Poverty & Social Welfare

March 4, 2020 6:13PM

Ignoring Social Security Paints False Wealth Inequality Picture

My recent paper with Chris Edwards concluded that studies estimating wealth inequality without accounting for Social Security would both exaggerate the level of inequality and overestimate its increases since the 1980s.

We realized that increasing amounts of wealth for the bottom 90 percent had become tied up in Social Security claims over the past three decades. And a host of evidence suggests that redistributive programs, such as Social Security, actively crowd out private saving among those on modest incomes.

By reducing the incentive and ability for lower paid workers to save (not least because of payroll taxes), Social Security widens marketable wealth inequality, which has been the focus of most inequality studies. Perversely, critics of current levels of marketable wealth inequality then use these calculations ignoring Social Security as justification for increasing the generosity of transfer programs such as Social Security, that would iwiden their preferred wealth inequality metrics further.

A new study from University of Pennsylvania economists adds empirical blast to our intuition. Whereas the oft‐​cited work of Thomas Piketty et al restricts wealth inequality statistics to the distribution of marketable assets, this new study estimates the present value of Social Security wealth too, before assigning it across the wealth distribution.

Its conclusions are striking. Adjusting for Social Security wealth not only substantially reduces the level of wealth apparently “held” by the top 1 percent and top 10 percent, it completely changes the trend since 1989:

Our most conservative estimates suggest that between 1989 and 2016 the top 10% share [of wealth] declined by 3 percentage points and the top 1% share increased only slightly by 1.2 percentage points. This differs drastically from recent work that excludes Social Security and finds the top 10% and 1% shares rose by over 10 percentage points over this period.

Why does including Social Security wealth have such a dramatic effect? Well, first, because the implied wealth is large, at around 42 percent of marketable wealth today. But, second, because Social Security wealth has increased over three‐​fold between 1989 and 2016, due to expansions of the program, a fall in real interest rates, and population aging, which means the share of workers near the peak of their Social Security wealth (just before retirement) is larger. As a result, in 2016 Social Security represented 57.7 percent of all wealth held by the bottom 90 percent by net wealth, up from 14.2 percent in 1989.

As the study makes clear, there is no convincing rationale for excluding Social Security from studies of wealth concentration. But doing so exaggerates both wealth inequality levels and its increases over the last three decades. If some academics still contest that marketable wealth inequality alone tells us something interesting, then they must also acknowledge that Social Security’s existence widens that measure.

Strangely, those who consider marketable wealth inequality a huge problem do not often advocate abolishing Social Security to narrow it. In fact, the opposite. So do they really care as much about wealth inequality as their rhetoric suggests?

January 27, 2020 2:12PM

The Folly Of Bernie Sanders’ National Rent Control Proposal

“Landlords cannot be allowed to raise rents to whatever they want, whenever they want,” Senator Bernie Sanders boomed on Twitter in November. “We need…a national rent control standard.” Now, his presidential campaign advocates one: under Sanders’ housing proposals, all landlords nationwide would only be able to increase rents annually by one and a half times the rate of inflation or 3 percent, whichever is higher. Assuming the current CPI for Urban Consumers is the inflation measure used, that would mean a rent increase cap today of just 3.4 percent.

Given the likely unconstitutionality of a truly national rent control law, one suspects Sanders should be taken seriously but not literally. What he is really doing here is endorsing a spate of new rent control laws across states, encouraging left‐​wing activists to push for more stringent restrictions elsewhere. California has already instituted a 5 percent plus inflation cap for older buildings. Oregon has passed a rent increase cap of seven percent per year above CPI. New York just expanded protections for existing rent stabilized tenants and is expected to follow the others with a proposal for a general rent cap.

