Brookings: Topics - Opportunity and Well-being

How Much Do Americans Care About Income Inequality? Part II

Scott Winship — Wed, 15 May 2013 16:00:00 -0400

Recently in this space, I criticized an op-ed that claimed to resolve a paradox related to inequality and public policy. Ilyana Kuziemko and Stefanie Stantcheva argued that while Americans are "deeply troubled about the current level of income inequality," support for government policy to reduce it is low. Based on a series of randomized experiments they conducted with Emmanuel Saez and Michael Norton, Kuziemko and Stantcheva speculated that rising inequality has eroded trust in government, resolving the paradox.

In my previous essay, I argued that there is little evidence to indicate that Americans are particularly concerned about inequality, so their lack of interest in having the government intervene should be unsurprising. Here I want to draw attention to a problem with the conclusion of Kuziemko and her colleagues that providing people with information about inequality reduced trust in government.

In their experiment, some survey respondents were provided information about their ranking in the income distribution and about inequality levels. Receiving this information produced a decline in expressed levels of trust in government. Kuziemko and her colleagues conclude that,"emphasizing the severity of a social or economic problem appears to undercut respondents' willingness to trust the government to fix it-the existence of the problem could act as evidence of the government's limited capacity to improve outcomes more generally." But the information in their survey did not simply emphasize the severity of inequality, it exaggerated economic hardship.

Respondents randomly selected to receive information about inequality first input their "annual household income" and were told the share of "US households" that earn less than their own "household." But the information the survey gave respondents made them feel richer than they were. I typed into the survey form the 2011 median household income according to the Census Bureau-$50,054. The survey should have told me that "my" household was richer than 50 percent of American households-that's what the median is. Instead, I was told I was richer than 66 percent of households.

In fact, what the information provided by the survey told the subject was the percentage of tax returns that have less gross income than the household income she reported. Tax returns are not households. Two roommates living together, a cohabiting couple, a married couple filing separate returns-all of these constitute one household but two tax returns. More to the point, a sixteen-year-old burger-flipper or a fulltime college student with a work-study job are also distinct tax returns even if they live at home. Furthermore, gross income on tax returns (AGI with adjustments put back in) is not "household income" as most people think of it. For example, non-taxable public transfers-including most Social Security benefits and all welfare benefits-are excluded. So are the tax-favored employee benefits commonly deducted from paychecks, such as health insurance premiums, retirement plan contributions, and flexible spending accounts.

The result of these differences between the income of households and the gross income of tax returns is that the median for the former is quite a bit bigger than the median for the latter (and the same is true for other parts of the income distribution, such as the "richest ten percent" or the"poorest third"). The survey tool reports that $33,800 is the median "household income"-one-third less than the actual median.

The respondent, then, "learned" that she was richer than she was, and if she correctly thought that her standard of living was average before responding, she learned that it was better than average. More people were doing worse than her than she thought, and fewer people were doing better than her. The next step in the survey drove that home by inviting her to move a slider to see how "households" with different income levels rank compared with other households. This step reinforced that Americans were poorer than they actually were.

Different subjects were shown additional screens subsequently. However, everyone randomized to receive the information about inequality proceeded through the rest of the survey-with its questions about policy preferences and trust in government-having been given this overly-negative data about how Americans are doing economically. The subjects randomized to bypass the informational screens were not primed in this way. The design of this experiment does not allow us to assess whether getting accurate information about the distribution of household income reduces trust in government. Instead, trust in government may be eroded by getting anxiety-provoking (and inaccurate) information.

Interestingly, Kuziemko and her colleagues report results from a separate experiment they conducted indicating that among below-median households, being primed with negative information about the state of the economy reduces opposition to inequality and support for redistribution and for progressive approaches to deficit reduction. It may be that attempting to convince middle class Americans that economic insecurity is more pervasive than it is will prove counterproductive to those who wish to help the truly insecure.

I have argued elsewhere that conventional accounts on the left do, in fact, systematically overstate both the extent of economic insecurity and the strength of the evidence that income inequality is harmful. It would be a regrettable irony if an excessive and distorted focus on inequality turns out to be more harmful to struggling families than income inequality itself.

Authors

Scott Winship

Publication: Real Clear Markets

Image Source: © Carlo Allegri / Reuters

Why We Still Think College Isn't for Everyone

Isabel V. Sawhill and Stephanie Owen — Mon, 13 May 2013 15:41:00 -0400

Is a college degree worth it? Not for everyone, according to our newly-released Center on Children and Families policy brief. The value of a college degree can vary dramatically, depending on factors such as field of study, type of college, graduation rate and future occupation. Here’s our final follow-up blog post, where we take a closer look at the conclusions we come to in the brief. (Read the first, second, and third parts here.)

Last week, the Center on Children and Families released a policy brief on making smarter decisions about higher education. We have welcomed the ensuing spirited debate from policymakers, students, colleges, and fellow researchers. The title of our policy brief, “Should Everyone Go To College,” is intentionally provocative and was chosen to start a conversation around the question. In favor of simplicity, we used the blanket term “college” to argue that a traditional four-year bachelor’s degree is not for everyone. We do think that some sort of postsecondary training is a good idea for almost everyone. This includes associate’s degrees, technical and vocational certification, apprenticeships, and worker training programs.

Some suggest that encouraging marginal students to pursue some of these non-academic paths creates a tracked system that keeps low-income and minority kids out of the upper echelons of our society. For that reason, vocational education has largely fallen out of favor in the United States, but gaps in academic performance between rich and poor and blacks and whites have persisted or, in the case of income, even grown. Closing these gaps has been one goal of the research done by the Center on Children and Families at Brookings, and we agree strongly that more needs to be done to prepare students to be college ready at the end of secondary school. But for the students we focus on in our brief—teenagers and young adults planning their educational and career paths—it is often too late to make up this lost ground.

The goal should be to help them make the choices that will turn out best for them given their individual strengths at the end of high school. For a student who has performed poorly in the classroom, the most bang-for-the-buck may come from a vocationally-oriented associate’s degree or career-specific technical training or from a period of work before returning to school with stronger motivation to learn what academic institutions teach. Think of the alternative: this student’s poor grades and possible ambivalence about classroom learning means he is likely to never finish his degree, and will have wasted time and money that could have been spent learning an employable skill. On the other hand, there are plenty of low-income students who are smart enough to succeed in college but who tend to choose schools that are beneath their ability and are more likely to drop out. The correlations of family background with college entry, persistence, and graduation have been rising, meaning it is especially important to help low-income students with the requisite abilities and preparation to enroll in a high-quality institution. Those individuals could benefit from better information about financial aid, graduation rates, and expected earnings.

Unfortunately, that information is not currently available: no one single comprehensive dataset containing information on earnings by school (let alone by major or program) exists. The Student Right to Know Before You Go Act, which we mention in our brief, has bipartisan support and would be an improvement on the status quo. The PayScale dataset we used for our brief has significant limitations, including questions about the reliability of its calculations and its representativeness.

Finally, some have rightly pointed out that our findings are descriptive, and should not necessarily be interpreted causally. It is likely true that smarter students self-select into engineering majors, so not every student will do better if she studies engineering rather than English. The same logic applies to more selective schools: part of why students at elite schools do better later on is that they are more talented before they ever enter college. Even so, careful economic research suggests that students do best when they attend the best school they can get in to, and that certain majors have real benefits.

Ultimately, higher education decisions are made by individual students and their families, and are based on their unique interests, strengths, and personal values, not only income and career prospects. Students need to have realistic expectations about what they’re likely to get out of pursuing higher education. Rigorous economic research has found that there is a sizeable proportion of people who experience a negative return to their education. That doesn’t mean they may not excel at other pursuits. It just means that one size doesn’t fit all high school students.

Authors

Isabel V. Sawhill
Stephanie Owen

Image Source: © Jessica Rinaldi / Reuters

Should Everyone Go To College?

Stephanie Owen and Isabel V. Sawhill — Wed, 08 May 2013 09:00:00 -0400

Summary

For the past few decades, it has been widely argued that a college degree is a prerequisite to entering the middle class in the United States. Study after study reminds us that higher education is one of the best investments we can make, and President Obama has called it “an economic imperative.” We all know that, on average, college graduates make significantly more money over their lifetimes than those with only a high school education. What gets less attention is the fact that not all college degrees or college graduates are equal. There is enormous variation in the so-called return to education depending on factors such as institution attended, field of study, whether a student graduates, and post-graduation occupation. While the average return to obtaining a college degree is clearly positive, we emphasize that it is not universally so. For certain schools, majors, occupations, and individuals, college may not be a smart investment. By telling all young people that they should go to college no matter what, we are actually doing some of them a disservice.

The Rate of Return on Education

One way to estimate the value of education is to look at the increase in earnings associated with an additional year of schooling. However, correlation is not causation, and getting at the true causal effect of education on earnings is not so easy. The main problem is one of selection: if the smartest, most motivated people are both more likely to go to college and more likely to be financially successful, then the observed difference in earnings by years of education doesn’t measure the true effect of college.

