Tuesday, January 10, 2017

Show Me the Money

It is January 10, and you are finally getting over the unintended effects of your New Year’s Eve celebration. You also read my last two blog posts and are ready to drop your subscription.

So I thought I would begin 2017 by really spouting off. Hopefully, this spout will antagonize many of you – at least those of you who cling to the old politics.
I title this one “Show Me the Money” because that’s what people in Missouri say. 

When you say this phrase, it means you want some evidence that something is valuable and that it is worth paying for. Robbers sometimes say the same thing but I am not dealing with those robbers today.

"Show Me the Money" is what I hope we collectively say to our politicians this year. Let’s face it: the Blue team is out of office now and they are not happy that the Red team is going to try to undo everything now Blue or Blue-er. We can be sure that even though the Republicans have majorities in Congress, they will be tested over and over. Supreme Court justices, energy policy, health care, tax policy, you name it – the screaming will be loud and colorful.

That’s where “Show Me the Money” comes in. Wouldn’t it be refreshing if instead of name-calling our fully paid and pensioned representatives of the people decided to have real discussions and debates about policy effectiveness? Maybe they could throw out a theory or two? Maybe they could argue over some real data? Maybe they could look at goals relative to results of their policies?

I am a macroeconomist, and therefore I would like to stick to what I know. I have opinions about lots of policies but one important one concerns income inequality. It turns out that despite me being the best professor ever on the planet, there were other professors teaching silly things like finance and nuclear physics who made more money than me. And similarly, I made more money than most high school teachers and a few plumbers.

So it is pretty clear just looking at my boring life that incomes are not equal. But if we look even farther, most of us who have any heart at all realize that there is a very wide gulf between the rich and the poor in America.

That bothers a lot of people. Many people believe that this gulf should be made smaller. Some want it to vanish altogether but probably most people just want it smaller. So it might seem reasonable that we have a debate about what to do to accomplish that. But try as I might, I don’t see anyone in Washington DC approaching this topic from a rational vantage point. Often the level of the argument does not exceed the intuitive but thoughtless idea that if we just take a dollar from a rich person and give that dollar to a poor person, then the problem would be solved.

In my perfect world, we might make some headway by doing the following. First, define the problem warts and all. Second, think about policies that might effectively improve the situation. Third, identify unintended consequences of the policy and deal with those too.

In the case of income distribution, problem identification is critical. Those who seem to worry the loudest about income distribution have in mind a comparison between the very rich and the very poor. But let's suppose, for example, the numbers tell us that much of the income gap is between the upper 1% and the upper 5%. We might not classify that as a big problem. Instead, maybe the income gap mostly impacts those who make $20k per year versus those who make $30k. Maybe you see that as a big enough problem. But clearly the remedy for that specific challenge is different than the usual perception about the richest and poorest. Maybe when we get done measuring, we find that there is no big distribution problem. Perhaps, instead, the problem is that economic growth lifted most boats but didn’t lift them enough. That’s not a problem of the distribution of income. That is a problem of not enough income for those at the bottom. But we won't know what the problem is until we stop lobbing F-bombs and start looking seriously at some data.

Once we have isolated a real distribution of income problem, then we need to find a matching solution. To do that, we might need to examine other country’s experiences with similar problems. And that is made tricky because, unlike white mice, countries can be very dissimilar. So doing thought experiments on policy among various countries is not as easy as picking out the best singing voice in Europe. For example, I took a quick look at the rankings of country income distributions done by the United Nations and the US Central Intelligence Agency (https://en.wikipedia.org/wiki/List_of_countries_by_income_equality ).  

Here are some of the countries with much more equal income distributions than the USA: Ukraine, Norway, Kyrgyzstan, Afghanistan, Denmark, Iraq, Sudan, India – can I stop now? Clearly the US does not want to follow the economic policies of all these countries.

How can we make permanent improvements in income equality across the citizens of the USA? Since we have never explicitly considered income distribution to be among our country's policy goals, we don’t have a lot of experience answering this question. It would nice if we trusted our elected representatives to do this in the same way that Eli Lilly scientists and executives try to solve Alzheimer’s disease.