But that Sanders’ national proposal probably won’t or can’t be implemented doesn’t mean his reasoning won’t damage housing policy across the country. His claim that landlords can charge “whatever they want” entrenches the idea that rents are set through greed or market power, not supply and demand. And if crude, low level rent increase caps are implemented even in individual cities, it could have disastrous consequences in “hot” markets – particularly given proposals like his are shorn of the exemptions one usually sees for small‐​time landlords, new properties or vacant units, that can provide a safety valve for the rental market.

To see the folly of a national rent policy, consider the differential state of major U.S. housing markets. According to a Demographia report last week, Rochester, New York has a median house price just two‐​and‐​a‐​half times the median income for the city. Similarly affordable housing can be found in Cleveland, Ohio and Oklahoma City (both 2.7 median multiples). On the other end of the spectrum, major Californian housing markets such as Los Angeles, San Jose, and San Francisco all have mean multiples above 8, while Seattle (5.5), Miami (5.4), and New York (5.4) are still deemed “severely unaffordable.”

Given housing affordability varies so much, we shouldn’t be surprised that rents similarly differ by locality. And if we accept that rents differ across the country for similar housing because of different household sizes, incomes, land use and zoning laws, and more, it stands to reason that average rents will change at different rates year‐​to‐​year as these supply and demand factors vary.

Looking across the last 20 years shows this clearly (see Table 1). In the broad housing markets around San Francisco, Seattle, Miami and Denver, average rent increases have exceeded what Bernie Sanders’ proposal would allow in over one of every two years. In contrast, cities such as Milwaukee, Cleveland, and St Louis have rarely seen rent increases exceed Sanders’ arbitrary cap. Within cities, we’d expect differences by neighborhood too (though perhaps with lower variance).

Years in Which Bernie Sanders' Rent Control Law Would Have Bound, On Average, By Metropolitan Area (2000-2019)

Is there any reason to suspect that landlords have been greedier in Miami than Milwaukee, or Seattle than St Louis? Or is it more likely that supply and demand trends have been different across cities over that 20 years? This evidence, plus the fact that rents within individual cities’ neighborhoods tend to quickly converge for certain property types and size, suggests that landlords cannot raise rents to “whatever they, whenever they want.” In reality, they are constrained both by tenants’ ability to pay and the availability of substitute properties. Or, to put it another way, by supply and demand.

Once one accepts that rental prices are overwhelmingly the product of market forces, not landlord greed, you see why rent control, especially as Sanders’ envisages, is such a misguided idea. It effectively seeks to drown out the message that rising rents is submitting – of an increased relative scarcity of rentable accommodation that has led rents to rise to clear the market. Instead, capping rents forces on the market the comforting lie that property is abundant. That produces a whole range of well‐​documented consequences.

Consider neighborhoods where market rents are expected to rise in the coming year beyond Sanders’ current 3.4 percent cap. The rent control will therefore bind, and if market rents continue increasing rapidly (perhaps because of an unresponsive supply of new housing to demand) then rents paid will become lower and lower relative to the underlying market rent. For hot rental markets:

  1. Once it becomes clear rent controls are likely to be implemented, some landlords may seek to raise rents today before the cap becomes law, second‐​guessing how market rents will evolve in the very near future.
  2. Once the rent control binds, there will be a shortage of property relative to the quantity demanded. Existing landlords will, on the margin, seek to find ways to convert rental accommodation into non‐​controlled forms of accommodation, such as condos, offices, use through AirBnB, owner‐​occupancy, and more.
  3. Since rents cannot adjust to the new market reality over time, and there are no exemptions for new properties, capital investment in new rentable accommodation will fall in neighborhoods affected. Existing buildings will likewise be knocked down and replaced with buildings for other uses. These effects will be exacerbated if landlords perceive rent control to be the precursor for other restrictions on how they use their buildings or choose their tenants. The overall supply of rentable accommodation in the market will therefore fall relative to where it would have been.
  4. Existing tenants who do not want to move will benefit significantly from the controls, with big rent savings. But over time that will mean many people being in accommodation that is the wrong size or location for them. Extensive wait lists for properties and black‐​market bribes will likely proliferate.
  5. Ordinarily, crude rent controls can lead to a deterioration of property quality. Landlords have incentives to either allow the property quality to deteriorate so that the market rent falls to the controlled rent or else to change the tenure type to non‐​controlled forms. In the case of Sanders’ proposal, however, landlords can apply for waivers from the controls if significant capital improvements are made. In very hot markets there are therefore big incentives for rapid gentrification – converting to very expensive, high‐​end properties and then fixing rents very high initially to reflect binding rent controls into the future.

