile, 65 percent of earners remained there after the 10-year stretch.[30]

Conclusion

The data would seem to confirm what we’d theoretically expect: Reducing the growth of government, cutting taxes, reducing regulation, and limiting inflation with sound monetary policy does in fact lead to economic growth. In a time today when the country is torn about how to get the economy moving again, we may want to look on the 1980s and the accomplishments of Ronald Reagan with a favorable light.

References
1. U.S. Department of the Treasury. Bureau of the Public Debt. Historical Debt Outstanding – Annual 1950 – 1999. Treasury Direct. Accessed 3 Aug. 2011. http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo4.htm

2. U.S. Office of Management and Budget. Statutory Limits on Federal Debt: 1940-Current. Table 7.3. Accessed 2 Aug. 2011. http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist07z3.xls

3. U.S. Office of Management and Budget. Fiscal Year 2014 Historical Tables: Budget of the U.S. Government. Table 1.1, p. 23, Apr. 2013. Accessed 7 Feb. 2014. http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/hist.pdf

4. Ibid. Table 3.1, p. 55-56

5. U.S. House of Representatives. Office of the Clerk. House History. Accessed 12 Aug. 2011. http://artandhistory.house.gov/house_history/

6. U.S. Senate. Senate Historical Office. Party Division in the Senate, 1789-Present. Accessed 12 Aug. 2011. http://www.senate.gov/pagelayout/history/one_item_and_teasers/partydiv.htm 

7. OMB. Historical Tables. op cit. Table 1.1, p 23. Table 3.1, p. 55-56. 

8. U.S. Department of Commerce. Bureau of Economic Analysis. National Income and Product Account Tables. Table 1.1.6, 29 Jul. 2011. Accessed 13 Aug. 2011. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

9. U.S. Department of Commerce. Bureau of the Census. Current Population Survey: Income: Total CPS Population and Per Capita Income. Table P-1. Accessed 13 Aug. 2011. http://www.census.gov/hhes/www/income/data/historical/people/

10. U.S. Department of Labor. Bureau of Labor Statistics.  Labor Force Statistics from the Current Population Survey. Accessed 14 Aug. 2011. http://www.bls.gov/data/

11. U.S. Department of Labor. Bureau of Labor Statistics. Consumer Price Index. Accessed 14 Aug. 2011. http://www.bls.gov/cpi/

12. Bureau of Economic Analysis. Account Tables. op cit. Table 1.1.6.

13. Freddie Mac. Monthly Average Commitment Rate and Points on 30-Year Fixed-Rate Mortgages Since 1971. Accessed 15 Aug. 2011. http://www.freddiemac.com/pmms/pmms30.htm

14. Board of Governors of the Federal Reserve System. Selected Interest Rates (Daily) – H.15: Historical Data. Accessed 15 Aug 2011. http://www.federalreserve.gov/releases/h15/data.htm

15. The Library of Congress, Thomas. Bill Summaries and Status. 97th Congress (1981-1982). H.R. 4242. Accessed 4 Aug. 2011. http://thomas.loc.gov/cgi-bin/bdquery/z?d097:HR04242:|TOM:/bss/d097query.html

16. The Library of Congress, Thomas. Bill Summaries and Status. 97th Congress (1981-1982). H.R. 4961. Accessed 4 Aug. 2011. http://thomas.loc.gov/cgi-bin/bdquery/z?d097:H.R.4961:

17. The Library of Congress, Thomas. Bill Summaries and Status. 99th Congress (1985-1986) H.R. 3838. Accessed 20 Aug. 2011. http://thomas.loc.gov/cgi-bin/bdquery/z?d099:H.R.3838:

18. Tax Foundation. Federal Individual Income Tax Rates History: Income Years 1913-2009. Accessed 4 Aug. 2011. http://taxfoundation.org/sites/taxfoundation.org/files/docs/fed_individual_rate_history_nominal%26adjusted-20110909.pdf

19. Dudley, Susan, and Melinda Warren. 2006. “Moderating Regulatory Growth: An Analysis of the U.S. Budget for Fiscal Years 2006 and 2007.” Weidenbaum Center on the Economy, Government, and Public Policy 28. Figure 1, p. 7. Accessed 16 Aug. 2011. http://wc.wustl.edu/files/wc/2007RegReport.pdf

