Worthwhile Canadian Initiative

The Beer IneQuality Index

The conventional Canadian view is that American beer is bad; watery and weak. Yet American breweries produce some of the world's best beers - superb brews coming out of microbreweries across the country.

What is striking about the United States is the country's level of inequality - or, to be more precise, the beer quality inequality. Countries like Germany, Belgium - the Scandinavian countries in general - have much less variation in the quality of their beer.

The question is: why? Does beer quality inequality result from other forms of inequality, like disparities in income and wealth? Or do the forces that produce income inequality also produce beer quality inequality? Is it a spurious correlation, or is the armchair empiricist's observation that the US has more beer ine-quality simply wrong?

Does capital income exist?

[Ages ago, as a graduate student, I "wasted" my time (when I should have been finishing my thesis) reading capital theory, including the more "heterodox" stuff. My memory is pretty hazy, but I still think about the old questions occasionally. There's nothing really new here for economists familiar with "dated goods".]

1. Suppose I know about a technology that lets me convert 100 apples into 105 bananas. Should we count those extra 5 bananas as part of my income? Of course not. You can't add (or subtract) apples and oranges bananas. They are two different goods. They don't taste the same.

A short history of the Canadian one per cent

Any sensible policy designed to address the concentration of income at the top of the Canadian income distribution over the past thirty years or so has to be based on a working model that explains how and why it happened in the first place. And we still don't have one. We still don't even have a good handle on the basic facts that this model should explain.

I think that one basic fact that such a model should explain is how the composition of the top earners group has evolved over time. So I'm going to present here some numbers from the Public Use Microdata Files for the censuses between 1981 and 2006.

Reverse Regression and the Great Gatsby Curve

[Update: I'm getting an awful feeling this post may be totally wrong. Does (1/b)/[1+Var(V(i))/Var(Y(i))] = b if the Lamarck model is true? If so, my proposal won't work. Wish I could do math.] [Update2. Nope, I think it will work. But Majromax in comments has come up with a simpler way to do the same thing. See my 01:19 pm comment.]

Economists normally run a regression of son's income on father's income, and interpret the estimate beta as a measure of "intergenerational mobility". (High beta means low "mobility"). I think we could learn something interesting by reversing the regression -- run a regression of father's income on son's income -- and comparing the results of the two regressions.

This post is about: econometrics (errors in variables bias); genetics (regression toward the mean); and mobility/inequality. I don't know much about any of those three areas, so I will probably get things wrong. I am not 100% confident my proposal will work, but I would like people with better technical skills than me to take a look at it.

Ideally, we should all agree on how we would interpret the results before we run any regressions.

Dumb questions about econometrics and GAI/NIT

I've been meaning to write this post for some time. Scott Sumner's post spurs me to write it now.

First let me ask my dumb econometrics question. It's a very simple question, and I really ought to know the answer. But I don't.

Q1. If you estimate a linear regression, using Least Squares or whatever, will the estimated residuals always sum to zero? If the answer is "yes", then skip the next question. [Update: Ben, Norman, and Matthew tell me in comments the answer is "yes", provided there is a constant term in the regression, and I want there to be a constant term.]

Interest rates, asset prices, and the rich

Does anybody here remember 1982? When interest rates went very high, and so asset prices went very low. Just the opposite of today.

What were people saying back then?

1. Were they saying: "Central banks are setting high interest rates and making asset prices low, which is bad for the rich, who own all the assets"?

2. Or were they saying: "Central banks are setting high interest rates, which is good for the rich, who have all the money to lend"?

Because my memory isn't very good. But I thought they were saying the second, back in 1982. And nowadays I think I hear the first, only in reverse.

P.S. And is anyone today writing a book about "saving the hippo"?

P.P.S. Maybe the underlying problem is that many people think about policy actions, when they should be thinking about policy regimes. Thinking about policy regimes imposes a symmetry on our analysis.

Dutch Inequality Theory

Last night I dreamt of Nick van Rowe again. I asked my Dutch ancestor what he thought would happen to the distribution of wealth in the future.

According to Dutch Capital Theory, "capital" is just the name we give to land that we have made ourselves in the past. The rent on an acre of land equals the value marginal product of that acre of land. But the price of land depends on both the rent (and expected future rents) and the rate of interest. And (one plus) the rate of interest equals people's marginal willingness to trade-off future consumption for present consumption.

We can imagine an economy where the aggregate stock of land, population, technology, preferences, output, wages, and land rents, are all constant over time, but where the price of land and inequality of wealth will grow over time.

Is The Big Problem r < g or r > g?

Two different memes about secular stagnation seem to be circulating in the econoblogosphere recently.

The first says that r < g, or will be in future, therefore the economy is dynamically inefficient, and we need government to fix this problem.

The second says that r > g, or will be in future, therefore inequality is increasing, and we need government to fix this problem.

Is this a moral panic?

[Update: soon after I posted this, Stefan Homburg emailed that he had noticed the same thing. His working paper (pdf) is now online. Stefan's figures 1 and 2 are especially interesting. It is land values that are rising, not capital. Theories of secular stagnation need to pay a lot more attention to land.]

[Make sure you put a space either side of < and > in comments, otherwise Typepad thinks it's a link.]

Meritocracy, mobility, and optimal taxation

What would a perfect meritocracy look like?

Suppose we could all agree on a definition of "merit" as "ability to contribute to the common good".

Suppose that each individual was born with a certain quantity of "merit", and that we could observe and measure each individual's "merit" perfectly. It's indelibly stamped on their foreheads.

Suppose that we had an economic system where each individual's income was strictly and perfectly proportional to that individual's "merit".

That perfect meritocracy is not a good economic system. Not in my eyes, anyway. Because, for example, it would mean that an individual who was unlucky enough to be born with zero "merit" would get zero income.