Finally, there is the issue of unintended consequences. In our zeal to solve social and economic problems, we often forget that things don’t always work out as planned. I am sure that Lyndon B. Johnson would be quite shocked to learn that his great war on poverty created many more poor people than existed in the 1960s. An earnest examination of poverty programs or any other programs designed to improve income distribution should commence. What has worked? What hasn’t worked. Come on dudes – be honest!

What is the real problem today and in the future? What policies have been used to eradicate or mitigate these problems? How can we learn from the past about approaches that work? What are the risks arising from these policies? How can we parcel out the citizen’s money in ways that we would all be proud of? Under Trump, we don’t know what to expect. Maybe he and his new advisers can forget partisan bickering and approach our problems like real scientists and executives? Or maybe I need another JD? 


  1. HA!Problem is a debate at a higher level between representing the populus and either acquiring or using power. In the day, power was by might ( guns, swords etc.) and power meant riches. Nothing has really changed except new technology which is in a way wealth and a great tool to hord, destroy, use or sell power.

    The US and a few progressive Euro countries have created social systems as well as economic systems where the people who dispense and collect power have a duty to think of their constituents and consequences of abusing power. Indirectly this gives the constituents a seat at the table. With that being said, we have a larger gap with a larger amount of people where income distribution is growing.

    Income is what one earns based on a roughly calculated value of their work. NFL QBs earn 5 times as much as linemen as do CEOs vs admin assistance. They worth the work is also called performance in view of goals set forth by the governing body. If less people have skills to provide value then it is not fair to those who do.... to make their income the same.....so it all starts with providing skill training and places (jobs) to use it rather than direct distribution to make up the gap. Jobs, other than government jobs, are not provided by the government but by private companies. The government should support to grow without creating dangerous consequences like poisoned rivers. That is the only real program that will work in the long run.

  2. The below is a comment by Mike M a wayward lad with good intentions but little ability to post his own damn comments. :-) So I am posting this for him.

    My dear Larry,

    Such erudition sent me scrambling for the wine rack along with my friend Harvey H. Homitz.
    Together with the aid of a fine NZ sauvignon blanc, (cheaper than Sancerre) we were able to parse your exceptional prose and offer a solution to your income redistribution dilemma.

    The answer of course is ‘Entitlement’ !

    Here’s how it works: The member of the 1% kneels before the Monarch who taps him on each shoulder with the flat part of a sword. He then ‘vests’ Title on the supplicant with the words, in your case, “Arise Sir Lawrence”! No self respecting Monarch would use the familiar ‘Larry’… imagine that prancing poofter getting a lead role in Hollywood as Sir Larry Olivier!?
    But I digress. The tap on the shoulder is not to be confused with the horizontal swipe which is accompanied by the words “Off with his head”.
    In macro-economic parlance, the “Tap” ‘invests’ the groveling subject in Title whereafter no self respecting Banker would dare refuse a personal loan. This transfers the burden from the public purse ( c.f. a $20 million 3 year stint at the helm of Fannie Mae) to fat cat bankers who can well afford to make bad loans. Likewise the Horizontal swipe “Off with his Head” should be seen as ‘Capital Divestment’ (a death tax if you will) which sends the miscreant to a better place and saves the taxpayer the cost of incarceration.
    Not to mention keeping the 1% in their place numerically speaking.

    Now it only remains to bring back the Monarchy, a coronation on January 20th. perhaps?

    Hope this is helpful,

    Harvey H.Homitz

  3. Dear LSD. Glad to read you survived the New Year’s celebrations and feel ripe (er, juiced?) enough to renew your spouting. Spouting apparently makes one feel good like a cigarette should . . . or used to . . . or something like that. Your spout doesn’t antagonize me as I am not clinging to old politics . . . or any other old tics for that matter. I’m looking forward to new politics (and new tics as my old ones really annoy me . . . like an eyelid that won’t stop fluttering) proposed by DJT’s ‘drain the swamp.’ As you know, I’ve fantasized about the trifecta for some time—having the Rs occupy/control the WH, Congress, and Senate. So let’s see if he/they can show us the money. In the context of your spout it means, “Show me the policies that will mitigate the income gap.”—or so I infer and if incorrect please let me know.

    Many factors cause income disparities; I’m not addressing all but only two that at least are shown correlated to income/wealth gaps but not proven 100% causal—although I feel both highly correlated: education and jobs. Studies show income/wealth correlated to education. For example, people with professional degrees earned 6x as much as people who did not graduate from high school (in 2009: $128,000 vs. $20,000). I think it’s plausible to say education is correlated to jobs—the better education begets better jobs and therefore better income/wealth potential.