20. Ibid. Figure 3, p. 9.

21. OMB. Historical Tables.  op. cit. Table 1.1, p. 22.

22.  Board of Governors. op cit.

23. U.S. Department of Labor. Bureau of Labor Statistics. Labor Force Statistics from the Current Population Survey. Accessed 14 Aug. 2001. http://www.bls.gov/data/

24. U.S. Department of Commerce. Bureau of Economic Analysis. op cit.

25. U.S. Department of Labor. Bureau of Labor Statistics. Consumer Price Index. Accessed 14 Aug. 2011. http://www.bls.gov/cpi/

26. U.S. Congress. Congressional Budget Office. Historical Effective Tax Rates, 1979 to 2005: Supplement with Additional Data on Sources of Income and High-Income Households. Table 1, p. 7. Accessed 24 Aug. 2011.

27. Ibid.

28. Heritage Foundation. 2011 Budget Chart Book. Percentage of Federal Income Taxes (2008). Accessed 3 Aug. 2011. http://www.heritage.org/BudgetChartBook/top10-percent-income-earners

29. Ibid.

30. Hubbard, R.G., J. Nunns, and W. Randolph. Household Income Changes over Time: Some Basic Questions and Facts. 1992. U.S. Department of the Treasury, Office of Tax Analysis. Table 6. Accessed 10 Jul. 2010. http://www0.gsb.columbia.edu/faculty/ghubbard/Articles%20for%20Web%20Site/Household%20Income%20Changes%20Over%20Time_Some%20Basic%20Questions%20and%20Facts.pdf

31. Ibid. Table 1.

December 2010: Unemployment Statistics Explained

The Bureau of Labor Statistics recently reported a decrease in the unemployment rate by four points during the month of December of 2010–from 9.8 percent to 9.4 percent. This would seem like good news, since the unemployment rate has been hovering at around 9.8 percent for many months. But when we look at the raw data, we see that the situation isn’t as optimistic as first indicated, and that the reasons for the drop in unemployment are far more insidious than we’d like.

For the month of December, the BLS reported a growth in the number of employed by 297,000 people. However, the number of unemployed decreased by 556,000 people. If you find these numbers a bit puzzling, you’re not alone. Where did those remaining 259,000 unemployed people go? It turns out that the civilian labor force, the total number of people currently either working or looking for work, decreased. The BLS refers to those people who left the labor force as either “marginally attached workers,” people who had looked for a job within the last 12 months but had stopped within the last four weeks, or “discouraged workers,” who have been without work for so long that they no longer believe there to be any jobs in the market. These people are not counted in the labor force, and their exodus from the labor force allows for the four point drop in the unemployment rate with only a surprisingly slight increase in the number of employed.

At the same time, the Civilian Non-institutional Population (anyone 16 or older and not in an institution such as a prison) increased by 174,000, offsetting the growth in employment so that the employment-population ratio only increased by a tenth of a percentage point. We can assume that none of these newcomers to the population actually joined the labor force, because the labor force decreased by 434,000–almost an exact sum of those who left, and those making up the population increase.

All this goes to show that we shouldn’t take all statistics at face value. The news media out there generally only report on the unemployment rate. Even though that rate went down, which is good, we shouldn’t lose sight of the story behind it. The rate would drop to zero if everyone simply left the labor force, but that wouldn’t solve the problem of unemployment. All this means is that we have a lot more work to do in terms of consistent job creation in this country.

A Leftist Misconception: Income Inequality

One of the most important issues to Americans is the economy. The state of the economy is something all Americans have a stake in, and there are a number of indicators we use to know how it’s fairing. GDP, unemployment rates, income, interest rates, and stock market returns are probably the most well-known indicators used by economists today. But there’s one lesser known indicator that leftists prefer to use for measuring the health of the economy: income inequality. While the previously mentioned indicators all measure efficiency in the economy, income inequality measures its equity. In other words, it’s a measure of one person or group’s economic welfare in relation to another. Leftists believe that the income divide between the rich and the poor in America has been widening. This is the misconception.

