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.
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.
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.
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.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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.
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.
I interpolated the value for 1982 in Meyer‐Sullivan.
Democrats running for president are condemning wealth inequality while calling for an increase in social spending. But expanding social spending would magnify wealth inequality, not reduce it, because it would displace private wealth accumulation by lower‐ and middle‐income households.
Evidence comes from a study by Pirmin Fessler and Martin Schurz for the European Central Bank. The authors explore the relationship between government social spending and wealth distribution in 13 European countries using a survey database of 62,000 households. The database contains household balance sheet information.
Regression analyses by the authors confirm that “the degree of welfare state spending across countries is negatively correlated with household net wealth. These findings suggest that social services provided by the state are substitutes for private wealth accumulation and partly explain observed differences in levels of household net wealth across European countries.”
The authors found that the “measured inequality of wealth is higher in countries with a relatively more developed welfare state.” Why is this the case?
The substitution effect of welfare state expenditures with regard to private wealth holdings is significant along the full net wealth distribution, but is relatively lower at higher levels of net wealth. Given an increase in welfare state expenditure, the percentage decrease in net wealth of poorer households is relatively stronger than for households in the upper part of the wealth distribution. This finding implies that given an increase of welfare state expenditure, wealth inequality measured by standard relative inequality measures, such as the Gini coefficient, will increase.
Fessler and Schurz found, for example, that Austria, France, Germany, and the Netherlands have high social spending and low private wealth holdings by less well‐off households. But other countries such as Luxembourg and Spain have lower social spending and higher private wealth holdings by less well‐off households.
The relationship can be seen in this figure, which is their plot of social spending compared to the wealth of households at the 25th percentile (from the bottom) of each nation’s wealth distribution.
The authors note that their results are in line with the displacement, or crowding out, effects found in other statistical studies, such as economist Martin Feldstein’s work showing that Social Security substantially displaces private saving for retirement in the United States.
strong social security programs — good public pensions, free higher education or generous student loans, unemployment and health insurance — can greatly reduce the need for personal financial assets, as Domeij and Klein (2002) found for public pensions in Sweden. Public housing programs can do the same for real assets. This is one explanation for the high level of wealth inequality we identify in Denmark, Norway and Sweden: the top groups continue to accumulate for business and investment purposes, while the middle and lower classes have a less pressing need for personal saving than in many other countries.
The bottom line for America is that expanding programs such as Social Security and Medicare will increase wealth inequality — the opposite effect Warren and Sanders may hope for. A better approach would be to cut the size of government and transition the nation to a leaner array of social programs based on personal savings accounts.
Elizabeth Warren and Bernie Sanders continue to blast wealth inequality. But the twin leftists seem oblivious that wealth inequality may reflect starkly differing causes, as I discuss in a new Fox Business op‐ed.
The Warren‐Sanders broad‐brush denunciations are useless as a guide to policy because high wealth inequality may reflect either the growth benefits of capitalism or the negative effects of cronyism and crowding out.
Capitalism here means economic freedom, entrepreneurship, and innovation. Cronyism means corruption and narrow benefits to particular groups. Crowding out means the displacement of private savings by the welfare state.
These causes of wealth inequality are loosely evident in cross‐country comparisons. Countries such as Denmark, Sweden, and the United States have high wealth inequality combined with high levels of capitalism and large welfare states. Countries such as Egypt, Kazakhstan, Nigeria, and Ukraine have high wealth inequality likely caused by high corruption, as measured by this index.
The figure below shows a modestly positive correlation across 167 countries between the United Nations Human Development Index and wealth Gini coefficients. The HDI measures income levels, life expectancies, and education levels. Higher numbers are better. The Gini measures wealth inequality, with higher numbers meaning more inequality. Wealth Gini data (mine from Credit Suisse) are likely quite rough measures.
Generally, countries with more capitalism provide more opportunities for entrepreneurs to become wealthy, which in turn generates growth and raises overall human development. However, some countries with fairly high levels of capitalism — such as Japan — have low wealth inequality. Why wealth inequality levels in, say, Japan and Denmark are so different is a mystery.
So one takeaway from the figure is that the level of wealth inequality does not tell us whether a country is prosperous or not. Both Sweden and Nigeria have high wealth inequality, while both Japan and Ethiopia have low wealth inequality.
Warren and Sanders say they want less inequality, but that could mean they want America to be more like either Japan or Ethiopia. I’d like to hear more specifics from the candidates on the causes of wealth inequality. Which cronyist government programs do they favor repealing? Would their plans to expand social programs cause more wealth inequality?
Wealth inequality means nothing on its own. It’s the causes that count.
Research help from interns Dan Rothschild and Jay Zaleski.