Researchers have attempted to get around this problem of causality by employing a number of clever techniques, including, for example, comparing identical twins with different levels of education. The best studies suggest that the return to an additional year of school is around 10 percent. If we apply this 10 percent rate to the median earnings of about $30,000 for a 25- to 34-year-old high school graduate working full time in 2010, this implies that a year of college increases earnings by $3,000, and four years increases them by $12,000. Notice that this amount is less than the raw differences in earnings between high school graduates and bachelor’s degree holders of $15,000, but it is in the same ballpark. Similarly, the raw difference between high school graduates and associate’s degree holders is about $7,000, but a return of 10% would predict the causal effect of those additional two years to be $6,000.

There are other factors to consider. The cost of college matters as well: the more someone has to pay to attend, the lower the net benefit of attending. Furthermore, we have to factor in the opportunity cost of college, measured as the foregone earnings a student gives up when he or she leaves or delays entering the workforce in order to attend school. Using average earnings for 18- and 19-year-olds and 20- and 21-year-olds with high school degrees (including those working part-time or not at all), Michael Greenstone and Adam Looney of Brookings’ Hamilton Project calculate an opportunity cost of $54,000 for a four-year degree. In this brief, we take a rather narrow view of the value of a college degree, focusing on the earnings premium. However, there are many non-monetary benefits of schooling which are harder to measure but no less important. Research suggests that additional education improves overall wellbeing by affecting things like job satisfaction, health, marriage, parenting, trust, and social interaction. Additionally, there are social benefits to education, such as reduced crime rates and higher political participation. We also do not want to dismiss personal preferences, and we acknowledge that many people derive value from their careers in ways that have nothing to do with money. While beyond the scope of this piece, we do want to point out that these noneconomic factors can change the cost-benefit calculus.

As noted above, the gap in annual earnings between young high school graduates and bachelor’s degree holders working full time is $15,000. What’s more, the earnings premium associated with a college degree grows over a lifetime. Hamilton Project research shows that 23- to 25-year-olds with bachelor’s degrees make $12,000 more than high school graduates but by age 50, the gap has grown to $46,500 (Figure 1). When we look at lifetime earnings—the sum of earnings over a career—the total premium is $570,000 for a bachelor’s degree and $170,000 for an associate’s degree. Compared to the average up-front cost of four years of college (tuition plus opportunity cost) of $102,000, the Hamilton Project is not alone in arguing that investing in college provides “a tremendous return.”

It is always possible to quibble over specific calculations, but it is hard to deny that, on average, the benefits of a college degree far outweigh the costs. The key phrase here is “on average.” The purpose of this brief is to highlight the reasons why, for a given individual, the benefits may not outweigh the costs. We emphasize that a 17- or 18-year-old deciding whether and where to go to college should carefully consider his or her own likely path of education and career before committing a considerable amount of time and money to that degree. With tuitions rising faster than family incomes, the typical college student is now more dependent than in the past on loans, creating serious risks for the individual student and perhaps for the system as a whole, should widespread defaults occur in the future. Federal student loans now total close to $1 trillion, larger than credit card debt or auto loans and second only to mortgage debt on household balance sheets.

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Should Everyone Go To College?

Authors

Stephanie Owen
Isabel V. Sawhill

Image Source: © Brian Snyder / Reuters

College Is The Holy Grail, But Should Everyone Go?

Isabel V. Sawhill — Wed, 08 May 2013 09:30:00 -0400

The new Holy Grail in American life appears to be a four-year college degree. Almost all high school students and their parents aspire to go to college, and high school graduates are enrolling in much higher numbers than in the past. The problem is that too few of them are graduating. Dropout rates from four-year schools are over 40 percent and from community colleges they are closer to 70 percent. The need for remedial courses to compensate for what kids are not learning in high school is distressingly high and not all that effective.

For those who actually graduate, a college degree can pay off handsomely in the labor market. After adjusting for other confounding variables, the extra lifetime income associated with a bachelor’s degree is $570,000, and the rate of return is high – somewhere around 10 percent. However, those figures are averages. The benefits of a college degree vary widely depending on the quality of the school and a student’s choice of major. Not all college degrees are created equal: there is a huge variation in the return to a bachelor’s degree, depending on choice of major and occupation; school type and selectivity level; as well as the likelihood of graduating. The details are spelled out in a newly released Brookings brief that notes that 170 of 853 unique schools, or 1 in 5 of those schools analyzed, have negative returns on investment.

With college costs at record highs, many students are incurring debilitating debt. Student loans are the second largest item on household balance sheets after mortgage debt. It may actually be irresponsible to tell young people that college is always the best choice, and that they will be able to find jobs that make these debt levels affordable. If a student is able to get into a school with high graduation rates, generous financial aid, and he or she chooses a major with high expected earnings – such as engineering or science -- they can greatly improve their lifetime prospects. But an expensive degree at a non-selective four-year school with a low graduation rate may not be a wise decision.

How can we help students make smarter investments in their postsecondary years? First, we need to make sure they have better information on financial aid, graduation rates, earnings levels, and other relevant information about the institutions they are considering. Some of this data exists, such as the PayScale college rankings and the Obama Administration’s College Scorecard, but should be more broadly publicized. Second, we should encourage more students to consider less traditional postsecondary alternatives such as job training programs, apprenticeships, vocational certificates, and associate degrees that train students in skills that are in high demand by employers. Finally, financial aid should be tied to academic performance: research suggests that students with financial aid that has strings attached are more likely to complete their degrees.

Authors

Isabel V. Sawhill

Publication: Real Clear Markets

Image Source: © Jason Reed / Reuters

Time for Change: A New Federal Strategy to Prepare Disadvantaged Students for College

Ron Haskins and Cecilia Elena Rouse — Tue, 07 May 2013 09:00:00 -0400

Abstract

If more children from low-income families graduated from college, income inequality would fall and economic opportunity would increase. A major barrier to a college education for students from low-income families is that they are poorly prepared to do college work. Since the War on Poverty of the 1960s, the federal government has funded several programs to help prepare disadvantaged students to succeed in college. Evaluations show that these programs are at best only modestly successful. We propose to consolidate these programs into a single grant program, require that funded programs be backed by rigorous evidence, and give the Department of Education the authority and funding to plan a coordinated set of research and demonstration programs to develop and rigorously test several approaches to college preparation.

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Time for Change: A New Federal Strategy to Prepare Disadvantaged Students for College

Authors

Ron Haskins
Cecilia Elena Rouse

Publication: The Future of Children

Myths of Inequality and Stagnation

Scott Winship — Wed, 27 Mar 2013 00:00:00 -0400

Much of what I write is an attempt to dispel economic doomsaying on the left. It’s not that I think we have solved every problem of fairness, opportunity, or security; rather, certain problems are real while others are overstated.

Sometimes dramatically so. Last month David Cay Johnston, Pulitzer Prize winner and former New York Times reporter, wrote an essay for the (generally very informative) “taxanalysts” website on income inequality. Johnston tried to make the case that the gains of the rich have come at the expense of everyone else with the eye-raising claim that the income received by “the bottom 90 percent of earners” rose by only $59 in terms of today’s purchasing power between 1966 and 2011.

This is one of those litmus-test claims that in a perfect world would disqualify some people from debate over living standards, inequality, and the state of the middle class. To honestly believe that below the top 10 percent of earners there has been essentially no improvement in 45 years is to declare an extreme disconnection from the real world and a commitment to a negative interpretation of the American economy that is beyond parody.

The claim was dutifully repeated this week by the Center for American Progress’s Think Progress, the Huffington Post, and Salon. It has been tweeted, liked, or emailed by over 10,000 readers of those sites and in turn read by their own followers and friends. They will be more accepting of the next fearful economic claim as a consequence.

This is an egregiously erroneous “finding”, as I’ll explain in a moment. But first, take the test yourself. The median household income is the income of the household that is right in the middle of the distribution—half of all households are richer than it and half are poorer. How much do you think median household income has risen since 1966? (Hint: I’d take the “over” if we’re starting with $59.)

The Census Bureau’s Current Population Survey is the most widely-used source of income data, though it has some flaws. The first year for which household income datais readily available from the CPS is 1967. From 1967 to 1979, median household income grew by $5,500. This understates income growth during this period because it does not incorporate non-cash public transfers like food stamps, Medicaid, and Medicare and does not include fringe benefits or realized capital gains (such as from the sale of a home). From 1979 to 2009, we can use improved estimates from the Congressional Budget Office that combine the CPS data with tax return data to partially fill these gaps. CBO indicates that median household income (before taxes) rose by $14,200. After taxes, median income rose by $17,600.

At a minimum, therefore, median household income rose by $20,000 from 1967 to 2009. The data on which Johnston relies shows a decline of $200.

