As I was betwixt and between this morning I heard a clip from President Obama’s appearance on ABC’s program, The View, that caught my attention. Here’s a transcript of the part that caught my attention. In response to the question “What would be so bad about a Mitt Romney presidency?”, the president said:
I’ll give you a very clear example. Yesterday Governor Romney on “60 Minutes” was asked, does he think it’s fair that he pays a lower tax rate than somebody who’s making fifty thousand dollars a year, and he said yes, I think it’s fair and I also think that’s the way you get economic growth, the notion being that if people at the top have more income, they’ll invest and they’ll create jobs. I’ve just got a different vision about how we grow an economy. I think, Barbara, that you grow an economy from the middle out, not from the top down, and that when the teacher and the bus driver and the receptionist and the office manager — when they’ve got a little money in their pockets, when they’re doing well, then that means business has more customers, that business makes more profits, they hire more workers, and that’s been the history of our country, we grow fastest when the middle class is doing well and when folks who are trying to get into the middle class have ladders of opportunity. So that’s a different vision about how we move the country forward, and ultimately it’s going to be up to the American people to make the decision about who’s got the better plan.
The emphasis is mine. The reason that caught my attention was the definition of “middle class” implicit in the president’s example.
The president cites four occupations: teacher, bus driver, receptionist, and office manager. Two of those are public employees (teacher and bus driver), two are either public or private employees (receptionist and office manager). In Chicago where the median household income is $38,000, teachers (who start at $48,000 and range from there to low $100K area) and bus drivers (who start at $38,000 and peak at $58,000) are middle class if you define middle class as middle income and they’re sole providers in their households. However, if they’re married with both spouses employed, they’re clearly in the fourth or fifth quintile of income earners in Chicago—upper middle income. IMO when bus drivers are paid at that rate they are grossly overpaid—the compensation reflects being unionized public employees.
Are receptionists and office managers really middle income jobs these days? Must have happened while I wasn’t looking. Every office manager I’ve met in the last dozen years is what we used to call “a secretary” and is paid commensurately however vital her work is to the operation.
From the standpoint of the work done, I would only characterize teachers as being middle class among that group. Bus drivers and receptionists are working class. Office managers would be either working class or middle class.
My point is this. “Helping middle class people” really means dramatically different things depending on what you mean by middle class. If your definition is public employees earning above the median income, raising their pay is how you help the middle class. If your definition is practically everybody else in the middle class, you help them by cutting their taxes and for many of them the most important tax they pay is FICA.
It also occurs to me that another way of helping middle class people is ensuring that there are enough middle class jobs to fill.
I’m not advocating a position on either helping middle class people or ways and means in this post. Just trying to point out the implications.
I’d argue that the difference between middle class and working class is salary versus hourly. That would put the bus driver and receptionist in the working class and not the teacher, and probably not the office manager (though I also think the term is ambiguous)
I think its dissapointing that (AFAIK) Illinois does not report the values of benefits of its employees. Other states like Wisconsin do this and the benefits typically are worth almost two-thirds of wages. When government employees can retire in their early 50s and receive 75% of their salary, plus an annual COLA — that’s an entirely different set of economic expectations than most of the median class.
It’s easy to say one should “grow the economy from the middle out” but what does that mean exactly? And what do comparative tax rates have to do with it?
I am surprised you didn’t fault Obama’s reasoning. You dont grow an economy based entirely upon consumer demand. You can kill one with a lack of it, but you need innovation and investment to grow. Which still means you need a middle class. We have concentrated our income and wealth into the hands of very few people. They aren’t coming through. They can’t. There arent enough of them. Those who exist are mostly financing the new businesses, they arent creating the ideas that lead to them.
Steve
I think that comment you high lighted underscores thinking that is often on display these days from the Left….we can get the economy and the country back on track via government/public sector jobs…or at least keep it from further off the rails.
Problem is that one thing I’ve brought up, you’ve brought up, and I think many libertarians/fiscal conservatives have a strong gut feeling for….deadweight loss. It is the reason you cannot have a country that is fiscally/economically sound when more and more people are being employed by the public sector/government, at least long term. A case might be made for very short term employment, but then how to handle the transition? What if the transition means a bump in unemployment? Even temporary government policies have a way of taking on a life of their own and continuing well beyond what anyone even thought was possible.
Technically you could, but you’d probably be on a sub-optimal growth path.
These are longer term considerations really. Innovation in the short run will destroy jobs. In the long run innovation along with investment will lead to more jobs and greater output and thus higher welfare on average. Problem is that destroying current jobs for future one’s is not usually a winning strategy for the type of democracy we have in this country (quite possibly any type of democracy).
