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Economists Agree: Democratic Presidents are Better at Making Us Rich. Eight Reasons Why.

August 13th, 2016 No comments

In 2013, economists Alan Blinder and Mark Watson — no wild-eyed liberals, they — asked a very important question: Why has the U.S. economy performed better under Democratic than Republican presidents, “almost regardless of how one measures performance”?

Start with their “performed better” assertion: it’s uncontestable. While you can easily cherry-pick brief periods and economic measures that show superior economic performance under Republicans, over any lengthy comparison period (say, 25 years more), by pretty much any economic measure, Democrats have outperformed Republicans for a century. Even Tyler Cowen, director of the Koch-brothers-funded libertarian/conservative Mercatus Center, stipulates to that fact without demur.

Here’s just one bald picture of that relative performance, showing a very basic measure, GDP growth:

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The difference is big. At those rates, over thirty years your $50,000 income compounds up to $105,000 under Republicans, $182,000 under Democrats — 73% higher. (And this is all before even considering distribution — whether the growing prosperity is widely enjoyed, or narrowly concentrated.)

Hundreds of similar pictures are easily assembled — different time periods, different measures, aggregate and per-capita, inflation-adjusted or not — all telling the same general story. No amount of hand-waving, smoke-blowing, and definition-quibbling will alter that reality. (If you feel you must try to debunk Blinder, Watson, and Cowen: be aware that you almost certainly don’t have an original argument. Read the paper, and follow the footnotes. You’ll also find more hereherehereherehere, and here.)

So what explains that superior performance? Blinder and Watson’s regression model basically says, “we dunno.” Their model, for whatever it’s worth, rules out a whole slew of possibilities — only finding a significant correlation with oil price shocks (uh…okay…) and Total Factor Productivity (the black-box residual economic measure that’s left when the other growth factors economists can think of are accounted for in their models).

Standing empty-handed after all their work, Blinder and Watson punt. They attribute Democrats’ consistently superior performance to…luck. Yes, really.

On its face, the bare fact of Democrats’ consistent outperformance suggests a straightforward explanation: Democrat policies and priorities, in their myriad interacting forms, expressions, and implementations, directly cause faster growth, more progress, greater and more widespread prosperity. (Blinder and Watson pooh-pooh this idea, simply because they don’t find short-term correlation with the rather bare measure of fiscal balances.)

So the question remains: what could it be about the Democratic economic policy mix that delivers superior performance? Here are eight possibilities:

1. Wisdom of the Crowds. Democrats’ dispersed government spending — education, health care, infrastructure, social support — puts money (hence power) in the hands of individuals, instead of delivering concentrated streams to big entities like defense, finance, and business. Those individuals’ free choices on where to spend the money allocate resources where they’re most valuable — to truly productive industries that deliver goods that humans actually want.

2. Preventing Government “Capture.” Money that goes to millions of individuals is much harder for powerful players to “capture,” so it is much less likely to be used to then “capture” government via political donations, sweetheart deals, and crony capitalism.

3. Labor Market Flexibility. When people feel confident that they and their families won’t end up on the streets — they know that their children will have health care, a good education, and a decent safety net if the worst happens — they feel free to move to a different job that better fits their talents — better allocating labor resources. “Labor market flexibility” often suggests the employers’ freedom to hire and (especially) fire, but the freedom of hundreds of millions of employees is far more profound, economically.

4. Freedom to Innovate. Individuals who are standing on that social springboard that Democratic policies provide — who have that stable platform of economic security beneath them — can do more than just shift jobs. They have the freedom to strike out on their own and develop the kind of innovative, entrepreneurial ventures that drive long-term growth and prosperity (and personal freedom and satisfaction) — without worrying that their children will suffer if the risk goes wrong. Give ten, twenty, or thirty million more Americans a place to stand, and they’ll move the world.

5. Profitable Investments in Long-Term Growth. From education to infrastructure to scientific research, Democratic priorities deliver money to projects that free market don’t support on their own, and that have been thoroughly demonstrated to pay off many times over in widespread public prosperity.