The main reason for the propagation of this misconception is a misreading of data from the U.S. Census Bureau. The Current Population Survey, the Bureau’s monthly survey of demographic information on roughly 50,000 people, has facilitated the collection of labor statistics for over 50 years. In the year 2000, the Census Bureau published a report summarizing the survey’s findings on income statistics over that time period, with special attention given to the disparity between the concentrations of household income within certain arbitrary statistical ranges. In order to quantify disparity, the report used the Gini Coefficient: a point on a 0 to 1 scale, where at 0 income is equally shared among all people, and at 1 all income resides with one person. According to the report, the Gini coefficient has been increasing steadily from 1968 to 1998, meaning that America has been becoming more unequal. Leftists like to take these data at face value because it justifies their egalitarian tendencies.

Unfortunately, there are some problems with measuring inequality this way. The first is the use of household incomes instead of individual incomes. The average household size for all Americans, according to Current Population Survey, has been steadily decreasing since before 1968, and that downward trajectory continues to this day. As we would expect, this has allowed the concentration of income in each quintile of households to change despite contradictory changes in median individual income over the same time period. Unfortunately, individual incomes cannot be effectively used to calculate the Gini Coefficient because of factors like unearned income, the earned income tax credit, government in-kind transfers, and countless other variables which can only be measured individually.

The main problem with the Gini Coefficient, however, is that it relies on measuring the concentration of incomes within statistical ranges. When you do this, income stops being a characteristic of a person, and starts being a characteristic of a given statistical range. Statistical ranges such as quintiles only outline boundaries, however, which are superimposed onto an income scale to capture multiple units of data. Looking only at these boundaries instead of looking at the people within them is going to give us a distorted view of the economy. The simple reason for this is that the statistical ranges of income on which the Gini Coefficient relies do not change: the bottom income quintile will always be the bottom income quintile, no matter how much income the people within that quintile individually earn over time.

This fact approaches the heart of the problem. What if a person within one income quintile begins to make so much money that he/she moves to a higher quintile? Likewise, what if a person takes such a sharp pay cut that he/she moves to a lower one?

The Gini Coefficient cannot measure these occurrences. In other words, the Gini Coefficient cannot measure income mobility.  We should all be concerned with the phenomenon of income mobility (the ease with which one can change their own income) because it is the free-market remedy for inequality, and it is one of our most important traditional values as Americans. It can be contrasted with redistribution, which is the leftist remedy for inequality.

We’ve now established that the Gini coefficient is inadequate for ascertaining the state of income mobility, so we need another measurement to use in its stead. What happens when we abandon the Gini Coefficient’s reliance on measuring household income concentrations within quintiles, and focus instead on the changes in individual incomes over time? Do we still see the growing disparity between the rich and poor in this country like the Census would suggest is occurring? No! In fact, the opposite has been occurring! In 2007, the U.S. Department of the Treasury published a report of trends in income mobility in the decade of 1996 to 2005. Using data from a sample of tax returns for over one-hundred and sixty thousand primary and secondary taxpayers, the Treasury finds that

There is considerable income mobility of individuals in the U.S. economy over the 1996 through 2005 period. More than half of taxpayers (56 percent by one measure and 55 percent by another measure) moved to a different income quintile between 1996 and 2005. About half (58 percent by one measure and 45 percent by another measure) of those in the bottom income quintile in 1996 moved to a higher income group by 2005.

In addition to reporting on income mobility, the report offers some insight on the overall strength of the economy. Also, the poor benefited more from income mobility than did the rich:

Median incomes of taxpayers in the sample increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. Further, the median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups. The median inflation-adjusted incomes of the taxpayers who were in the very highest income groups in 1996 declined by 2005.

The composition of the very top income groups changes dramatically over time. Less than half (40 percent or 43 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Only about 25 percent of the individuals in the top 1/100th percent in 1996 remained in the top 1/100th percent in 2005.

The report also comments that

The degree of relative income mobility among income groups over the 1996 to 2005 period is very similar to that over the prior decade (1987 to 1996). To the extent that increasing income inequality widened income gaps, this was offset by increased absolute income mobility so that relative income mobility has neither increased nor decreased over the past 20 years.

Referenced in the study is a litany of prior research on income mobility dating back to the 1960s, all of which indicates that there was a large amount of mobility within past decades as well, especially in the decade of 1979-1988, where by one measurement, “86 percent of taxpayers in the lowest income quintile in 1979 had moved to a higher quintile by 1988 and 15 percent of them had moved all the way to the top quintile.”

