Young Economics.

Economic inequality in Canada

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Professor Gordon at the great Worthwhile Canadian Initiative comments on economic inequality in Canada:

The increase in the income share at the top end of the top end of the distribution is sometimes expressed in terms of the gains in the top quintile (top 20%) or the top decile (top 10%). But it’s clear that the real winners since 1985 are those above the 99th percentile. And even within this group, the gains are concentrated at the upper end:

Income growth by percentile

It’s important to make this distinction. As a matter of statistics, it’s perfectly true that people who are in (say) the top 10% have received the lion’s share of gains to national income. But people who are at the 90th or even the 95th percentile could fairly object to such a broad brush, because they – like the people at the median – haven’t seen much in the way of increases in income either. So when you talk about ‘the rich’, it’s important to restrict attention to those making (say) $400-500k/yr or more.

Everything Prof. Gordon says is true.  All the action in economic inequality in recent decades has been at the very, very top of the distribution, and it’s important to keep that fact in mind when discussing inequality.  However, the other side of that same coin is the inaction in the rest of the distribution.  Look at this graph from Osberg (2008):

Real wageI think this is one of the most striking images in empirical economics.  (It includes the total value of all hourly compensation.)  It emphasizes two points.  First, the trend toward a more unequal income distribution since approximately 1980 is not merely a matter of the super high-income jobs (financiers, professional athletes and star entertainers) experiencing very fast wage growth.  It is an essentially distributional issue; around 1980 there was some significant change in the mechanisms by which national income is distributed across the labour force, a change that caused the income gains for some jobs to rise dramatically and the gains of the rest of the economy to more or less end. Second, this change in society’s distributional mechanisms was a radical departure from the pre-1980 economic regime.

It’s important to take note of both aspects of the economic inequality trend — the rise in incomes in the top percentile, and the stagnation of the rest of the distribution — because they both have implications for how we should address the issue.  I think that the stagnation of real income for most of the income distribution is a more significant problem than the mere fact that measured inequality is rising due to gains at the top end.  To solve this, we have to figure out exactly what changed around 1980 to cause the sudden shift in the distribution mechanisms in Canada (and the US and much of Europe).  Meanwhile, the fact that most of the income gains are going to a very small part of the population might limit the degree to which redistributive taxation can reduce inequality.  The super-rich tax base is pretty small, so extracting a lot of revenue from them would require very high tax rates that would probably have significant incentive effects.  In particular, it would make Canada even less attractive (relative to the US) for high earners.

Written by Alex

August 16, 2009 at 8:57 pm

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Interesting game theory application

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Bruce Bueno de Mesquita predicts Iran’s future at TED (if you don’t know TED look it up). Very cool, and I like that PoliSci people are getting more rigorous. My only quibble with his presentation is when, make the case for his accuracy, he says “I got it 93% of the time when the experts got it wrong”. Well, did you also get it right when they did?

Written by Brian Quistorff

August 16, 2009 at 8:31 pm

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Stimulus as a change in the discount factor

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Quick thought: Simple government cost-benefit analysis often involves discounting future benefits using a discount rate and seeing if they outweigh the current costs. The problem is that one’s recommendation often depends on value of the discount rate. Certain projects, such as climate amelioration and US metrification, would only be undertaken with a discount rates close to 1 (equating future outcomes with present ones). I could imagine an economically-minded government that, in normal times, uses a particular discount rate, but that during times of recession (when stimulus is needed) uses a different rate closer to 1 so as to initiate more, but still arguably worthwhile,  projects.

Written by Brian Quistorff

August 15, 2009 at 10:39 am

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Theoretical 4th Ro(e)mer found!

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  1. Christina Romer (Berkeley)- chair of the US Council of Economic Advisers
  2. David Romer (Berkeley) – married to the above and author of our Macro book
  3. Paul Romer (Stanford) – developed the endogenous tech change model we studied in Macro
  4. John Roemer (Yale) – PoliSci & Econ guy who used to be a Marxist

And to think only a year ago, I thought there were only two.

Written by Brian Quistorff

August 15, 2009 at 9:57 am

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Some Canadian Trivia

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Ok, ready?  What was the first invention that got Bombardier, our well known transportation company, off the ground?  Here’s a hint:  it hasn’t anything to do with the planes and the trains they’re known for.

Answer: The Snowmobile!

Joseph-Armand Bombardier built his first snowmobile as a teenager, and soon perfected the basic concept: steerable skis in front of a tracked drivetrain. The SkiDoo, a smaller recreational snowmobile for the mass market, followed in 1959. Bombardier’s company became a large transportation manufacturer, specializing in airplanes and trains.

The quote comes from a cool feature the Globe and Mail put together – they highlight the top tech innovations that have come out of Canada. Link: Canada’s tech history.