Despite his claim, the data Johnston uses represents tax returns, not “earners”. A married couple filing jointly is a single tax return. But even if we give Johnston the benefit of the doubt and ask what has happened to the median “earner”, he is way off. Thereadily available CPS data goes back to 1975—the increase in earnings for the median worker was $6,500 from 1975 to 2011, while the tax return data relied on by Johnston suggests a decline of $1,200.

How did Johnston get it so wrong? The most fundamental answer is that he failed to challenge his priors when the data showed an implausible result. But he is not making his numbers up. The problem is that the data he used cannot be used to examine trends in living standards among the non-rich.

Johnston relies on the tax-return-based data of economists Thomas Piketty and Emmanuel Saez—the data that is the basis for the ubiquitously reported (and true) finding that incomes at the top have sky-rocketed. As I have written before, the degree of income inequality we have in the U.S. is truly mind boggling, though that fact tells us nothing about whether inequality is problematic. Clearly it makes a difference if the bottom 90 percent is only $59 richer over 45 years rather than $20,000 richer. Piketty and Saez do show that the income received by the bottom 90 percent of “tax units” rose by just $59. We know because they admirably make mounds of their data available to the public (in this case, see the “Table_Incomegrowth” tab, column J).

Why are their numbers so different from the Census Bureau and CBO figures? The share of household and personal income that is included in the Piketty/Saez measure has declined markedly since 1966. In that year, the total income in the Piketty/Saez data amounts to 109% of the total income in the CPS. That the share is over 100% largely reflects the fact that the CPS does not capture the very richest households and caps the amount of income reported at artificially low levels for confidentiality purposes. By 1979, Piketty/Saez income was just 93% of CPS income, despite the fact the CPS continued to understate income at the top. The decline in share of income accounted for by Piketty/Saez is due to the fact that taxable public transfers are largely excluded from their measure, as are tax-favored employer benefits deducted from paychecks. Both sources of income have grown over time. Their estimates also exclude realized capital gains among the bottom 90 percent, and those were rising over time too.

The share of CPS income accounted for by Piketty/Saez income was largely unchanged in 2009. But this was the period in which income inequality rose. If the CPS could adequately capture top incomes, the increase in CPS income would have been greater than the data indicate, and so the share of CPS income accounted for by Piketty/Saez income would have fallen again. From 1979 to 2009, we can turn to the CBO income estimates, which incorporate public transfers, employer-provided health insurance, full pay (before deductions), capital gains, and top incomes. The share of CBO income accounted for by Piketty/Saez income fell from 89% in 1979 to 77% in 2009.

It is also the case that “tax units”—essentially tax returns, but with a small number of additional “units” added in to account for non-filers—include, for example, teenagers who have summer jobs and college kids on work study who file tax returns and make very little. Changes over time in the size of these groups could also affect the results—not only by pulling the incomes of the bottom 90% down but by pushing the entry point to the top 10% up (more low-income tax returns means the “top 10%” is a richer group). There may also be under-reporting of self-employment and other income in the tax return data, and if that has increased over time, it would also dampen the rise in income in the bottom 90%.

You might think that these problems call into question the basic Piketty/Saez claims about rising income inequality.This is a possibility I’ve considered (and continue to), but evidence from other sources supports the basic conclusion that the incomes of the very rich have skyrocketed. These sources are not without problems themselves (and most rely on the tax return data in some way), but many of the shortcomings of the Piketty/Saez income measure are absent from them.

The Johnston analysis, in the end, is just an extreme case of liberal negativism about living standards. As I discuss in my new essay for National Affairs, “Overstating the Costs of Inequality,” the median household in the U.S. is twice as rich as it was in 1960, at the peak of the supposed “Golden Age” the American middle class. Too many commentators refuse to see that and are all-too-ready to accept the most outlandish claims about living standards. As I’ve argued before, this sort of thing sows economic insecurity and works against continued improvement in our standard of living. And it detracts from real-world problems.

Authors

Scott Winship

Publication: National Review

Image Source: © Frank Polich / Reuters

Overstating the Costs of Inequality

Scott Winship — Mon, 25 Mar 2013 17:16:00 -0400

In recent years, inequality has become the core economic concern of the American left. The gap between the haves and have-nots is understood to be the fatal flaw of our economic system — a fundamental problem that is the source of countless other difficulties. To hear many liberals tell it, increasing inequality is holding back growth, crushing the prospects of the poor and middle class, and even undermining American democracy. Such concerns are prominent in President Obama's rhetoric, and seem also to drive key parts of his policy agenda — especially the relentless pursuit of higher taxes on the wealthy. As the president put it in his second inaugural address in January, he believes "that our country cannot succeed when a shrinking few do very well and a growing many barely make it."

The idea that our economy is held back by inequality is echoed in the claims of some of the nation's most prominent economists. Princeton professor (and Nobel laureate) Paul Krugman and David Card of the University of California, Berkeley, contend that inequality hurts economic mobility. Princeton's Alan Krueger (now chairman of the White House Council of Economic Advisers) and Columbia's Joseph Stiglitz (another Nobelist) think it dampens economic growth. Along with Raghuram Rajan, former chief economist of the International Monetary Fund, Stiglitz also argues that inequality was behind the financial crisis. Cornell economist Robert Frank and former labor secretary Robert Reich are convinced that it fuels the indebtedness of the middle class. The Massachusetts Institute of Technology's Daron Acemoglu believes that inequality enables economic elites to capture the machinery of government and thus ultimately produces national decline.

Read the rest of the article at the National Affairs website or download a fully annotated version of the essay.

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Overstating the Costs of Inequality (with full annotations)

Authors

Scott Winship

Publication: National Affairs

Subjective and Objective Indicators of Racial Progress

Betsey Stevenson and Justin Wolfers — Fri, 15 Mar 2013 00:00:00 -0400

Abstract

Progress in closing differences in many objective outcomes for blacks relative to whites has slowed, and even worsened, over the past three decades. However, over this period the racial gap in wellbeing has shrunk. In the early 1970s data revealed much lower levels of subjective well-being among blacks relative to whites. Investigating various measures of well-being, we find that the well-being of blacks has increased both absolutely and relative to that of whites. While a racial gap in well-being remains, two-fifths of the gap has closed and these gains have occurred despite little progress in closing other racial gaps such as those in income, employment, and education. Much of the current racial gap in well-being can be explained by differences in the objective conditions of the lives of black and white Americans. Thus making further progress will likely require progress in closing racial gaps in objective circumstances.

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Subjective and Objective Indicators of Racial Progress

Authors

Betsey Stevenson
Justin Wolfers

Image Source: © Mike Blake / Reuters

The Affluent Economy: Our Misleading Obsession with Growth Rates

Scott Winship — Mon, 25 Feb 2013 00:00:00 -0500

For progressives, the economy of the mid-20th century constitutes a kind of paradise lost. Between 1947 and 1973, mean family income doubled, rising as much among the poor as among the rich. By contrast, from 1973 to 2007, income growth was half as great. While growth was less equally distributed than in the earlier “Golden Age,” it slowed across the board, with all but the top 1 percent seeing declines in annual income growth. So profound and demoralizing was the change that Paul Krugman called ours the “age of diminished expectations.”

Concern over the slowdown of economic growth spans the ideological spectrum, even when it is not accompanied by worry over rising inequality. “Typical individuals in earlier generations reaped much greater gains than ours, as their living standards doubled every few decades,” wrote libertarian economist Tyler Cowen in his 2011 book, The Great Stagnation. “Life is better and we have more stuff, but the pace of change has slowed down compared to what people saw two or three generations ago.” Similarly, Northwestern University economist Robert Gordon predicts that “the rapid progress made over the past 250 years could well turn out to be a unique episode in human history.”¹

Indeed, the rate of economic growth has slowed, and the benefits of growth have certainly shifted toward those at the top. But these basic facts have been misinterpreted and divorced from the relevant context to paint a skewed picture of our economic circumstances. Setting aside the enormously important question of how growth is distributed, it is important to appreciate the magnitude of real economic gains that we continue to experience. The current obsession with growth rates prevents us from doing so.²

As nations become wealthier, it is harder for them to sustain high rates of growth. That doesn’t mean that the United States is in decline, or even stagnating. When a nation is as rich as ours, it can realize larger absolute gains than it did in the past and larger gains than other nations even if it has lower growth rates. That’s because a growth rate of, say, 2.5 percent represents a larger increase in absolute wealth the richer an economy becomes. In 1900, a 2.5 percent increase in gross domestic product (GDP) per capita would have translated into about $150 in today’s dollars for every man, woman, and child in the United States. In 2010, it would have been roughly $1,200, reflecting the fact that in the aggregate, we are about eight times wealthier than we were 110 years ago.³ By focusing too much on growth rates and too little on absolute increases in wealth, we have failed to appreciate the magnitude of economic gains in recent decades.