6. Power to the Producers. The dispersal of income and wealth under Democratic policies provides the widespread demand (read: sales) that producers need to succeed, to expand, and to take risks on innovative new ventures. Rather than assuming that government knows best and giving money directly to businesses (or cutting their taxes), Democratic policies trust the markets to direct that money to the most productive producers.

7. Fiscal Prudence. True conservatives pay their bills. From the 35 years of declining debt after World War II (until 1982), to the years of budget surpluses and declining debt under Bill Clinton, to the radical shrinking of the budget deficit under Obama, Democratic policies demonstrate which party merits the name “fiscal conservatives.”

8. Labor and Trade Efficiencies. The social support programs that Democrats champion — if they truly provide an adequate level of support and income — give policy makers much more freedom to put in place what are otherwise draconian, but arguably efficient, trade and labor policies. If everyone can confidently rely on a decent income, we have less need for the sometimes economically constricting effects of unions and trade protectionism.

To go back to Blinder and Watson’s “luck” explanation: A non-economist might suggest that “to a great extent, you make your own luck.” And: “hire the lucky.”

Cross-posted at Evonomics.

How Perfect Markets Concentrate Wealth and Strangle Growth and Prosperity

June 5th, 2016 5 comments

Capitalism concentrates wealth. Ridicule Marx and his latter-day disciples all you like (I’ll help); he definitely got that right.

But capitalism is a big word with lots of meanings, and enough ideological baggage to fill a Lear Jet. Let’s talk about something more precise: perfect markets, with ownership, in which individuals compete with others to produce stuff, and store up savings. You can see this kind of perfect world in agent-based simulations like Sugarscape. Start with a bunch of sugar farmers trying to accumulate sugar in an artificial world, hit Go, and watch what happens.

Here’s what happens to wealth concentration (number of poorer farmers on the left, richer on the right):

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Wealth is pretty evenly distributed at the beginning (top). That doesn’t last long. You can see the same effect in another Sugarscape run, here compared to real-world wealth distributions:

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That’s the Gini coefficient for wealth. Zero equals perfect equality; everyone has equal wealth. 1.0 equals perfect inequality; one person has all the wealth.

Perfect markets concentrate wealth. It’s their nature. But at some point, market-generated wealth concentration strangles those very markets (compared to markets with broader distributions of wealth). If a handful of people have all the wealth, how many iPhones will Apple sell? If only a few have the wealth to buy cars, automakers will produce a handful of million-dollar Bugattis, instead of forty handfuls of $25,000 Toyotas. Sounding familiar?

But wealth concentration doesn’t just strangle the flows of spending, production, and income. It throttles the accumulation of wealth itself. Another simple simulation of an expanding economy (details here) explains this:

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The dynamics are straightforward here: poorer people spend a larger percentage of their income than richer people. So if less money is transferred to richer people (or more to poorer people), there’s more spending — so producers produce more (incentives matter), there’s more surplus from production, more income, more wealth…rinse and repeat.

This picture says nothing about how the wealth transfers happen (favored tax rates on ownership income, transfers to poorer and older folks, free public schools, Wall Street predation, the list is endless). It just shows the results: As wealth is transferred up to the rich, on the left, and wealth concentration increases, our total wealth increases more slowly. When that transfer is extreme, even in this growing economy the poorer people end up with less wealth. (Note how the curves get steeper on the left.) As wealth concentration declines on the right, our total wealth increases faster, and poorer people’s wealth increases much faster. Note that richer people still get richer in most scenarios — it’s a growing economy, always delivering a surplus from production, and increasing wealth — just more slowly.

And that’s just talking dollars. If we start thinking about our collective “utility,” or well-being — the total of everybody’s well-being, all summed up — the effects of wealth concentration are even more profound. Because poorer people getting more does a lot more for their well-being than richer people getting more. (Likewise, even if the richer people actually lose some of their wealth, they’re not losing as much utility.)

Because: Declining marginal utility of wealth (or consumption, or whatever). This is one of those Econ 101 psychological truisms that seems to actually be true. The fourth ice-cream cone (or Bugatti, or iPhone) just doesn’t deliver as much utility as the first one. Plus, a Bugatti in one person’s hands doesn’t deliver as much utility as forty Toyotas in forty people’s hands. (Prattle on all you want about relative and revealed preferences; you won’t alter this reality.)