I don’t think wealth concentration by itself is as problematic as many claim. I do see a problem with wealth concentration and an activist government that is open to being influenced by those with whom wealth is concentrated. In that case, I’d argue you’d get less innovation, not more. Instead you’d get more rent seeking and ossification of the status quo. Couple it with bailouts and you get things like malinvestment. Malinvestment and lack of innovation are going to hamper long term growth, and despite the abuse of the famous phrase by Keynes by most people, the long run will eventually obtain…perhaps even sooner than many realize. In fact, we might be in the long run now…or approaching it. By that I mean our economy might be adjusting and settling into the “new normal” where growth is lower, unemployment higher, and future prospects are more pessimistic.
steve: You dont grow an economy based entirely upon consumer demand.
Steve V.: Technically you could, but you’d probably be on a sub-optimal growth path.
Wait, I thought people buying new iPhones was supposed to grow the economy all by itself! Pure consumer demand, baby!
“Problem is that one thing I’ve brought up, you’ve brought up, and I think many libertarians/fiscal conservatives have a strong gut feeling for….deadweight loss.”
Meaning they have a feeling for myopia. Despite the insinuation, we all know about Harberger Triangles and the eternally cute obsession with micro-inefficiencies. And yet libertarians/fiscal conservatives seem to know surprisingly little about Okum Gaps, and how you can fit a whole lot of Harberger Triangles into them.
So we get the endless, paralyzing discussion of marginal “deadweight losses” and ignore the giant elephant of unemployment, the greatest economic inefficiency of all. The damage done by it is permanent in terms of lost incomes and skills, and the social effects are multi-generational. Alchoholism, drug abuse, mental illness, suicide, depression, poverty, stress and delayed family formation are an enormous cost and drag on economic performance, but “Deadweight Loss!”, so fuck it.
You mean as opposed to the bullshit macro theories everybody and their Crazy Uncle Ernie has?
Please tell us how a the dead weight loss disappears in the long run.
You mean an Okun Gap? Are you suggesting that an Okun gap is the result of dead weight loss or that dead weight loss is insignificant compared to an Okun gap?
Dave, can we change Ben’s nick to Kreskin cause apparently he took my comment to mean we should just ignore unemployment. Of course, I didn’t write any such thing. What I did write is that we can’t, as a long term solution, rely on government to provide jobs for the unemployed. That strategy is not a sustainable long term solution. Your straw man that I’m saying ignore unemployment does not follow….
Grow up.
By the way, did you stop to consider this possibility Ben? Okun gaps are at least in part the result of deadweight loss? Here is another thing for you to ponder, the minimum wage also comes with a deadweight loss and the effects of price floors can be duplicated via taxes.
No Steve, your problem is you delude yourself into believing a focus on markets can ever deliver full employment. It never has in history, despite the promises of the mainstream that a supply-side emphasis would create greater prosprity. The only result of that, as anyone with eyes can see, has been economic stagnation, financial bubbles and declining employment. There is no way a capitalist system can get the job done. They always suffer from insufficient demand no matter how you may juice goods and services you juice.
But then the usual approach is always to blame the unemployed, isn’t it? They make too much money thanks to minimum wage laws, they’re lazy because welfare is too generous. Value judgements are always at the heart of “deadweight loss” argument, exposing the tortured psychology of the people espousing them. Cut welfare, cut wages, maintain a pool of unemployed to buffer against inflation. Do anything but address the greatest inefficiency in our economy and society, then when it doesn’t work blame the unemployed again.
Hi Dave,
I recently stumbled across your blog and loved your perspective on this! HuffPost Live is hosting a segment on defining the middle class and we’d love for you to potentially join us as a guest via webcam. Our segment streams tomorrow at 2:30pm EST. Would you be interested in participating? If so, please email me at felicia.kelley@huffingtonpost.com. Thanks!
Ben & Steve,
Your debate makes me think of fundamental questions about how the economy works. I think it might be possible that you’re both right, context-dependent.
I thought of this thread when I read this article this morning:
I’m not sure what to think on the merits of the original paper or this rebuttal, but I do agree about the state of economics. It’s to the point that I come into any economics argument with an ass-load of skepticism.
Andy first….
I haven’t read Gordon’s analysis (and being a bit busy probably wont get to it and will likely forget about it…sorry).
However, I think that there are a couple of points you might want to consider. First off is that micro economics is not nearly as riddled with problems as macro economics. Very few economists dispute the following claims:
1. Demand is a decreasing function of price.
2. Supply is an increasing function of price.
3. Price ceilings result in excess demand (generally speaking–i.e. when the market clearing price is above cieling).
4. Price floors result in excess supply (generally speaking).
5. Most firms maximize profits.
6. Incentives are a very real problem.
In other words, in micro economics there is a great deal more agreement amongst economist relative to macro theory.