In short, a Sanders national rent control proposal would bring a lot of economic damage. But even if implemented more locally, such a crude rent cap would bring significant downsides to local housing markets, and the economy more broadly. And all based on the misguided idea that landlords have vast market power to set rents.

January 16, 2020 11:10AM

Raising Wages via Policy Is Hard or Destructive. It’s Time to Focus on Living Costs

A Presidential election year will bring with it plenty of good, bad, and ugly policy ideas to help struggling families. With the unemployment rate extremely low, much focus will be on real wage growth for workers. This is not currently disastrous – real wages are growing at around 1.4 percent per year (see Chart below). But after 15 years of relatively sluggish performance in GDP per capita growth, politicians will be trying to think of ways to broadly raise living standards further.

Average hourly earnings and personal consumption expenditure inflation

Over time, living standards are driven in large‐​part by rising wages, in turn driven by the rising productivity of workers. But in an excellent Bloomberg article this week, Tyler Cowen points out that many of the forces that determine workers’ wages are structural, global, and difficult for policymakers to affect. (And, I’d add, government attempts to affect wages – through, say a $15 minimum wage, or greater union bargaining –come with large trade‐​offs for jobs for certain groups).

Yes, we know that a robustly growing economy driven by broad‐​based productivity growth is the best way to get rising living standards. Unfortunately raising the productivity growth rate of the economy is difficult. Governments don’t really know what drives much of the innovation that really propels growth. And to the extent that we think growth can be enhanced through better policies (certain tax cuts, deregulation etc), Tyler shows that the effects might be offset in the coming years by other global headwinds.

If policymakers really want to improve living standards in the near term then, Tyler concludes that they should focus on living costs. In particular: housing, healthcare, and higher education costs. To which I say: Amen, brother.

A couple of years ago, I wrote “Government and the Cost of Living: Income‐​Based vs. Cost‐​Based Approaches to Alleviating Poverty,” making the case that with the budget deficit already large and productivity growth in a rut, policymakers should focus on undoing bad things that currently raise both raise prices for poorer consumers while also worsening the efficiency of the economy. In other words, they should focus on how far workers’ wages go in being able to afford important goods and services, rather than always thinking about nominal incomes.

Instead of just picking three sectors, as Tyler has done, I looked at what poorer families tend to spend their money on, honing in on specific current policies affecting housing, childcare, food, transport, clothing and footwear, and services governed by occupational licensing.

What I found was that bad laws and regulations at the local, state and federal levels of government in all these areas actually raised prices for the average lower‐​income family by anywhere between $830 and $3,500 directly per year (never mind the damage to economic efficiency). What’s more, my examination of policy areas wasn’t comprehensive. High healthcare costs are an obvious area to tackle, as Tyler says, and there are other transport and house building costs affected by policy (not least trade policy) that could be examined too.

A supply‐​side agenda for lowering basic living costs is an underrated tool to tackle genuine poverty and ease the pressure on all families. Though reform of these areas is difficult to achieve, and we must be cautious to politicians’ using concern about living costs as a precursor to price controls, too much focus on people’s living standards remains on income through wages or transfers, leaving a lot of regulatory low‐​hanging fruit ignored.