It’s a little scary however how the most current invention on the list is the blackberry, which came out in 1996.  I guess we’ve been too busy figuring how to get oil out of sand to do anything else.

Written by jk

August 2, 2009 at 9:09 pm

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Oh Snap!

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You may have recently read about the Chinese discomfort with the recent expansion of the US Fed’s balance sheet.  The worry is based on the claim that a bigger balance sheet means more green-backs are out and about in the world, implying inflation.  This would be quite a bad thing for the Chinese – their reserve balances recently eclipsed $2 trillion, with the majority in $US denominated treasury bills.  Significant inflation would erode these assets.

This idea has been looked at by several different authors recently, who generally go over exit strategies the Fed could take to avoid any problems (in my opinion Jim Hamilton is the one you want to read  – link ).  Another approach to this issue, however, was just offered up by Brad Setser, and I think it’s great:  Pot calling kettle black

One thing that has puzzled me is that some of the countries that have — implicitly at least — been most critical of the expansion of the Fed’s balance sheet during the crisis long have had much larger balance sheets than the US Federal Reserve.

Before the crisis, the Fed’s balance sheet was around 6% of US GDP. Right now, it is around 15% of US GDP. A big increase no doubt. But the balance sheet of the People’s Bank of China (PBoC) is around 70% of China’s GDP. Foreign assets make up about 80% of the PBoC’s balance sheet — or around 55% of China’s GDP. And the PBoC’s estimated holdings of US treasuries and agencies are about equal to 30% of China’s GDP — a level that is far higher, relative to China’s GDP, than the US Fed is ever likely to achieve. The Fed expects its balance sheet to peak at roughly $2.5 trillion, or between 15% and 20% of US GDP.

Oh snap!  Check the link for further comment on how to sterilize the expansion to prevent inflation.

Written by jk

July 30, 2009 at 9:13 pm

Some new QJE papers

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Guiso, Sapienza, and Zingales: “Cultural Biases in Economic Exchange?

There are remarkable differences in the level of trust among European managers. When asked to score fellow managers of different countries on the basis of their trustworthiness their responses implied the following ranking (where 1 is the best and 5 the worst):

1=high trust, 5=low trust

1=high trust, 5=low trust

. . .

We find that a higher level of bilateral trust can explain cross-country trade beyond what extended gravity models can account for. . . .  At sample means, a one-standard-deviation increase in the importer’s trust toward the exporter raises exports by 10%. . . . We find similar results when we analyze the pattern of foreign direct investments (FDI) and portfolio investments. A country is more willing to invest in another (either directly or via the equity market) when it trusts the other country’s citizens more. Not only do the latter results confirm our trade ones, but they also suggest that cultural effects are not limited to unsophisticated consumers, but are also present among sophisticated professionals such as mutual fund managers.

Lalive and Zweimuller: “How does Parental Leave Affect Fertility and Return to Work? Evidence from Two Natural Experiments”

This paper analyzes the effects of changes in the duration of paid, job-protected parental leave on mothers’ higher-order fertility and postbirth labor market careers. Identification is based on a major Austrian reform increasing the duration of parental leave from one year to two years for any child born on or after July 1, 1990. We find that mothers who give birth to their first child immediately after the reform have more second children than prereform mothers, and that extended parental leave significantly reduces return to work. Employment and earnings also decrease in the short run, but not in the long run. Fertility and work responses vary across the population in ways suggesting that both cash transfers and job protection are relevant. Increasing parental leave for a future child increases fertility strongly but leaves short-run postbirth careers relatively unaffected. Partially reversing the 1990 extension, a second 1996 reform improves employment and earnings while compressing the time between births.

Clingingsmith, Khwaja, and Kremer: “Estimating the Impact of the Hajj: Religion and Tolerance in Islam’s Global Gathering

We estimate the impact on pilgrims of performing the Hajj pilgrimage to Mecca. Our method compares successful and unsuccessful applicants in a lottery used by Pakistan to allocate Hajj visas. . . . We find that participation in the Hajj increases observance of global Islamic practices, such as prayer and fasting, while decreasing participation in localized practices and beliefs, such as the use of amulets and dowry. It increases belief in equality and harmony among ethnic groups and Islamic sects and leads to more favorable attitudes toward women, including greater acceptance of female education and employment. Increased unity within the Islamic world is not accompanied by antipathy toward non-Muslims. Instead, Hajjis show increased belief in peace, and in equality and harmony among adherents of different religions. The evidence suggests that these changes are likely due to exposure to and interaction with Hajjis from around the world, rather than to a changed social role of pilgrims upon return.

Written by Alex

July 29, 2009 at 11:12 am

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