The distinction between absolute gains and relative gains has been roundly ignored in the way that policy makers, analysts, and the media conceptualize economic growth. Comparing ourselves to what might have been if we had experienced higher growth rates, rather than to what our actual income and wealth were in the past, makes us feel that we are doing worse than our predecessors when we are actually better off. This comparison unnecessarily increases worker anxiety and is as likely to inspire selfishness as generosity among voters. Perhaps most troubling, the focus on growth rates misdirects our attention from the minority who are struggling to the broad majority who are doing well, leading progressives to suggest costly universal policies, or mistargeted ones, when more- focused policies aimed at the poor would be more appropriate.

1.
For all the talk about stagnant growth, you’d have a hard time divining it from looking at the material circumstances in which most Americans live. Even after the Great Recession, we live in larger houses and own more cars than previous generations. Our homes are cluttered with all manner of gadgets, electronics, and appliances. Air-conditioning and air travel, once considered luxuries, are now available to virtually all of us.

If our obvious material affluence seems difficult to square with various narratives of economic decline, that’s because it doesn’t. What has declined is the rate of improvement in our lives. From 1947 to 1979, average family income grew by 2.4 percent per year, while it grew by half that from 1979 to 2007. But the lower growth rate since 1979 masks impressive absolute gains. The annual increase in average family income was $860 in today’s dollars, not all that much less than the $970 annual increase from 1947 to 1979, despite the lower rates. And even this comparison understates the gains that we can expect in the future because we are at the point where we will soon be rich enough as a society that annual gains will be permanently higher than they have ever been, even if growth rates remain low.

Source: GDP per-capita estimates are from Louis Johnston and Samuel H. Williamson, “What Was the U.S. GDP Then?” MeasuringWorth.org. Nominal figures are adjusted for inflation using the implicit price deflator for GDP. Prior to 1948, GDP per-hour estimates are based on real gross private domestic product per hour, while 1948–2007 GDP per-hour estimates are based on real GDP per hour for the total economy. Estimates for 1900–1947 are from the Historical Statistics of the United States, Millennial Edition Online, Table Cg265-272. Estimates from 1948–2007 are from National Income and Product Accounts real GDP estimates, Table 1.1.6, and unpublished annualized quarterly hours are from the Bureau of Labor Statistics Office of Productivity and Technology, courtesy of Robert Gordon, Northwestern University. I averaged the quarterly hours for each year.

Prior to the Great Recession, annual absolute gains were actually stronger than ever — and rising. By some measures of growth, gains today have rebounded in the wake of the recession and are higher than they were during the Golden Age. Consider productivity, which is simply GDP divided by the total hours worked by Americans and is a key measure of our long-term capacity to produce wealth. The chart below shows, for any given point, annual productivity growth averaged over the nine-year window centered on that point. Absolute and relative growth figures are scaled so that the 1959–69 average equals 1.0; the 1978 value of 0.35 for relative change indicates that the nine- year average growth rate centered on 1978 was 0.35 times the 1959–69 average (or 65 percent lower).⁴

Points in the chart are nine-year averages centered on each year shown. Source: Author’s computations from National Income and Product Accounts real GDP estimates, Table 1.1.6, and unpublished annualized quarterly hours from the Bureau of Labor Statistics Office of Productivity and Technology, courtesy of Robert Gordon, Northwestern University. I averaged the quarterly hours for each year.

When annual productivity growth is measured in terms of percentage changes, rates fall and never achieve the early 1960s level again. But when year-to-year growth is measured in absolute terms — the inflation-adjusted dollar change — productivity growth has been at historic highs since the mid-1990s. At its peak around 2000, it was nearly 80 percent higher than productivity growth in the 1960s.⁵

Comparisons of per-capita and per-worker GDP growth to past levels tell a similar story. Absolute growth exceeded early 1960s growth starting in the mid-1990s and dipped below those levels again during the recession. Absolute per-worker growth is exceeding early 1960s growth once more, even though absolute per-capita growth has not fully recovered. In contrast, as with productivity growth rates, neither per-capita nor per-worker growth rates have returned to their early 1960s levels.⁶ Once the economy fully recovers, absolute growth measured per hour, per worker, or per capita and averaged over several years can be expected to permanently exceed the annual growth experienced during the Golden Age of the postwar American economy. (That is, the “Absolute Change” line in the chart above is unlikely to dip below the 1959–69 level ever again.) Mathematically, that is what will happen as our wealth increases, barring the highly unlikely onset of, say, a decade of negative growth.⁷

While some have referred to the aughts as a “lost decade,” absolute growth was higher from 2000 to 2007 than from 1959 to 1969, an apples-to-apples comparison because both periods are between business cycle peaks. Even though GDP per capita rose by only 1.4 percent per year between 2000 and 2007, less than half the 3 percent per year from 1959 to 1969, annual absolute gains were $650 per person compared to $600 in the 1960s.

To fixate on the diminished rate of growth is to jealously compare ourselves not to Americans in the 1960s, who were poorer than we are and whose living standards improved less than ours did, but to Americans living today in some parallel universe, where growth rates did not decline.⁸

Consider what would have been required to have maintained 1960s growth rates. If we start with actual 1969 GDP per capita and begin applying annual growth rates of 3.0 percent, the absolute increase per person in 1970 would have been $700. In 1990, after cumulating annual 3 percent gains, the per-person increase would have been $1,264. By 2010, a 3.0 percent increase in per-capita GDP would have amounted to $2,283 — more than three times the actual 1970 increase.

That certainly would have been nice — much better than the $922 gain we actually saw — but it is asking a lot from the economy to produce ever-bigger absolute gains from ever-higher initial levels. It is an unreasonable expectation — it demands bigger absolute gains year after year not because prices have increased (inflation adjustment takes that into account) and not because we work harder (estimates of productivity growth control for hours worked). Just ... because.

As another example of the importance of wealth levels and absolute growth, consider that the mean hourly compensation of workers in the nonfarm business sector grew at an annual rate of 3.2 percent during the 1950s (from 1948 to 1959, which were business cycle peaks). From 1959 to 2010, growth slowed to 1.7 percent per year.⁹ Had mean compensation continued to grow at the 1950s rate, it would have stood at $75 an hour in 2010 rather than $36 an hour. Obviously, our lives would be enormously better if growth rates had not slowed. On the other hand, the 3.8 percent raise that workers got in 1952 was worth about 44 cents in today’s dollars, while the 1.2 percent raise that workers got in 2005 was worth almost as much — 41 cents. Because we are richer today, we get the same absolute benefit from a smaller percentage change in growth.¹⁰

To believe that compensation growth should have remained at an annual rate of 3.2 percent after the 1950s is to believe that today’s workers should be twice as rich as they actually are. Further, it is to believe that they should then get a raise next year over five times larger in constant purchasing power terms than the raise received by workers in 1952. It is one thing to expect annual absolute income increases and quite another to expect annual increases that grow ever more generous, forever.

Focusing on absolute changes in wealth also provides needed context for assessing our economy’s performance relative to that of other industrialized nations. During the heyday of America’s midcentury industrial economy, annual per-capita GDP growth rates were actually higher in Europe, averaging 4.3 percent from 1948 to 1969 across 12 western European countries, versus 2.5 percent here.¹¹ But Europe was playing catch-up. GDP per capita was twice as high in the United States at the beginning of this period as in those same 12 countries (for comparison, today our per-capita GDP is twice that of Portugal). As a consequence, the absolute growth in per-capita GDP from 1948 to 1969 was essentially the same in Europe and the United States, despite the lower relative growth here. Conversely, the United States and Europe experienced roughly the same economic growth rates from 1969 to 2009, but because the United States started with higher wealth, our absolute growth was 35 to 40 percent greater.¹²

2.
That we will continue to experience large absolute gains in income and wealth despite lower rates of economic growth should be cause for great optimism. As growth rates translate into bigger and bigger absolute gains, we should expect marked changes in living standards that ought to temper concerns about inequality and global competition.¹³ Of course, if growth continues to be unequally distributed, these ever-growing absolute gains might not trickle down to the middle class and poor. But while inequality is unlikely to decline, there is reason to believe that rates of growth in male earnings will soon begin to track productivity growth rates again.¹⁴

As living standards rise, workers might choose to continue putting in the same amount of work and reaping higher incomes, but more likely they will choose to cut back their work hours. Doing so would be consistent with the steady increase in leisure time enjoyed by American workers over the last century. Nobel laureate Robert Fogel projects that the decline in hours worked in the 45 years from 1995 to 2040 will exceed in percentage terms the decline over the 115 years from 1880 to 1995.¹⁵ Based on historical patterns, he projects a 30-hour workweek in 2040 and continued declines in the typical retirement age. Writing in 2000, he noted that the fraction of American men aged 60 to 64 that were in the labor force had declined from close to 100 percent in 1880 to 50 percent.