November 14, 2019 4:07PM

Rich Earn Wealth Slashing Prices for Poor

The Albrecht family of Germany is one of the richest in the world. They earned their wealth from innovations in price‐​slashing for European grocery shoppers. Their Aldi grocery chain is now spreading across the United States and bringing savings to millions of lower‐ and middle‐​income families. I profiled Aldi in this recent post.

bottles

Rather than bashing the rich, Bernie Sanders, Elizabeth Warren, and other liberals should be praising wealthy entrepreneurs and corporations, such as Aldi, that are reducing poverty through aggressive market competition.

Aldi was the subject of a fascinating profile in the UK Guardian. Snobby British observers did not think Aldi would succeed because they assumed consumers didn’t mind high prices. Aldi proved them wrong. UK grocery chains were used to fat profits. Aldi eliminated them. Sanders and Warren take note: open markets and intense competition transfers wealth from corporations to moderate‐​income consumers.

Here are some excerpts from the Guardian piece by Xan Rice:

On a Thursday morning in April 1990, in the suburb of Stechford in Birmingham, a strange grocery chain started trading in the UK. It only stocked 600 basic items – fewer than you might find in your local corner shop today – all at very low prices. For many products, including butter, tea and ketchup, only a single, usually unfamiliar brand was offered. To shoppers accustomed to the abundance of Tesco and Sainsbury’s, which dominated the British grocery sector with thousands of products and brands, delicatessens, vast fridges and aisles piled high with fresh fruit and vegetables, the range would have seemed dismal.

The managers of this new shop, which was called Aldi, had not bothered to place a single advert announcing its arrival – not even an “Opening soon” sign outside the store. Strip lights illuminated the 185 sq metre store, and from the ceiling hung banners listing prices for the goods stacked on wooden pallets or displayed in torn‐​open cardboard boxes on metal shelves.

… most people were confident they would fail in Britain, where there was a discernible snobbery about discount stores. When a reporter from the Times visited an Aldi store in Birmingham the following year, he thought it represented the “anonymous, slightly alarming face of 1990s grocery shopping”, without any pretence of sophistication. “One looks in vain for avocados or kiwi fruit.” The British supermarket giants, whose 7% profit margins were the world’s highest, were even more dismissive.

But today, the boasts of Tesco and Sainsbury’s read like a classic example of business hubris. While the major supermarkets dozed, convinced that many people would not be seen dead in a discount store, the German chains quietly turned the sector on its head. Nearly two‐​thirds of households now visit an Aldi or Lidl branch at least once every 12 weeks, according to the research firm Kantar Worldpanel.

… By sucking in shoppers and, as former Aldi UK CEO Paul Foley puts it, “sucking the profitability out of the industry” – profit margins of 2–3% are now the norm – the two German‐​owned companies have forced the “big four” supermarkets to take drastic measures.

… The stores’ overall feel is still more gritty than pretty. In the latest Which? magazine survey of its members’ favourite supermarkets, published in February, shoppers ranked Aldi third overall, behind only Waitrose and Marks & Spencer, despite giving it only one star out of five for store appearance. Merchandise is still displayed on pallets, in plastic crates or cardboard boxes – or arranged haphazardly, as in the case of the one‐​off, bargain‐​priced goods found in the “middle aisle”, which hosts a rapidly rotating assortment of ultra‐​discounted oddities.

… Packaged products in all supermarkets come with a barcode, which the checkout assistant will locate and scan. But look closely at a packet of Aldi toilet rolls and you will see not one but four barcodes: two long ones down the sides, and one on each large flat surface. A container of butter has three barcodes; a bag of carrots has two. For kidney beans, a pinstripe barcode is wrapped around half of the can. This means that whichever way the assistant holds the product the scanner will register it.

… what Aldi managers describe, straight‐​faced, as “the thrill at the till”: your trolley full of goods has cost less than you thought it would. The rushed, no‐​frills experience isn’t something you merely endure for the sake of saving money; the awareness of your savings makes that experience a pleasure in itself.