So if we were to re-work the chart above showing utility instead of dollars, you’d see far greater increases in utility on the right side, especially for poorer people. Widespread prosperity both causes and is greater prosperity.

Why, then, aren’t we spending our lives on the right side of this chart? It’s a total win-win, right? The answer is not far to find. Nassim Taleb shows with some impressive math (PDF) what’s also easy to see with some arithmetic on the back of an envelope: if a few richer people (who dominate our government, financial system, and economy) have the choice between making our collective pie bigger or just grabbing a bigger slice, grabbing the bigger slice is the hands-down winner.

That’s why decades of Innovative Financial Engineering has served, mostly, not to efficiently allocate resources to efficient producers, improve productivity, or increase production. Rather, these fiendishly clever entrepreneurial inventions control who gets the income from production. You can guess who wins that game. Top wealth-holders would be nuts to play it any other way (if you go with economists’ definition of rationality…).

But for the rest of us, it’s a loser’s game — at least compared to the world we could be living in. If household incomes had increased along with GDP, productivity, and other economic-growth measures for the last two or four decades, a typical household would have tens of thousands of dollars more to spend each year — and much bigger stores of wealth to draw on. If you think that sounds like a thriving, prosperous society…you’re right.

To summarize: perfect markets, left to their own devices, concentrate wealth. Concentrated wealth results in less wealth, and far less collective well-being. (You’ll notice that I haven’t even mentioned fairness. It matters. But I’ll leave that to my gentle readers.)

This all leads one to wonder: how could we move ourselves into that happy world of rapidly increasing wealth and well-being on the right side of the graph? Hmmmm….

Cross-posted at Evonomics.

Why Economists Ignore So Much of Rich People’s Income

January 25th, 2016 Comments off

Yes: Concentrated Wealth and Inequality Crushes Economic Growth

December 15th, 2015 2 comments

Like it or not, if countries want to join the “rich country-club,” they need to redistribute wealth. What has not been studied much — at least partially because the data is hard to come by — is the distribution of wealth within countries, and how that relates to economic growth.

My devoted readers will undoubtedly remember my 2008 research into rich countries’ wealth inequality and economic growth. (In case you haven’t heard, wealth inequality utterly dwarfs income inequality.) Here’s the bottom line:

Correlations Between Rich Countries’ Wealth Concentration/Inequality and:

GDP per capita growth from 1970 to 2005 (35 years) -.67
…from 1975 (30 years) -.58
…from 1980 (25) .11
…from 1985 (20) .22
…from 1990 (15) .68
…from 1995 (10) .38
…from 2000 (5) .44

This analysis suggests that in rich countries, greater wealth inequality/concentration goes with faster economic growth over the shorter term, but over the long term it’s associated with much weaker growth. In the long run, trickle-down fails badly. (Viz, the increasing wealth concentration and moribund growth in the U.S. post-Reagan.)

There are numerous problems with this analysis, discussed in that previous post. Not much data was available back then, and the statistical correlation analysis is decidedly sophomoric.

But now we (finally!) have some more sophisticated work on this correlation from professional economists Sutirtha Bagchia and Jan Svejnar: “Does wealth inequality matter for growth? The effect of billionaire wealth, income distribution, and poverty.” (Gated; a much earlier and different ungated 2013 version is here. A two-page descriptive policy research brief published by the right/libertarian Cato Institute is here.)

Bagchia and  Svejnar’s (robust) top-line conclusion:

wealth inequality has a negative relationship with economic growth

(So much for “incentives.”) B&S attempt to distinguish between “politically connected” and unconnected (market-driven) wealth inequality, and conclude that only politically connected wealth inequality — “cronyism” — has a negative association with growth.

I don’t have access to the latest gated paper, but @NinjaEconomics has posted the key table (click for larger):

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Key points:

• B&S are looking at growth rates over ensuing five years (average annual change in GDP/capita). Interestingly, their negative correlations for this short lag period contradict mine for rich countries, which only showed negative correlation over decades. (It infuriates me, by the way, that every growth-correlation study doesn’t look at multiple time lags, where possible. They should all look like this.)