Leftists and others looking at the Current Population Survey might suggest that more government regulation and more progressive tax policies are needed to improve equity in the economy, but if we’ve learned anything here, it’s that liberty and opportunity are the greatest equalizers. If we wish to promote equality of opportunity, we should ensure a free market economy, of which economic freedom and mobility is a central component. We should accordingly dismiss the policies that, in an effort to achieve equality of outcomes, must necessarily destroy that freedom and mobility.

The Cost of College

Why state aid is the problem, not the solution

Of all the issues concerning college students these days, few hit closer to home than the issue of college tuition. In a world where a college education–especially a four-year degree–is seen as a bare necessity to compete in the global economy, making a quality education affordable to the most people should be of utmost importance to us as a society. Many people view higher education as something the government should predominantly, if not completely, fund. This sentiment surfaced in Wisconsin with the advent of Governor Walker’s Budget Repair Bill, and prevailed in the discussion surrounding his subsequent biennial budget proposal. Absent from this discussion, however, was a thoughtful inquiry into the root causes of skyrocketing tuition, and the true effects of government aid to public colleges and universities.

For a quick macroeconomics refresher, let us first observe the basic roles of costs and prices in a normal market situation. In a normal market situation, competing firms strategically limit costs and prices in order to attract customers and maximize revenue, which will consequently maximize profit.

This is not the case in the world of higher education, where very few colleges operate under the motivation for profit. In the world of higher education, prices are heavily subsidized by the government. The University of Wisconsin itself derives a hefty amount of financial comfort from this system. Students, just look at your fall semester bill sometime: at the bottom, under “IMPORTANT NOTES” you’ll see a message that says “The Legislature and Governor have authorized $1,001,508,980 of state funds for the University of Wisconsin System and its students during the 2011-2012 academic year. This is a tuition subsidy of $6,418 per student from the taxpayers of Wisconsin.” Because of this, the student is never faced with the true cost of their college experience, and colleges have no incentive to limit costs because they know the government will pay for most of the resulting growth in the price. However: one substantial problem arises from this: Whenever a subsidy shields consumers from the true cost of a product, they tend to overuse the product, and whenever consumers overuse a product, that product will be more costly to produce. Unfortunately, government doesn’t cover all of the new costs incurred by the university, and these costs are passed on to the students. Consequently, we have seen tuition rise far faster than the rate of inflation. According to the College Board, in the last decade alone, tuition at a public four-year college or university has had an average annual growth of 5.6% above the rate of inflation. In fact, it is now 259% more expensive today than it was in 1980, even after adjusting for inflation, and we can see similar trends in both private four-year colleges and public two-year colleges.

This problem is exacerbated by the fact that the assessments of various college accrediting agencies, such as the American Bar Association: Council of the Section of Legal Education and Admissions to the Bar, and the American Dental Association, set academic standards for colleges based primarily on inputs–how much the college spends–and not on outputs, or the individual end result of higher education. This forces even the smallest and most frugal colleges to constantly spend more than they otherwise would, on things they don’t need, simply to gain accreditation. Colleges are also required to periodically publish research in journals and reviews in order to gain accreditation. This diverts resources (professors) from teaching and focuses them on research.

There are two main things we can do to limit the price of college education. First, is simply to stop or severely limit our subsidization of it. Without the promise of massive government funding, colleges would be forced to make more prudent decisions regarding costs, and eliminate waste. If they didn’t, the costs they amass would be too great to sustain because the unsubsidized tuition would prevent students from attending altogether.

Second, we must have accrediting agencies more concerned with the results of education at a specific college, not with how much the college spends. The Secretary of Education is required by law to publish a list of nationally recognized accrediting agencies which are considered reliable in the evaluation of colleges. Any accrediting agency which does not focus primarily the educational outputs of colleges should not be included, and we should not rely on them as a proper gauge of higher education quality.

This doesn’t mean we’d have to sacrifice quality of education either. Colleges could still achieve positive results by finding cost effective ways to deliver education, such as prioritizing teaching over research, providing more flexible hours and classrooms in which professors can teach, and through implementing online teaching technology. College tuition may still rise, but it would rise more gradually, concurrent with inflation.

If we continue to trust the misguided recommendations of accrediting agencies, and if we continue to heavily subsidize our compliance with those recommendations, then we will continue to see a rapid growth in college tuition, as we see today.