… Aldi managers were expected to make continuous improvements to the company’s processes, a business philosophy also used by Japanese manufacturers, where it was called kaizen. In their book “Bare Essentials”, Dieter and Nils Brandes argued that Aldi’s embrace of kaizen, its lean management structure and just‐​in‐​time approach to inventory – taking delivery of stock only when needed, to cut holding costs – made it the “most Japanese” company in Germany.

… “The rest of the industry hated us,” said Paul Foley, who was the company’s third employee in the UK, and chief executive from 1999–2009. “I heard us called parasites, leeches, and ‘a plague of locusts landing on our shores’” – because of the company’s record of dragging down prices and profit margins in new markets. “It means nobody will help you: nobody wants to rent you space, organise transport for you, or sell you product.”

… Today, new Aldi store assistants receive industry‐​leading pay of £9.10 an hour, and £10.55 an hour in London – the London living wage – while a graduate accepted on to the area manager programme starts on £44,000 and gets an Audi A4 company car. Paying well obviously helps attract and retain staff, who might otherwise go to chains where the pace of work is slower. But it also serves to drive up wages across the industry, which, because of Aldi’s lower overall employee costs, hurts its competitors more.

November 5, 2019 10:04AM

New Study on Wealth Inequality

A growing number of political leaders consider wealth inequality to be a major economic and social problem. They complain that wealth is being shifted to the top at everyone else’s expense.

Is wealth inequality the crisis that some people believe it is?

A new Cato study examines six aspects of wealth inequality and discusses the evidence for the various claims being made. Here are some findings:

  1. Wealth inequality has risen in recent years but by less than is often suggested. Faulty data from economists Piketty, Saez, and Zucman are behind many exaggerated inequality claims. Furthermore, wealth estimates overstate inequality because they do not include the effects of social programs.
  1. Wealth inequality tells us nothing about poverty or prosperity. Inequality may reflect innovation in a growing economy that is raising overall living standards, or it may reflect cronyism that causes economic damage.
  1. Most of today’s wealthy are business people who built their fortunes by adding to economic growth, and some have created innovations that benefit all of us. The share of the wealthy who inherited their fortunes has declined sharply in recent decades.
  1. Cronyism is one cause of wealth inequality which may have increased as governments have expanded subsidies and regulations. Some countries with high levels of wealth inequality also have high levels of cronyism or corruption.
  1. The growing size of the U.S. welfare state has crowded out or displaced middle‐​class wealth‐​building, and thus likely increased wealth inequality. Some countries with large welfare states, such as Sweden, have high levels of wealth inequality. Numerous presidential candidates want to expand social programs, but that would likely increase wealth inequality.
  1. Wealth inequality has not undermined U.S. democracy despite frequent claims to the contrary. Research shows that wealthy people do not have homogeneous views on policy and do not have an outsized ability to get their goals enacted in Washington.

Wealth inequality by itself is not a useful metric, but the underlying causes should be considered. U.S. wealth inequality has risen modestly, but mainly because of innovation and growth that is raising all boats. Policymakers should aim to reduce inequality by ending cronyist programs and removing barriers to wealth‐​building by moderate‐​income households.

The new study by Chris Edwards and Ryan Bourne is here.

Other Cato commentaries on wealth inequality are here, here, here, here, here, and here.

November 4, 2019 3:11PM

Government Assets Fall Apart

A recent New York Times article described the wretched management of New York City’s public housing. The main problem highlighted is a common one in government ownership: bureaucracies do not maintain their assets.

Governments build shiny new highways, rail systems, schools, parks, sidewalks, and other infrastructure, and then let the assets rapidly deteriorate. Politicians like to brag about the new projects they are spending money on, but they pay little attention to old facilities that are falling apart, except when the media shines a spotlight.

The federal government provides $7 billion in annual funding to public housing agencies. Such aid induces irresponsible local management. It should be zeroed out and states encouraged to privatize their public housing stock. See these studies on federal aid and public housing.