Unlike men, women have increased their paid work hours dramatically, but because their unpaid time doing housework has declined more, their leisure time, too, has risen. Growing demand for leisure and family time, as evidenced by increasingly widespread concerns over work-family balance, suggests that work hours might be on the verge of declining among men and women alike.
Of course, not every worker cuts back his or her hours voluntarily, and the slow recovery of labor markets since the Great Recession has heightened long-standing fears that technological change might throw increasingly large numbers of people out of work. This is the theme of the recent book Race Against the Machine, by economists Erik Brynjolfsson and Andrew McAfee. Fears of mass technological unemployment, as Brynjolfsson and McAfee acknowledge, have existed alongside technological development since at least the time of John Maynard Keynes, but they have not materialized. However, even if technological unemployment were to substantially increase the jobless ranks, as Brynjolfsson and McAfee fear, the economy might increasingly be rich enough that we can easily afford expanded safety nets. Arguably, that is what we are already seeing in the rising number of working-age men receiving federal disability payments. We may have reached a point where living standards are high enough that disability benefits, which are tied to earnings levels, can afford less-skilled men a comfortable (if not luxurious) lifestyle, at least when combined with other income sources.

A rich society with an underclass of financially comfortable unemployables supported by an overclass of highly skilled analysts and a resentful middle class is an unattractive future. But there is no reason that even this worst-case scenario must come to pass. Work-sharing arrangements used by European nations and a number of US states during the recession show how the cost of falling demand for labor can be distributed broadly in the form of reduced hours for multiple workers, rather than landing entirely on the worker who would be laid off. Growing affluence might eventually facilitate a costless version of work sharing, allowing even part-time work to sustain less-skilled workers comfortably.

3.
We should, of course, pursue a best-case scenario that raises the skill levels of workers and increases demand for the less-skilled workers who remain. The most effective way to raise skill levels is to improve our educational systems. Practically, this means that progressives must compromise with conservatives by pairing greater spending on the one hand with stronger accountability, more choice for parents and students, and greater flexibility for principals and school districts on the other. Taking advantage of new technologies to promote distance learning in higher education could bring down the cost of postsecondary education dramatically, opening it up to more young adults.

The best way to boost demand for less-skilled workers is to have sustainable strong economic growth. Higher growth rates are still better than lower ones, after all, and we should be striving for the rates of the Golden Age. However, it is not clear that we know how to attain them. Republicans have blamed the growth slowdown on the expansion of government, high tax rates, excessive regulation, and a safety net that has sapped initiative. Democrats have blamed changes in the global economy that have been abetted by laissez-faire policies, weak national industrial policy, thin safety nets that dissuade risk taking, and insufficient federal efforts to counter rising inequality.

Clearly, we should identify more ways to promote entrepreneurship and innovation. And if we do not tame our federal budget deficits, it seems likely that economic growth rates will eventually be affected. But because growth rates have slowed even more in Europe than in the United States over the past few decades, explanations for our slowdown that center on American policies or features of our economic or political system are of limited use in figuring out how to boost growth rates. Whatever we are doing wrong similarly afflicts other developed countries.¹⁶

To be sure, steadily rising absolute growth will not solve all our economic problems. Perhaps most important, there is no reason that rising affluence must expand opportunity defined in terms of relative mobility. We can expect a continuation of the current pattern whereby the strong majority of children end up better off than their parents in absolute terms. Such absolute upward mobility was experienced by four in five of today’s 40-year-olds.¹⁷

But even if everyone ends up better off than their parents, that does not mean that those starting at the bottom of the ladder must end up any higher, relative to their peers, than their parents were. Among today’s 40-year-olds, two in five who started out in the bottom fifth of incomes as children remain in the bottom.

If today’s most disadvantaged children in 25 years have more money than their parents did, work less, but remain equally unlikely to “be whatever they want when they grow up,” then in an important sense, we would remain a nation with limited opportunity. Here is where progressives would be wise to prioritize their policy goals.

4.
The United States is an affluent nation — richer than any comparable society the world has ever seen — even as our affluence has grown at a diminishing rate. Yet to hear many progressives tell it, one would think most Americans were losing ground.
For too long, progressives have attempted to convince the broad middle class that its fate was tied to the prospects of the poor. They have understated improvement in living standards and overstated the extent of economic insecurity. They have dwelled too much on the rise in inequality without considering whether the gains at the top have come at the expense of everyone else.¹⁸ Income growth for those at the middle and the bottom has slowed but remains impressive, with median income higher by at least 35 percent today than it was when Reagan took office.¹⁹

Some progressives argue that a pessimistic economic narrative will create a sense of “shared experience” or a kind of “class solidarity” between the middle class and the poor.²⁰ But scaring middle-class Americans is unlikely to make them more generous. The renowned economist Benjamin Friedman has argued that egalitarian appeals are most likely to succeed when people feel secure enough to share. Indeed, as early as 1952, public opinion analyst Samuel Lubell noted that traditional New Deal themes were resonating less with increasingly affluent Americans, conjecturing that “[t]he inner dynamics of the Roosevelt coalition have shifted from those of getting to those of keeping. The dominant concern of most of the Roosevelt elements today is not to get more but to preserve their post-depression gains.”²¹

By 1968, Richard Nixon had succeeded in splintering the New Deal coalition by running on the theme of law and order. Lubell’s prophecy proved correct — it was no coincidence that cultural and foreign policy issues trumped pocketbook concerns. Median family income had increased by 68 percent over the 1952 level that was already, according to Lubell, a comfortable standard of living. Today, the family in the middle of the income distribution is over 130 percent richer than its midcentury counterpart.²²

By focusing on disappointing economic growth rates, we have missed the fact that today, low growth rates produce absolute growth that surpasses that seen in the Golden Age of the mid-20th century. Obsessed with comparing ourselves to doppelgängers in some world where unusually high growth rates prevailed, flying around in jet packs and teleporting to the moon, we have been dissatisfied with continued gains and even with annual improvements that surpass the previous high-water marks.

Politics is about prioritizing. The more time, energy, and dollars we spend on the overstated economic problems of the middle class, the less we can devote to the poor. The poor are certainly better off than in past decades, but one in five American household heads still reported that sometime in 2010 they worried about whether their food budget would fall short before the month ended.²³ Only 13 percent of children starting in the bottom fifth will end up in the top two-fifths in adulthood (compared with 63 percent of children who start out in the top two-fifths).

It is time to shift our focus to all that we have rather than that which we do not. It is time to renew our commitment to the American Dream of upward mobility — to help those facing long odds of occupying the most desirable positions — even as we recognize that the broad majority of us have never had it so good. /

1. See his 2012 National Bureau of Economic Research Working Paper, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds.”

2. I am working on a companion piece that will argue that the “stagnation” of earnings and income for middle class families represents a historical correction and return to the long-run trajectory of growth that productivity gains would predict. Wage growth outpaced productivity growth in the middle of the twentieth century, and recent decades have restored wage levels to historical patterns by allowing productivity to catch up. The historic shift of married women into the workforce also produced invaluable benefits to women that are not captured in measures of GDP, income, and earnings.

3. GDP per capita estimates are from Louis Johnston and Samuel H. Williamson, "What Was the U.S. GDP Then?" MeasuringWorth.org. Nominal figures are adjusted for inflation using the implicit price deflator for GDP. All dollar amounts in this essay are in 2010 dollars.

4. Presenting rolling averages allows the longer-term patterns to emerge from noisier year-to-year changes and ensures that the results are not sensitive to the starting and ending years chosen. The scaling allows the trends in the relative and absolute rates to be compared easily. I chose to use 1959-69 as the benchmark because it represents a period that started and ended with a business cycle peak and was followed by a period of slower growth.

5. Some researchers believe that the increasingly common practice of offshoring production to low-wage countries has overstated economic growth over the past fifteen years. Government economists within the Bureau of Economic Analysis acknowledge the methodological issue but believe it to be relatively minor, constituting at most 0.1 to 0.2 percentage points of annual real GDP or productivity growth (and likely less due to offsetting biases). See here and here. At worst, this issue would marginally change the quantitative figures presented in this essay without affecting the broader point that a focus on absolute growth should change our evaluation of trends in living standards.

6. Per worker estimates use the same GDP figures as the per capita and per hour estimates. Estimated number of workers prior to 2001 are from the Historical Statistics of the United States, Millennial Edition Online, Table Ba478-486. From 2001 to 2010, they are from http://www.census.gov/statab/hist/02HS0029.xls and the 2010, 2011, and 2012 editions of the Statistical Abstract of the United States. Charts for per capita and per worker growth available from the author on request.

7. Keep in mind, all of these absolute growth figures are in real, inflation-adjusted terms. So it is not that we have more growth but a dollar today is worth less than a dollar in the past. They are also in “per capita,” “per worker,” or “per hour” terms, so increases in population, employment, or hours worked do not affect these estimates. The different growth measures have different trends because of changes in the share of the population that works (e.g., due to shifting retirement or schooling patterns, to rising labor force participation among wives, or unemployment) and changes in the number of hours worked per worker (e.g., due to greater frequency of voluntary or involuntary part-time work).