• Their sample set is a complete grab-bag of countries* — from tiny to large, developed, less-developed, emerging, etc. This gives higher N so greater statistical significance, but makes the true significance of the findings…questionable. We’ve known for decades that predictors and causes of growth are very different in developed and less-developed countries. I’d personally love to see their results for prosperous countries only.

• Such an analysis of similar, prosperous countries would allow them to use the narrower but more reputable Luxembourg Wealth Study data, rather than the data set they constructed based on spottier and far less rigorous Forbes 400 billionaire lists. (Their data and analysis files have not been made available for public vetting.)

• The rather tortuously constructed classification of “politically connected” versus market-driven wealth is, in their own words, “somewhat subjective.” It could not really be otherwise — wildly so, in fact. That they are “fully up-front about how we carry out the classification” does not obviate that reality.

• As Brad DeLong has pointed out, even with that subjectively constructed data set, B&S:

failed to find a statistically significant difference between the effect on growth of politically-connected wealth inequality and the effect on growth of politically-unconnected wealth inequality. That would be a more accurate description of what the data say.

They trumpet their non-statistically significant finding, in what surely looks like an attempt to downplay their significant main finding.

But perhaps to their chagrin, their main finding holds: wealth concentration, inequality, kills economic growth.

* From the 2013 paper: Australia, Bangladesh, Belgium, Brazil, Bulgaria, Canada, Chile, China, Colombia, Costa Rica, Denmark, Dominican Republic, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Japan, Malaysia, Mexico, Netherlands, New Zealand, Norway, Pakistan, Peru, Philippines, Poland, Portugal, Republic of Korea, Singapore, Spain, Sri Lanka, Sweden, Thailand, Trinidad and Tobago, Tunisia, Turkey, United Kingdom, United States, and Venezuela.

Cross-posted at Evonomics.

Wait: Maybe Europeans are as Rich as Americans

November 6th, 2015 6 comments

I’ve pointed out multiple times that despite Europe’s big, supposedly growth-strangling governments, Europe and the U.S. have grown at the same rate over the last 45 years. Here’s the latest data from the OECD, through 2014 (click for larger):

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And here’s the spreadsheet. Have your way with it. More discussion and explanation in a previous post.

You can cherry-pick brief periods along the bottom diagonal to support any argument you like. But between 1970 and 2014, U.S. real GDP per capita grew 117%. The EU15 grew 115%. (Rounding explains the 1% difference shown above.) Statistically, we call that “the same.”

Which brought me back to a question that’s been nagging me for years: why hasn’t Europe caught up? Basic growth theory tells us it should (convergence, Solow, all that). And it did, very impressively, in the thirty years after World War II (interestingly, this during a period when the world lay in tatters, and the U.S. utterly dominated global manufacturing, trade, and commerce).

But then in the mid 70s Europe stopped catching up. U.S. GDP per capita today (2014) is $50,620. For Europe it’s $38,870 — only 77% of the U.S. figure, roughly what it’s been since the 70s. What’s with that?

Small-government advocates will suggest that the big European governments built after World War II are the culprit; they finally started to bite in the 70s. But then, again: why has Europe grown just as fast as the U.S. since the 70s? It’s a conundrum.

I’m thinking the small-government types might be right: it’s about government. But they’ve got the wrong explanation.

Think about how GDP is measured. Private-sector output is estimated by spending on final goods and services in the market. But that doesn’t work for government goods, because they aren’t sold in the market. So they’re estimated based on the cost of producing and delivering them.

Small-government advocates frequently make this point about the measurement of government production. But they then jump immediately to a foregone conclusion: that the value of government goods are services are being overestimated by this method. (You can see Tyler Cowen doing it here.)

That makes no sense to me. What would private output look like if it was measured at the cost of production? Way lower. Is government really so inefficient that its production costs are higher than its output? It’s hard to say, but that seems wildly improbable, strikes me as a pure leap of faith, completely contrary to reasonable Bayesian priors about input versus output in production.

Imagine, rather, that the cost-of-production estimation method is underestimating the value of government goods — just as it would (wildly) underestimate private goods if they were measured that way. Now do the math: EU built out governments encompassing about 40% of GDP. The U.S. is about 25%. Think: America’s insanely expensive health care and higher education, much or most of it measured at market prices for GDP purposes, not cost of production as in Europe. Add in our extraordinary spending on financial services — spending which is far lower in Europe, with its more-comprehensive government pension and retirement programs. Feel free to add to the list.