So if the discussion is at the macro level, yes be skeptical. If it is a micro discussion, then there is much more reason to be less skeptical.
Ben,
So much wrong….
Uhhmmm no. My belief is that macro is riddled with a great deal of problems and hence I’m skeptical of the pronouncements of any single school of thought. Also, many of these schools of thought often line up nicely with political views. For example, the New Classical and Real Business Cycle theory schools would fit very nicely with one who is a libertarian. I have issues with both schools though. The neo-Keynesian tend to fit more with people who have a liberal/progressive views.
So my thinking is that macro is not going to give us much help. What area of economics is left? Micro. Will it give us full employment? Probably not. But we can start to look at problems related to bad incentives. We can look at issues like deadweight loss and minimizing those impacts. We can look to public finance and look at issues of tax incidence and how to reform our tax system to enhance economic growth. Is there going to be grand strategy where if we just do x to the money supply things will be great? No.
And I think ignoring the problems that a micro economist would point to can have larger macro implications. There were huge information problems in the mortgage business….principle agent problems dealing with adverse selection, moral hazard and hidden information.
Here is another area I think gets overlooked….there is often lots of talk about inequality. As a person who is more micro theory oriented than macro, I’d argue that from an incentive stand point some degree of inequality is probably necessary. Many who get involved in discussions of macro economics and inequality ignore this point. That is why I wrote above that income inequality isn’t necessarily a bad thing by itself. It could be bad if it gets to be too unequal and you combine it with a government policy structure that makes rent seeking possible.
This is where your lack of formal training becomes glaringly apparent.
Supply side theory /= micro economic theory.
Hell, I even hesitate to call supply side arguments a full blown theory and to claim it rests on the power of markets is dubious at best. The primary element of supply side arguments is that in some cases one can lower taxes and raise just as much or more revenue than at the higher tax rate. Notice the word can in there. An honest look at supply side theory does not lead one to conclude:
Lower taxes => higher revenue (almost everywhere).
So an honest supply sider right now should probably be hesitant to lower taxes as a means of increasing tax revenue, to say the least.
Research by Joel Slemrod also indicates that for the most part tax rates in the last 20-30 years have had only a small impact on economic growth. This is why, I’ve been rather sanguine about raising taxes and have in the past advocated as part of a solution to our fiscal problems.
During the last 20-30 years I’d hesitate to call it a capitalist system. In fact, I’d call our economy corporatist for the most part. It isn’t something I like. It is something I see as part of the problem.
WTFAYTA? No really, WTFAYTA? I don’t think I’ve every written anything, anywhere to imply any such thing.
Deadweight loss is the result of prices no longer being at their market clearing price and usually result in economic profits if the deviation is due to lack of competition (monopoly, monopsony, oligopoly). These are generally seen as undesirable since economic profits are really unearned profits and the market distortions result in things like less employment/output.
As for taxes that is more tricky since presumably the tax revenues will be used on things that enhance welfare for some or all people in the economy that are either absent in a pure market economy or under provided (e.g. a vaccination program, public roads, parks, fire department, etc.). Here one has to balance the economic inefficiencies (deadweight loss) with the welfare gains from providing various government services and goods that otherwise would not be provided. Ideally you’d structure the taxes to minimize the impact of the deadweight loss while generating enough tax revenues to cover expenditures.
Really…where is the blame for minimum wage earners? My point wasn’t that we should eliminate the minimum wage or the unemployed are to blame for their situation, but to point out to you that even something like the minimum wage comes with economic distortions that could have repercussions beyond that single market.
Again, this is where your lack of formal training is glaringly obvious. Have you heard of the theory of the second best? Normally the theory is presented as, if you have an inefficiency in one sector and try to correct for an inefficiency in yet another sector then even if the policy correction is “right” (for that sector) it could make things worse off. But another implication is that introducing a market inefficiency in one sector can have implications in other sectors. Hence my comment about the minimum wage. It is a pretty big inefficiency that is introduced into the low skilled labor market. Looking at just the deadweight loss for the minimum wage may very well understate the true magnitude of the costs associated with the minimum wage. Doesn’t mean it should abandoned, but it goes back to your claim:
Maybe not. Or at least maybe not as many as you think.
WTFAYTA? No really, WTFAYTA?
He’s just getting you and Drew confused on a minor point.
It’s to the point that I come into any economics argument with an ass-load of skepticism.
That should be your default option on pretty much everything that isn’t mathematics. For mathematics, you just need some combination of (a) an ass-load of knowledge, (b) a brainpan-load of brains and (c) a cakendar-load of time to catch up.