    So, in your parlance—I think this “isolates” a cause-effect to the problem of the income gap and therefore a matching solution can be articulated: Strengthen education outcomes (e.g. higher HS grad rates and educate/train folks for jobs of the future) to reduce the income/wealth gap. A long-term solution for sure—but DJT is on the prowl to fix education via his new cabinet pick, DeVos.

    Secondly, we need better, higher-paying jobs that will generate moola to help close the income gap. Similarly, DJT is growling to achieve that with various policies such as tax reform, reg reduction, renegotiating trade agreements, etc. headed up by formidable, capable, proven folks . . . and badgering big corporations. I think it's a well-rounded strategery all around that would/should eventually match solutions/policies to the income/wealth gap—e.g. make ‘merica great (wealthy) again.

    Stick’m band aide fix-it programs and policies don’t/haven’t worked, solved the problems: The War on Poverty, food-stamps, welfare payments, earned-income tax credit, other wealth transfer/entitlements, and state lotteries don’t address the correlated/causal stuff like better education and the availability of good-paying jobs.

    Of course unintended consequences (those should be re-stated as “unforeseen” rather than unintended) always get in the way. Maybe DJT could badger DARPA to invent a working crystal ball to see into the future—that would go a long way to showing where the moola is.

    1. Dear Tuna, Thanks for the deeper look into income distribution. Too bad we don't have more liberals active here so they could dispute your facts and ideas. But I have to say that my intent was not so much to focus on income distribution. I was using it more as an example of a more general problem relating to a more scientific way to approach policy issues. Problem definition is a first step and one that eludes many because they begin hell-bent on promoting an agenda. They are not willing to examine or re-examine the facts before they begin recommending all sorts of policies. On private email I got castigated by several folks who said I was naive in thinking that people could think scientifically. Maybe I am naive but I stick with the idea that if they'd stop this ideological nonsense and revisit facts, we might actually make a little headway in solving our problems. Silly me.

    2. Dear LSD. In my previous reply I said there were many factors causing income disparity but limited my reply to only two. You’ve now introduced social factors—to which I include culture and mores—that should be addressed via “good social policy” (as you say) and which I purposefully avoided to keep my reply simple/short. I say the social/cultural/moral/familial fabric has decayed to the point where parents do not instill critical thinking and pursuit of behaviors (e.g. just say no to drugs, stealing, truancy, teen pregnancy/parenthood, etc. that lead to jail and adverse personal issues) that would improve children’s chances to succeed at education and careers. I think that pursuit of such desirable thinking/behaviors would be much better than education/job creation to improve income/wealth—it’s the essential grease that makes the wheels of education and job creation roll to success. I think the lack of a strong social/cultural/moral fabric is what has kept many from achieving education and job success—and it’s not that “lots of people don’t really have good choices”—(true in some cases)—they don’t have the parental/adult support to know what is a good vs. bad choice. Adult role models are sorely lacking.

      I can’t imagine what “good social policy” would entail that would (1) be effective and (2) would not be barked at by the left-wing regressives that agitate against self-reliance, personal achievement, and independence from big govomit. Applying the scientific method to problem-solving zounds mighty fine but will and has failed because folks can’t even agree on the facts or what those facts mean. Applying this to your bailiwick—Krugman, Blinder, and Goolsbee all say the Obama economy/record is just peachy; Davidson, Moore, and Laffer say it sucks . . . yet ya’ll are looking at the same data/facts.

      Yeah, let’s get some liberals in here!

    3. The subject of your second paragraph is the topic of my blog next week. As for the first one, I think we agree that it is the social/cultural mix that is failing. The big question is how you effectively preserve individual rights and at the same time intervene in ways that allow for the young (as others) to escape self-defeating behaviors. Removing children from homes with criminal adults sounds rational but has its own negatives including individual rights. Sending kids to good kindergartens in the day and then home to bad environments at night also has limitations. Maybe we have to think outside the box. I dunno. But if people cling to simplistic slogans and don't think hard about these things then they will just get worse.

    4. Dear LSD. A “social policy” at the federal level will fail . . . . the last eight years prove that. We need to return policy-making to the regional, state, and local levels . . . git big govomit out’a our lives. Let the local decision-makers think “hard” ‘bout that stuff . . . and let them bear/enjoy the consequences.