8. Again, there remains the question of how this growth was distributed, but even here the picture is more complicated than progressives believe, as my companion piece to this essay will show.

9. Total compensation of employees in domestic industries is from National Income and Product Accounts, Table 6.2, and hours worked by full-time and part-time employees is from Table 6.9. Estimates are adjusted for inflation using the Personal Consumption Expenditures deflator from the National Income and Product Accounts Table 1.1.4.

10. Actually, this characterization understates the importance of levels of wealth and absolute growth. Holding constant changes in the age profile of the workforce and other population dynamics, what a 41-cent increase in pay really means is that, for example, 39-year-olds in 2004 received 41 cents more in 2005 than 2004’s 40-year-olds did. In the absence of growth, the 2004 39-year-olds would have received pay raises that left them in 2005 with the same average pay as the 2004 40-year-olds. If all else is equal—that is what zero growth means—the 2005 40-year-olds would make no more than the 2004 40-year-olds did. But they would still have made more than they had in 2004 as 39-year-olds. For sake of illustration, assume that workers of a given age in both 1951 and 2004 would have received raises of one percent even in the absence of growth, purely as a consequence of becoming more experienced or skilled. In that case, the increase in pay experienced in 1952—as a result of aging and economic growth combined—would have been 4.8 percent, while the increase experienced in 2005 would have been just 2.2 percent. But because pay was so much higher in 2004 than in 1951, the absolute increase for a worker with average pay would have been $0.74 an hour in 2005 rather than the $0.56-an-hour increase in 1952.

11. Angus Maddison, The World Economy, Volume 2: Historical Statistics, Tables 1c and 2c (Organization for Economic Co-operation and Development, 2006). The twelve European countries are Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, and the United Kingdom.

12. I computed these rates using 1969-2001 estimates from Maddison and 2001-2009 rates from OECD.StatExtracts. All cross-national comparisons I cite use figures adjusted for differences in purchasing power across countries and over time.

13. Note that I am not heralding the so-called “Singularity,” where technological advances lead to an almost impossibly accelerating rate of improvement in our wellbeing. My argument is not that rates of growth will increase any time soon (though they may). I am simply noting that even the diminished growth rates of the past few decades imply large absolute gains in our material conditions.

14. So I will argue in a future complementary essay to this one on the distribution of growth. Male wage growth has lagged productivity growth because productivity levels have had to catch up to the over-heated union-driven wage growth of an earlier era. Once productivity has caught up, the two should move in tandem in the future.

15. Robert W. Fogel (2000), The Fourth Great Awakening and the Future of Egalitarianism (Chicago: University of Chicago Press). See Chapter 5.

16. Indeed, simple demographics appear to be a big part of the story. Changes in the composition of the workforce—due to baby booms, the rise in immigration, and the increased labor force participation of married women—may have lowered experience and skill levels. Changes in schooling and retirement—and increases in longevity—have altered the ratio of workers to non-workers.

17. Pew Economic Mobility Project (2012), “Pursuing the American Dream: Economic Mobility Across Generations.” See also Julia B. Isaacs (2008), “Economic Mobility of Families Across Generations,” in Isaacs, Isabel V. Sawhill, and Ron Haskins, Getting Ahead or Losing Ground (Pew Economic Mobility Project).

18. See my recent essay, “Bogeyman Economics,” in National Affairs (Winter, 2012), as well as my recent piece on the New Republic website, “Stop Feeling Sorry For the Middle Class! They’re Doing Just Fine."

19. See Bruce D. Meyer and James X. Sullivan (2011), “The Material Well-Being of the Poor and the Middle Class Since 1980,” American Enterprise Institute Working Paper #2011-04, and Richard V. Burkhauser, Jeff Larrimore, and Kosali I. Simon (2011), “A ‘Second Opinion’ on the Health of the American Middle Class,” National Bureau of Economic Research Working Paper 17164.

20. See Mark Schmitt (2012), “If Liberals Want to Help the Poor, They Should Focus on the Middle Class,” The New Republic online.

21. Samuel Lubell (1952), The Future of American Politics (New York: Harper).

22. These computations are based on median family income estimates found here, adjusted for inflation using the Personal Consumption Expenditures deflator. The figures indicate a 128 percent increase from 1952 to 2010, but adding the value of health insurance would push this significantly above 130 percent.

23. From the U.S. Department of Agriculture’s Economic Research Service.

Authors

Scott Winship

Publication: Breakthrough Journal

Image Source: © Norbert von der Groeben / Reuters

Let's Have More Immigrants, Not More Babies

Isabel V. Sawhill — Wed, 20 Feb 2013 12:04:00 -0500

Fertility has fallen in all advanced countries and will almost surely continue to fall in the future. In the United States, the fertility rate is now 1.93 children per women, a little below the replacement level of 2.1. It waxes and wanes with the state of the economy and other factors, but the long-term trend is pretty clear: women have fewer children as their own opportunities, along with their ability to control their reproductive destinies, expand.

Bear in mind that right now roughly a quarter of all childbearing in the U.S. is unintended. As women's employment opportunities continue to grow, as marriage rates continue to decline, and as the promise of newer and more effective long-acting contraceptives is realized, women will almost surely have even fewer children than they do today with some ,opting out of childbearing altogether. As one indicator of where we may be headed consider the data on the number of women who have remained childless by the age of 40-44. It was 18 percent in 2008, up from 10 percent in 1976, an increase of 80 percent.

Should this be a concern?

Most definitely, says Jonathan Last, in his new book, What to Expect When No One's Expecting. In his words, we can "forget the debt ceiling. Forget the fiscal cliff, the sequestration cliff and the entitlement cliff. Those are all just symptoms. What America really faces is a demographic cliff: The root cause of most of our problems is our declining fertility rate." These problems, according to Last, include not just an aging population but less innovation, lower productivity, slower growth, and less ability to project our military power around the world. Just look at Japan, he says, where consumers bought more adult diapers than baby diapers last year!

But is Last right? It's certainly true that the aging of the population is a big fiscal problem in Japan, and to a lesser extent, in the U.S. Spending on pensions and health care are rising sharply as the number of working age adults per elderly person shrinks. But the solution does not need to be more babies. We can solve the problem by allowing more immigrants to enter the country -- legally. What we need is a new immigration system that not only creates a path to citizenship for the 11 million who are here illegally now, but creates a reformed system that increases the numbers allowed to come into the country in the future in a way that is better aligned with our economic interests.

The fact is that immigration, done the right way, is good economic policy. It may also be good social policy as well.

The key point from an economic perspective is that the 7 billion people in the world are a potential pool of talent that any advanced country should want to attract. Ignoring that pool is the equivalent of General Motors recruiting all of its workers from Michigan while ignoring the other 49 states.

Fears that immigrants replace or undermine the wages of American workers are, for the most part, unfounded. They may have hurt the job prospects of some of our least skilled workers, such as high school dropouts, but they have become the backbone of many sectors of the economy from construction to agriculture, thereby producing jobs for Americans in businesses that would otherwise be unable to flourish.

If we move to a more employment-based immigration system in which the needs of the economy are given much greater weight and family reunification a smaller role, immigration can become a dynamic force for growth and a partial solution to our fiscal problems. Countries, such as Canada and Australia, in which skills-based immigration is the norm, have benefitted from such a system.

Immigration is often feared because immigrants are "different," because they place a burden on local social services, and fail to assimilate by learning English and the other hallmarks of our culture. Yet, we have been a nation of immigrants from the beginning with each new wave raising such fears and later becoming almost fully accepted into society.

With a more rational and controlled immigration system, one based more on employer needs, any short-run problems of adjustment would be far easier to deal with and the resulting longer term diversity would be a potential source of strength for the nation as a whole. In the meantime, if fertility does decline, and there are fewer American children to support, whatever resources parents and governments have to invest in the education and health care of the next generation will go much further.

Expecting women to rededicate themselves to producing children is not in the cards, even with the kind of family-friendly policies that Last and some others support. One only has to look at what is going on in Europe where such policies have been tried at great expense to see that they are not likely to be very effective. At 1.6 children per woman, the fertility rate in these countries is well below U.S. levels.

So no, Mr. Last, we don't need more babies; we just need more immigrants.

Authors

Isabel V. Sawhill

Publication: Real Clear Markets

Assessing Universal Pre-K Programs in Oklahoma

Ted Gayer — Fri, 15 Feb 2013 17:39:00 -0500

As President Obama continues to roll out his proposal for universal preschool as outlined in his State of the Union address, it is worth looking at results of these types of programs in states that already run such programs.

In a paper with Wiliam Gormley (Journal of Human Resources, 2005 (pdf)) and another with Gormley, Phillips, and Dawson (Developmental Psychology, 2005(pdf)), we studied the impact of Oklahoma's universal pre-K program on children's readiness for kindergarten. In the JHR study, which relied on the results of a school-readiness assessment developed by Tulsa Public Schools, We found that attending pre-school boosted school readiness for Hispanic and black students but not for whites. We also found that pre-school had a bigger effect on school readiness among students who qualified for free lunch at school, than those who did not. In the other study, which relied on a standardized and widely-used assessment of school readiness, we found that attending pre-school improved school readiness for students across all racial and income groups.