Here are highlights from the NYT story by Luis Ferré‐​Sadurní:

The seven steel boilers should have been replaced years ago. Instead, they continue to sputter inside a cavernous brick building, producing steam that travels through a maze of old pipes providing heat and hot water to the Breukelen Houses in Canarsie, Brooklyn, a public housing complex where 3,500 people live.

… As winter approaches, [New York City] is racing to ready boilers in the nation’s largest public housing system, where widespread heat outages have repeatedly left many of its 400,000 low‐​income residents shivering in their homes. Many of the boilers are old; some were built in the 1950s. With temperatures dropping, the fragile, antiquated heating network imperils a large portion of public housing residents: children, older residents and people with health conditions.

Providing consistent heat is only one challenge in a long list of woes for the agency, which oversees 176,000 subsidized apartments. New York City Housing Authority is under the supervision of a federal monitor after federal prosecutors accused it of years of mismanagement. In addition to heating inadequacies, the agency has a history of failing to rid its apartments of mold and lead paint.

More than half of the housing authority’s 1,713 boilers — some made by companies that no longer exist — are more than 20 years old, the typical life span of a boiler. Following years of underfunding and poor maintenance, nearly half are in critical condition and need major repairs or replacement. Pipes that circulate steam to apartments are crumbling, aging buildings are poorly insulated and radiators need to be overhauled.

… But as it started to get cold again, those improvements meant little to residents of the Breukelen Houses. It was among the developments with the most outages last winter. Residents there had no heat or hot water 25 times from Oct. 1, 2018, to May 1, 2019 — the city’s heat season.

NYCHA
November 4, 2019 10:09AM

U.S. Poverty Has Plunged

The government says that America’s poverty rate is 11.8 percent. It also says that the poverty rate has hovered around 11 to 15 percent since 1970 suggesting little or no progress against poverty in decades.

But the Census Bureau’s official poverty rate is biased upwards and kind of meaningless. In terms of material well‐​being, families near the bottom are much better off today than in past decades because of general economic growth and larger government hand‐​outs.

In a Cato study, John Early recalculated the U.S. poverty rate using more complete data and found that it fell from 19.5 percent in 1963 to just 2.2 percent in 2017. (The study’s charts are updated here.) Early is a former Assistant Commissioner of the Bureau of Labor Statistics.

Bruce Meyer and James Sullivan perform a similar exercise in this new study. They find that the poverty rate fell from 13.0 percent in 1980 to 2.8 percent in 2018. Meyer‐​Sullivan calculate their figure based on consumption rather than income, but the general idea is the same. Meyer is at the University of Chicago and Sullivan is at the University of Notre Dame.

The Early and Meyer‐​Sullivan estimates are charted below. Both estimates reflect a large reduction in material deprivation for less fortunate Americans. Unfortunately, this great news about the American economy is usually ignored in media reports and political discussions.

Both Early and Meyer‐​Sullivan use a more accurate inflation measure than the one used for adjusting the official poverty rate each year. And they both correct for the fact that the Census—in its main poverty series—excludes numerous government benefits including Medicaid, food stamps, and earned income tax credits. Both studies make a number of further adjustments.

The charts below show the Early and Meyer‐​Sullivan poverty rates compared to the official Census series. Note that all poverty rate calculations stem from essentially arbitrary poverty thresholds measured in relation to a chosen base year. John Early anchors his series to the official rate in 1963. Meyer‐​Sullivan anchor their series to the official rate in 1980.

The important thing is not the calculated poverty rate in any particular year but the trend over time. The official series shows no sustained improvement in poverty in recent decades, while the better estimates from Early and Meyer‐​Sullivan suggest large gains for households near the bottom.

In sum, using somewhat different methods, Early and Meyer‐​Sullivan both show that the official poverty data is far too pessimistic.

one
two

I interpolated the value for 1982 in Meyer‐​Sullivan.