      I’m less concerned about preserving “individual rights” in the context of the young and more concerned about what policies/incentives that local/federal govomit can offer to get parents and their off-spring to behave such that the latter become productive citizens. My take on the inclusion of “individual rights” resonates more with the Michael Moores and Hollyweed citizens than with the practical application of behaviors, rules, mores, and punishments I grew up with in the 60s/70s—those produced in most cases an understanding of rational behaviors that led 50 years later to a respectable accumulation of wealth to comfort us old fogies. We matured, grew up, and understood/assimilated and applied the basic principles that would comfort in later years. The challenge for the 21st century pols is to instill those old-fogie wealth-generating principles and behaviors and to provide govomit policies to effect that outcome. I don’t think thinking out of the box is needed; simply apply the old-fogie principles.

      Keep it simple. Retro is good.

      It’s late. I’m out’a here.

    5. Dear Tuna,
      First, I agree that more local control would be an improvement. But I think the rest of your story is a circular one. You long for those days of "Father Knows Best" when families conveyed great values to their offspring. But wanting a return to all that is a lot like me wanting all those black hairs to return to the top of my head. The issue to me is why that culture disappeared. Government, local or national, thought they were making lives better with social policy. I doubt they know how. That's why I said thinking out of the box is necessary. Old theories and old debates are not getting us anywhere. In today's environment, how does society restore values that help children make better decisions? Simple and retro are slogans -- not solutions.

  4. Perhaps somebody already said it...two hours of yard work in this balmy..70 degrees...January weather has affected my concentration. But, choice might play a big factor in this discussion. My dad was a combat medic in WW2 and learned a great deal about medicine. When he returned home, a local pharmacist who had no children offered to pay my dad's way through pharmacy school, bring him into the business, and turn it over to my dad when the pharmacist retired. My dad, instead, chose to become an auto mechanic. Instead of living comfortably, he struggled to make ends meet working 14- to 16-hour days. We make poor choices everyday which affect our lives and incomes, but rather than admit our bad decisions, we want everybody else to bail us out. As long as people are people, people who choose not to take advantage of opportunities afforded them, there will be significant income inequality. My 2-cents worth.

    1. Nice to hear from you Fuzzy. Too bad there aren't more liberal folks willing to participate in this forum. I am guessing they would react to your comment by pointing out that lots of people don't really have good choices. The opioid addict comes to mind who got hooked after dealing with pain -- or perhaps the child who grows up in a very bad environment. Often these folks end up at the bottom of the income distribution because choices are not great. My comment would be something like -- if we have good social policy then we would deal better with these and other things that make it hard for some folks to succeed economically. That the distribution gets wider implies to me that we need better social policies. And along the lines of my blog post this week -- maybe we need to recheck our assumptions about what good social policy means.

    2. While I agree with most of what you say...there are people who have poor alternatives to choose from...it's hard for me to see how the progressives, on both sides of the aisle, who control our policy-making apparatus will give us a social policy any different than what we've had for decades. We all had/have the opportunity of a "free" education through 12th grade. Many of us chose/choose to take advantage of it, and many chose/choose not to. I can cite several cases of people I went to high school with who didn't have the proverbial container in which to urinate...single-parent families...who took advantage of their educational opportunities and excelled in the business world. Of course, not everyone will reach that level of success, but it's fer sher they won't if they don't make the effort. While education isn't the only determining factor in income equality, it certainly is a big one.
      The "government" has given us social programs which negate motivation in those who typically use those programs. Pardon me if my skepticism is showing, but I believe it's more important to give a hand up and not a hand out to those who are capable of working and earning. I contend that in DC, there's no real interest in closing income gaps, because the issue is too big a weapon in election wars. As I said, excuse my skepticism. Maybe I'm singing to the choir. Sorry if I'm off key.

    3. Fuzzy,

      I doubt you are alone in preferring a hand-up instead of a hand-out. If 60 years of well-intended social programs have not been able to pull that off -- then how are we going to do it now? Conservatives say the problem is liberals -- but the liberals are not going anywhere. Now that conservatives may have more government power they need to pursue a better approach while recognizing that the longevity of such an approach recognizes that liberals will have to be part of the solution. I wonder if they can do that.