Authors

Ted Gayer

Global Love Rankings

Thu, 14 Feb 2013 12:47:00 -0500

Valentine’s Day and the Economics of Love

Thu, 14 Feb 2013 02:04:00 -0500

On Valentine’s Day, even a dismal scientist’s mind turns to love. It’s a powerful feeling, with a value that goes far beyond the millions of chocolate boxes and bouquets that will be delivered this Feb. 14.

Survey data from the Gallup Organization, where Justin works as a senior scientist, allow us to take a uniquely deep look at the state of love around the world. In 2006 and 2007, Gallup went to 136 countries and asked people, “Did you experience love for a lot of the day yesterday?” It’s the largest such dataset ever collected.

The good news: Ours is a loving world. On a typical day, about 70 percent of people worldwide reported a love-filled day. In the U.S., 81 percent felt love, as did 81 percent of Canadians and 79 percent of Italians. Germany and the U.K. were less loving, with slightly less than 3 in 4 people reporting feeling loved. Surprisingly, the same was true of the supposedly romantic French. And if you’re in Japan, please hug someone: Only 59 percent of Japanese said they had experienced love the previous day.

Across the world as a whole, the widowed and divorced are the least likely to experience love. Married folks feel more of it than singles. People who live together out of wedlock report getting even more love than married spouses -- an interesting factoid for conservatives worried about the effects of cohabitation. Women get more love than men, particularly in the U.S.

Young Love

If you’re young and not feeling all that loved this Valentine’s Day, don’t despair: You’re not alone. Young adults are among the least likely to experience love. It gets better with age, ultimately peaking in the mid-30s or mid-40s in most countries before fading again into the twilight years.

Money is related to love. Those with more household income are slightly more likely to experience the feeling. Roughly speaking, doubling your income is associated with being about 4 percentage points more likely to be loved. Perhaps having more money makes it easier to find time for love.

That said, the data aren’t necessarily telling us that money can buy you love. It’s possible that other factors correlated with income, such as height or appearance, are the real source of attraction. Or maybe being loved gives you a boost in the labor market.

What’s perhaps more striking is how little money matters on a global level. True, the populations of richer countries are, on average, slightly more likely to feel loved than those of poorer countries. But love is still abundant in the poorer countries: People in Rwanda and the Philippines enjoyed the highest love ratios, with more than 9 in 10 people providing positive responses. Armenia, Uzbekistan, Mongolia and Kyrgyzstan, with economic output per person in the middle of the range, all had love ratios of less than 4 in 10.

Fun facts aside, we think there is a deeper and more consequential purpose to the study of love. Think about what love means to you. To us, it means caring about others and being cared for. Love is valuable, even if it is absent from both our national accounts and our political discourse.

In the language of economics, love is a form of insurance. It involves bonds of reciprocity that provide support when we’re feeling down, when we’re sick and when times are tough.

More broadly, love has the power to mitigate the free-rider and moral hazard problems associated with social (and private) insurance. Bailing out a bank might encourage executives to take bigger risks in the future, but helping loved ones down on their luck has fewer incentive problems because our loved ones typically care for us in return. Such mutually beneficial relationships make us all more resilient in times of crisis. This is why the household remains one of the most powerful institutions for organizing not just families but also our economic lives.

If we can find more love for our fellow citizens, our society will function better. Hard as this may be to achieve in an era when trust in government, business and one another is low, it’s worth the effort. When you expand the boundaries of trust and reciprocity, you expand the boundaries of what is possible.

Note: This content was first published on Bloomberg View on February 13, 2013.

Publication: Bloomberg

Where Do You Stand in the Global Love Ranking?

Thu, 14 Feb 2013 01:52:00 -0500

Paris and Rome may be famous for romance, but it’s Filipinos who get the most love. That, at least, is a conclusion that can be drawn from a global love survey conducted by the Gallup Organization.

In our latest column for Bloomberg View, we mine the unique Gallup data for insights into the nature of love and its relationship to nationality, age, money and economic development. The survey, conducted in 136 countries, posed the question: “Did you experience love for a lot of the day yesterday?”

In honor of Valentine’s Day, we thought readers might be interested in seeing the full ranking. So here goes. The first number after each country name is the percentage of respondents who said they had experienced love the previous day. The second (in parentheses) is the sample size for the country.

Philippines 93% (2193)
Rwanda 92% (1495)
Puerto Rico 90% (495)
Hungary 89% (1002)
Cyprus 88% (988)
Trinidad and Tobago 88% (506)
Paraguay 87% (1986)
Lebanon 86% (970)
Costa Rica 85% (1985)
Cambodia 85% (1961)
Nigeria 84% (1965)
Guyana 83% (486)
Spain 83% (998)
Mexico 82% (989)
Tanzania 82% (1941)
Ecuador 82% (2126)
Jamaica 82% (534)
Venezuela 82% (997)
Cuba 82% (978)
Brazil 82% (1038)
Laos 81% (1947)
Argentina 81% (1985)
Belgium 81% (1015)
Canada 81% (1006)
Greece 81% (996)
U.S. 81% (1224)
Denmark 80% (1003)
Portugal 80% (995)
Netherlands 80% (993)
Vietnam 79% (1901)
New Zealand 79% (1775)
Italy 79% (1000)
Colombia 79% (1994)
Madagascar 78% (998)
Uruguay 78% (1969)
Turkey 78% (985)
Dominican Republic 78% (1976)
United Arab Emirates 77% (961)
Saudi Arabia 77% (978)
Chile 76% (1982)
Malawi 76% (1997)
Ghana 76% (1986)
South Africa 76% (1968)
Australia 76% (1199)
Panama 75% (1995)
Zambia 74% (1971)
Kenya 74% (1965)
Namibia 74% (996)
Nicaragua 74% (1988)
Germany 74% (1214)
Ireland 74% (992)
Sweden 74% (993)
U.K. 74% (1200)
Switzerland 74% (986)
Montenegro 74% (800)
Austria 73% (984)
France 73% (1217)
Kuwait 73% (934)
Finland 73% (993)
El Salvador 73% (2000)
Pakistan 73% (2253)
Zimbabwe 72% (1989)
Honduras 72% (1947)
Peru 72% (1982)
Egypt 72% (1024)
Serbia 72% (1474)
Bosnia and Herzegovina 72% (1896)
Sierra Leone 71% (1986)
India 71% (3140)
Taiwan 71% (984)
Bangladesh 70% (2200)
Belize 70% (464)
Croatia 69% (958)
Macedonia 69% (1000)
Mozambique 69% (996)
Bolivia 69% (1948)
Liberia 68% (988)
Iran 68% (963)
China 68% (7206)
Slovenia 68% (1000)
Haiti 68% (471)
Norway 67% (992)
Sri Lanka 67% (1974)
Poland 67% (939)
Guatemala 67% (1988)
Uganda 66% (1961)
Sudan 66% (971)
Israel 66% (957)
Kosovo 65% (983)
Thailand 65% (2377)
Jordan 65% (998)
Albania 64% (855)
Guinea 62% (952)
Botswana 62% (999)
Angola 62% (957)
Burkina Faso 62% (1876)
Malaysia 61% (2115)
Mali 61% (984)
Niger 61% (1925)
Palestinian Territories 61% (991)
Romania 61% (937)
Senegal 61% (1805)
Indonesia 61% (2013)
Afghanistan 60% (1128)
Hong Kong 60% (789)
Cameroon 59% (1967)
Japan 59% (1138)
Nepal 59% (1965)
Bulgaria 59% (927)
Slovakia 58% (991)
Singapore 58% (3002)
Czech Republic 58% (992)
Mauritania 57% (1960)
Benin 56% (974)
South Korea 56% (2056)
Myanmar 55% (1047)
Latvia 54% (1942)
Togo 54% (988)
Estonia 53% (1800)
Lithuania 50% (1863)
Russia 50% (4667)
Chad 49% (1915)
Yemen 48% (959)
Ukraine 48% (1930)
Ethiopia 48% (1913)
Azerbaijan 47% (1824)
Tajikistan 47% (1847)
Moldova 46% (1937)
Kazakhstan 45% (1871)
Morocco 43% (1011)
Belarus 43% (1992)
Georgia 43% (1904)
Kyrgyzstan 34% (1969)
Mongolia 32% (928)
Uzbekistan 32% (962)
Armenia 29% (1954)

Note: This content was first published on Bloomberg View on February 13, 2013.

Publication: Bloomberg

Establishing a Task Force for Expanding Preschool Programs

Ron Haskins — Wed, 13 Feb 2013 17:39:00 -0500

In a single paragraph, President Obama’s State of the Union address opened the door to implementing important changes in the nation’s multitude of preschool programs and to increasing the number of children participating in quality programs.