All those European government services are measured at cost of production, while equivalent U.S. services are measured at (much higher) market cost. Is it any wonder that U.S. GDP looks higher?

I’d be delighted to hear from readers about any measures or studies that have managed to quantify this difficult conundrum. What’s the value or “utility” of government services, designated in dollars (or whatever)?

Update: I can’t believe I failed to mention what’s probably the primary cause of the US/EU differential: Europeans work less. A lot less. Like four or six weeks a year less. They’ve chosen free time with their families, time to do things they love with people they love, over square footage and cubic inches.

Got family values?

I can’t believe I forgot to mention it, because I’ve written about it at least half a dozen times.

If Europeans worked as many hours as Americans, their GDP figures would still be roughly 14% below the U.S. But mis-measurement of government output, plus several other GDP-measurement discrepancies across countries, could easily explain that.

Cross-posted at Angry Bear.

 

Why Prosperity Requires a Welfare State

November 5th, 2015 Comments off

I’ve got a new post up at a new site, Evonomics Magazine (“The next evolution of economics”). It’s an impressive offshoot with some great articles, assembled by folks involved with The Evolution Institute, which I’m a big booster for.

Screen shot 2015-11-05 at 11.17.04 AM

My readers here will find much familiar in the post, but I’m happy with how it pulls various threads together. I’ll be following comments over there, so have your way with it.

Cross-posted at Angry Bear.

Which Countries Work Hardest? You Might (Not) Be Surprised

June 30th, 2015 Comments off

Imagine you had to choose, and could choose: you can spend your whole life and raise your family in either of two equally prosperous countries. In one country people work lots of hours to attain that prosperity. In the other country people work far less. You don’t know anything else about these countries.

Which would you choose? The answer seems kind of obvious, right? Equally prosperous, and less work for me and my family? Sign me up!

But that straightforward question is almost never asked, explicitly, in discussions of prosperity, growth, and national well-being. The most obvious measure of that difference — hours worked per capita — is buried, invisible, and unavailable in the various national data sets scattered around the web. (The typical national measure you see out there is hours worked per worker.)

For the curious, here’s how more-prosperous countries (OECD and a handful of others) sort on the “hard-working” scale:

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This average includes the whole population — workers, children, students, retirees, etc. — so it’s an index of how much the average person has to work over the course of their life. (More hours during working years, less or none during non-working years; it’s an average.) 

There’s one main generalized takeaway from this that I see: The less-work end of the spectrum is dominated by western European countries. People there work far less hours in the course of their lives. People in “Anglo”-model countries work far more.

Going back to choosing a country: you also want to know how prosperous it is in pure money terms, using something like GDP per capita. Here’s that (I’ve excluded tiny, crazy-high-GDP Luxembourg here — think: banking — to show other countries more clearly):

Screen shot 2015-06-30 at 12.08.53 PM

If you’re a rational shopper, you’ll choose Norway (yeah, they’ve got the advantage of all that oil…), Ireland, the Netherlands, or another country in the upper left. If an extra $5,000 or $10,000 a year is worth sacrificing four or five extra weeks of work, choose the U.S. (Think: “buying” an extra month of time with your family, doing things you like and love, every year. You decide. But do I need to remind you that 1. Life is short, and 2. “Family values” really do have value?)

One perhaps-surprising takeaway from this graph: hard-working countries aren’t richer. QTC. Causation? It seems improbable that working less would cause higher prosperity. Higher prosperity could quite reasonably cause people to work less. (The good old substitution effect, income versus leisure.) But the most likely conclusion is that high productivity (GDP per hour worked) is the 800-pound gorilla when it comes to prosperity. Long hours worked have zero or negative apparent effect on prosperity.

(Interesting parallel: hours worked per household member in the U.S. only “explain” seven percent of the variance between household incomes. Whodathunkit?)

Rather than eyeballing that scatter plot, you might want a handy index of which country to choose. Here’s one approach to what I’ll call Work-Weighted Prosperity: GDP/Capita divided by Hours Worked/Capita. If people in one country have to work lots of hours to get that prosperity, it gets ranked lower.