Standard Optimal Tax Theory says that if we lived in such a world we should put a tax on "merit", and only on "merit". And we should put the tax rate high enough to ensure that all individuals earn exactly the same after-tax income, regardless of "merit". Because doing so would maximise total utility of the population (assuming diminishing marginal utility of income).

Capital income in a recession

Profits and income from capital are not the same thing, though they are mixed together in the national accounts. (Paul Krugman has made this point before.)

I work through some simple examples with sticky prices and/or sticky wages, where income from capital always falls in a recession caused by tight monetary policy.

[I add an incomplete postscript on how this will affect real interest rates in a recession.]

Economic Inequality, Saving and Economic Growth

“It is generally recognized that more saving takes place in communities in which the distribution of wealth is uneven than in those in which it approaches more closely to modern conceptions of what is just.” T.S. Ashton (1948) The Industrial Revolution 1760-1830, p. 7.

I came across this quote while reading Ashton’s account of the industrial revolution and was taken by this sweeping assertion especially in light of current public debate such as Obama’s State of the Union pledge to tackle inequality as well as research on economic inequality and how it is harming economic growth. If new investment and capital formation is a function of saving, then if inequality fosters greater saving, it should also play some role in fostering investment and economic growth. 

Two compulsory lotteries

Never reason from an increase in inequality. What the effects of increased inequality are, and whether it's good or bad, will depend on what caused that increased inequality. Inequality is an endogenous variable.

So let's think of a government policy that would cause increased inequality, and talk about that.

Suppose the government gave every Canadian a "free" lottery ticket. It isn't really free, of course. Those "free" lottery tickets are financed by increasing taxes. Maybe by increasing GST (VAT). If each ticket has an expected value of $1, and you get one ticket per day, and there is one winner every day, the prize would be around $35 million, and your chances of winning the lottery during your lifetime would be around one in one thousand, or 0.1%. You too could become a 0.1 percenter!

Federal Transfers, Equalization and Ontario's Cries for Reform

Transfers and equalization often flare up in Canadian policy discussions with the cry that there is a need for reform.  A recent Cohn column in the Toronto Star on Ontario’s economic stall concluded “Outdated equalization and transfer payments cry out for reform, but will likely continue to bleed Ontario’s taxpayers of about $12 billion a year (a burden that would wipe out our deficit and balance the budget instantly.”  This is a continuing mantra in Ontario that began with the 23 billion dollar fiscal gap put forth by Dalton McGuinty in 2006 and estimated at $11 billion by the Mowat Centre in a report in the spring of 2013.  I suspect the target of the Mowat Centre or Martin Regg Cohn here is not so much the Canada Health Transfer or the Canada Social Transfer – which is paid put on a per capita basis to all the provinces – but equalization.  So, how much equalization has the federal government out, and what are we to make of an equalization system that currently has Ontario as a recipient?

What will really old, stupid, and uneducated people do?

Typepad puts almost all my comments in spam. Me! Don't they know who I am? I can fish them out of the spam filter when it's my own post, but it means I have given up commenting on other people's posts, both here and on other blogs, if they use Typepad. Because my comments go straight to spam, and don't get fished out, which presumably confirms to Typepad I really must be a spammer.

But my problems with Typepad are just a symptom of a wider problem.

The hollowing-out of the middle class: It's a guy thing

I've been having a hard time getting my head around the 'hollowing out of the middle class' theme that were seeing so much of. What, exactly, does that mean? And is it actually happening? In a Maclean's post a couple of months ago, I tried looking at it in terms of the proportion of the income distribution that was within a certain distance of the median, and this is what I got:

Contrasting trends in Canadian and US median incomes

This is a graph of real Canadian median family incomes:

What do you think the relevant trend is for current policy?

Revolution, Income and Regional Decline: The American Revolution and the First American Great Depression

Using the framework of neoclassical institutional economics, new institutions are innovated if the perceived expected net gains are positive.  That is, the benefits from the change should exceed the implementation costs plus the net benefits of the existing institutional arrangement.  A primary ingredient of those gains must invariably translate into higher per capita income.  As a result, it is quite intriguing that recent new income estimates for the United States between 1774 and 1800 by Peter Lindert and Jeffrey Williamson show that the aftermath of the American Revolution and Confederation era saw real per capita income in the United States drop by 20 percent – a drop akin to that of the Great Depression from 1929 to 1933.

What is the link between unionisation and inequality?

I've looked at graphs like this many times over the past few years:

One of the things that I notice in that chart is that countries that are reputed to have strong union movements have market inequality outcomes that don't appear to be all that much better than those with weaker union movements.

So this post offers some cross-country evidence about the empirical link between unionisation and inequality. All data are taken from the OECD. The inequality measure is the Gini coefficient, which means that this post has nothing to say about 'top end' income concentration. (See here for why I think the distinction is important.)

Wealth, Religion and Inequality

In nineteenth century Canada, religion was a very important institutional and social force and via its social networks affected employment opportunities and ultimately income.  Via both direct and indirect effects, religious affiliation invariably affected asset accumulation and wealth and by extension must also have affected wealth inequality.  Indeed, when it comes to examining the wealth distribution of Anglicans versus Baptists or Methodists, the Baptists and Methodists appear to have had their wealth more equally distributed.

Does the End of Growth Mean the Rise of Inequality?

Classical economics argued that eventually a stationary state or the end of economic growth was going to be reached but they did not forsee the technological change of 19^th century industrialization.  The result was income and wealth growing by leaps and bounds.  However, yet another paper - this time by Thomas Piketty and Gabriel Zucman of the Paris School of Economics - suggests it may all be coming to an end with important effects this time for wealth and inequality.