Of all the opportunities to promote the development of poor children and to increase opportunity in America, none is as promising as high-quality preschool programs. Although there are still disagreements about the strength of evidence on these programs, the literature on preschool’s impacts on a host of short-term and long-term child outcomes is strong, and there are several excellent benefit-cost studies as well.

Research leads to the conclusion that if poor children attended high-quality preschool, they would be better prepared to achieve and behave well in public schools. There could also be longer-term outcomes including higher graduation rates, less delinquency, less teen pregnancy, and higher rates of employment and income. But these benefits and their corresponding budget savings will not be achieved unless the preschool education is high-quality, provided by highly effective teachers. Today, most preschool facilities do not meet that standard.

As would be expected in a State of the Union address, the president gave only a hint of what he had in mind for preschool. His goal was to “make high-quality preschool available to every child in America.” If the Obama administration is serious about expanding early childhood programs, here is one way to proceed.

The first order of business should be to figure out how to get the most out of the programs we now have and the money we now spend. The president should appoint a small group within the administration that includes one senior official from the Departments of Education, Health and Human Services, and Labor, as well as the White House and Office of Management and Budget, and charge them with presenting a bold plan for coordinating these programs. The president’s task force should consult widely, especially with the states, for how these programs can be better coordinated at the state and local level.

Second, the president should abandon his idea of providing high-quality preschool for “every child in America.” Rather, his task force should assume that only children from poor and near-poor families would be eligible for federal subsidies. Especially in this time of budget crisis, it is likely to be decades before the combined financing of the federal and state governments can afford the additional billions of dollars that would be required to provide free, universal preschool programs.

Third, the task force plan should include strategies for providing the poorest children and families, as well as those at risk of abuse and neglect, with home visiting and other support services. For this relatively small group, the services should begin in the prenatal period and extend throughout the preschool years.

Fourth, we will eventually need additional dollars to make sure every poor and near-poor child can receive services. Thus, the group should make an estimate of the costs of their system and propose several alternatives for sharing the burden between the states and the federal government.

The nation should stop setting preschool policy by merely creating more programs and adding money to existing ones in accord with political feasibility. Instead, we need a vision of the comprehensive system we should build and estimates of the long-term costs of the system. As President Obama said several times during his State of the Union address, “we can do this.”

Authors

Ron Haskins

Publication: Spotlight on Poverty

What Will Rubio Say in Response to the SOTU?

Isabel V. Sawhill — Fri, 08 Feb 2013 00:00:00 -0500

I have no idea what Senator Marco Rubio (R-FL) will say on Tuesday. But here’s a good guess: opportunity matters. We need to build a strong middle class. People should be given every chance to climb the ladder of opportunity. They don’t need handouts but they do need a helping hand. And we can’t forget about the immigrants who have made this country great.

Here’s what he probably won’t say: it costs money to provide opportunity. If we want more early education programs, more health care and nutrition, better teachers in the classroom, and more Pell grants so low-income and immigrant kids can go to college, taxpayers will have to pony up. Instead, he’ll claim that his vision is consistent with a more limited and less costly government.

The fact is these two goals – providing opportunity and limiting costs – need not be incompatible. We can invest more in less advantaged kids and keep the cost down if we just face up to the need to reallocate resources from the affluent elderly to struggling younger families and their children. And yes, that means curbing the growth of Medicare and Social Security.

It wouldn’t surprise me if Rubio softened the Republican message while evading the hard policy questions. But getting the message right isn’t a bad start.

Authors

Isabel V. Sawhill

A State of the Union Wish List

Ron Haskins — Fri, 08 Feb 2013 09:00:00 -0500

Here are three things I wish Obama would say, but probably won’t, in next Tuesday’s State of the Union address. The first is to start delivering on his first-term promise to change the tone of debate in the nation’s capital. In his January 14 press conference, the president said that House Republicans have suspicions about government’s role “to make sure that seniors have decent health care as they get older” and to “make sure that kids in poverty are getting enough to eat.” Issuing blanket statements like this about your political opponents is neither the way to change the tone of debate in Washington nor the way to publicly characterize people you’re about to negotiate with over issues – such as deficit reduction, immigration, and gun control – that are vital to the nation’s future. Obama would be well advised not only to avoid negative and mostly unjustified accusations of this type, but even to try to say something nice about Republicans.

Second, the president should say something as specific as possible about his ideas on further deficit reduction. Between the 2011 Budget Control Act and the 2012 American Taxpayers Relief Act, Congress and President Obama have reduced the deficit over the next ten years by $2.4 trillion (including interest savings). If the $1.2 trillion (again including interest) from the sequester is actually implemented, the total deficit reduction so far will be $3.6 trillion over ten years. Not bad for a dysfunctional government. But at least another $1 or $2 trillion is needed even to maintain a steady debt/GDP ratio over the next decade. Worse, there has been virtually nothing saved from entitlement programs, and no agreement so far that would put Medicare and other health programs on a more sustainable growth path. It would be a breakthrough if the president highlighted and expanded his offer of changes in entitlement programs like he did in his recent press conference. He should also say that he is ready to talk about savings in Medicare – while perhaps adding that he would be especially interested in discussions about savings that could be achieved by having the higher income elderly pay a higher fraction of their health care costs.

Third, President Obama and his wife and children have set a wonderful standard for marriage and American family life. It would be difficult to exaggerate the damage that is being done to American children and the nation’s GDP by the tsunami of nonmarital births and the relentlessly rising share of American children being reared by single parents. For starters, kids in female-headed families are four times as likely to be poor as kids living with their married parents. Black children bear the heaviest burden in this regard because well over 70 percent of them are born into single parent families. Similarly, over 50 percent of Hispanic children are born outside marriage, imposing a heavy burden on them as well. Economic opportunity is a theme President Obama has strongly emphasized, but the astounding level of nonmarital births is like a little motor pushing up poverty rates and reducing opportunity for millions of American children – and disproportionately so for black and Hispanic children.

The president has a better chance than anyone in the nation to have an impact on this problem. He should include at least two paragraphs about marriage in his State of the Union address. In the first paragraph, he should describe the advantages of marriage to adults, children, and society, which can be done without mentioning the negative effects of single-parent families. In the second paragraph, he should announce that once a month for the next year, he plans to attend a predominantly black, Hispanic, white, or integrated church – as often as possible accompanied by his wife – to sing the praises of marriage and the great contribution his marriage and family have made to his personal life and to lives of his wife and children.

President Obama has a chance to hit a policy trifecta – encouraging civility in the nation’s capital, reducing the deficit while at last addressing entitlement and especially Medicare spending, and speaking out for marriage as a way to reduce poverty and increase opportunity in America.

Authors

Ron Haskins

A New Federal Policy Architecture to Promote Social Mobility

Richard V. Reeves — Tue, 22 Jan 2013 11:15:00 -0500

Right now in Washington, it's all fiscal cliffs and debt ceilings. But there is a slower-burn crisis taking place in the US: the quiet decline of social mobility. Harvard academic Robert Putnam has warned that we are heading towards a “mobility cliff,” with affluent kids all but guaranteed a comfortable adult life and the poorest kids likely to remain stuck on the bottom rungs. Isabel Sawhill and Ron Haskins have vividly described the lack of mobility in the U.S. The opportunity gaps start at conception, widen through K-12, and harden during the transition to adulthood. Horatio Alger is not dead, but he is pretty sick.

To say that promoting mobility is a complex task would be a wild understatement. A vast array of economic, social, cultural and individual factors are at work, to different degrees, across the entire life course – influencing an equally wide canvas of outcomes, from education to character to fertility. Promoting intergenerational mobility is not a policy agenda for the faint-hearted. There are no quick or easy solutions.

But it is wrong to be fatalistic. There are policies proven to narrow gaps. If they are applied consecutively, one brick on top of another, their effects are likely to amplified. And other nations, even those with similar levels of income inequality to the U.S. – such as Canada and Australia – have higher rates of intergenerational mobility. Improving rates of mobility is hard, but not impossible. Given the economic and social consequences of a more stratified society, we cannot simply shrug our shoulders.

A small but important first step would be to create a Federal “policy architecture” to properly track trends in mobility, and evaluate the impact of policies. The UK Government, explicitly committed to a mobility goal, has created a annual dashboard of “leading indicators” of mobility. My former boss, Deputy Prime Minister Nick Clegg, has also created an independent commission to report annually on progress towards greater social mobility.

Of course this kind of policy architecture would not promote mobility. But it would create a shared understanding of the facts, and a foundation for developing policy. Back in the 1970s, Brookings called for the creation of an independent agency within the legislative branch of government, to forecast the public finances and estimate the fiscal impact of legislation or proposed policies. The Congressional Budget Office was born. Something similar is now needed for opportunity: say a Congressional Mobility Office? So that if our politicians are able to look beyond today's cliffs and ceilings, and embrace the challenge of promoting opportunity, they'll have a better idea where to start.

Authors

Richard V. Reeves