Screen shot 2015-06-29 at 6.06.17 AM

The takeaway here? Move to Luxembourg and get into banking.

The curious among you are probably wondering about different countries’ working-age populations (doesn’t actually vary that much), and the percentage of working age that are working (varies somewhat more). Here’s the spreadsheet.

Cross-posted at Angry Bear.

Scalia’s Craven Self-Contradiction and Pettifogging Pedantry

June 26th, 2015 Comments off

In his dissent to Edwards v. Aguillard, Supreme Court justice Antonin Scalia made a neat distinction, sidestepping the issue of “legislative intent” that he finds so troubling:

it is possible to discern the objective “purpose” of a statute (i. e., the public good at which its provisions appear to be directed),

(The dissent is obsessed with “purpose”; the word appears 76 times therein.)

But in his dissent on yesterday’s King v. Burwell (Obamacare) decision, he chooses to ignore that statute’s obvious, objective purpose: to provide subsidies for buyers of exchange plans.

Rather than doing as he proposes, trying to “discern the objective ‘purpose’ of a statute'”, he seeks to deny the statute’s obvious purpose by determining the “purpose” of a few words therein — with a statement that can only be perceived as intentionally obtuse:

it is hard to come up with a reason to include the words “by the State” other than the purpose of limiting credits to state Exchanges

This very smart man could easily “come up with a reason.” Since those words contradict the obvious, objective purpose displayed by everything else in the statute, the words were accidentally misphrased. You might even go so far as to say that this is the obvious, “objective” conclusion.

Scalia would agree. In his dissent on the previous Obamacare challenge, he says:

“Without the federal subsidies . . . the exchanges would not operate as Congress intended.”

You may feel free to quibble over “purpose” versus “intention,” but the obvious, objective, intentional purpose of the statue was to give subsidies to purchasers of exchange plans.

Any attempt to deny or obscure that reality is pettifogging pedantry. Nothing more.

Update: Bruce Webb in comments shows just how objectively obvious the “purpose” is. The title of the statute’s opening section (emphasis mine):

Title I. Quality, Affordable Health Care for All Americans

Cross-posted at Angry Bear.

No: Rich People Don’t Work More

May 11th, 2015 Comments off

The meme is ubiquitous, and widely documented: Rich people work longer hours. Obvious implication: they deserve what they get, right? Ditto the poor.

Bunk.

Why? All the research supporting that meme looks at workers, not families. It completely ignores students, the retired, and anyone else who isn’t working. Alert the media: workers work and earn more than non-workers.

And, news flash: rich families are full of non-workers. If you look at families and their hours worked per person, you see a very different picture:

image (2)

Here’s the same 3+ household data for working-age families only: those with a head of household under age 65.

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Pretty much the same story.

This is all based on a fast-and-dirty random census pull of about 5,000 U. S. households, from IPUMS. It uses 3+ households as a proxy for families — probably not a bad proxy. A professional economist doing proper due diligence would fine-tune that, or even better turn to the Panel Study of Income Dynamics (PSID), which has better microdata to track families. Careful work would even allow them to track extended, multi-generation families, not just nuclear families living together. (Think: dynasties.) I’d expect the pattern we see here to be more pronounced in that view (though that’s just a surmise).

Here’s some more evidence, from across the pond:

Figure 1: Average hours of work across the distribution of earnings: UK, 2013

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Figure 2: Changes in post-tax real hourly earnings and average hours for the median and top 1 per cent

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Even as rich people’s incentives to work have skyrocketed, their hours worked have plummeted. This even though they’re far more likely to be doing interesting, engaging work in pleasant environments. Curious.

But still: low-income people work less. More of them are unemployed. Is that a surprise to anyone? (I’ll leave the “voluntary” argument to my gentle readers.)

There’s a stylized fact out there, universally repeated by economists and pundits, that seems to misrepresent the state of the world. There are some nice tractable research projects here for those who are paid to do such things.

Cross-posted at Angry Bear.

American Exceptionalism Re-Revisited: OECD Taxes/GDP Since 1965

April 26th, 2015 Comments off