U.S. economy

An economy undermined?, Financial Times

Betting the bank, by Paul Krugman

The b word, by Paul Krugman

Slump moves from Wall St. to Main St., New York Times

A subprime conversation, by Mark Thoma

Living standards, inequality, poverty

Green-collar jobs in America’s cities, by the Apollo Alliance

The subprime borrower protection plan, by Dean Baker

The squeeze is on, by Jared Bernstein

How to cast a mortgage lifeline?, by Alan Blinder

The rich are different, by Len Burman

The end of the age of Friedman, by Brad DeLong

On the new reports from the Social Security and Medicare trustees, by Robert Greenstein

Unemployed, and skewing the picture, by David Leonhardt

Culture of success: inside an inequality riddle, by Brink Lindsey

How Europe’s model could solve America’s immigration problem, by Douglas Massey

Infrastructure is America’s best investment, by Felix Rohatyn and Warren Rudman

House of cards: consumers turn to credit cards amid the mortgage crisis, delaying inevitable defaults, by Tim Westrich and Christian Weller

The American public and the next social contract, by Cliff Zukin

Education

The teaching penalty, by Sylvia Allegretto, Sean Corcoran, and Lawrence Mishel

Middle-class schools for all, by Richard Kahlenberg

At charter school, higher teacher pay, New York Times

What makes Finnish kids so smart?, Wall Street Journal

U.S. politics

What is McCain’s economic agenda?, by Jared Bernstein

Obama’s theory is tested, by David Brooks

Rich state vs. poor state, rich voter vs. poor voter, over time, by Andrew Gelman

Expand the House of Representatives, by Larry Sabato

Forecasting the electoral college, by John Sides

What should the Democrats do about Florida and Michigan?, by Jeff Weintraub

The case for partisanship, by Matthew Yglesias

Abroad

Brazil’s lesson for China: do not ignore inequality, by Geoff Dyer

Economics and the rule of law, The Economist

Why we need a world education bank, by David Manning

Darfur – four years and counting, by Jeff Weintraub

Miscellaneous

Information liberation, by Daniel Akst

Where the Starbucks and Walmarts are, by Andrew Gelman

Body counting, by Megan McArdle

More and more Americans are in mortgage default. In some cases the homeowner can no longer afford the mortgage payment. But according to reports in the Financial Times and Wall Street Journal, a growing number of homeowners are choosing to walk away from their mortgage even when not forced to do so by their financial situation.

Why?

For some, no doubt, it’s straightforward economic calculus. One recent estimate suggests that for 10% of homeowners, the largest share since the Great Depression, mortgage debt now exceeds the value of the home. Over the past decade it became easier to get an initial mortgage loan with very little down payment. Many were able to later add a second mortgage (home equity loan); home equity loan debt tripled between 2000 and 2007. With rising home prices, this strategy works: the homeowner can keep up with the loan payments and even accumulate equity. But if home values fall, mortgage debt can easily exceed the market selling price of the home.

A mortgage is a non-recourse loan, which means a borrower in default does not owe the lender anything other than delivery of the loan’s collateral — in this case, the home itself. Defaulting on a mortgage loan in this circumstance therefore makes financial sense (at least in the short run, as default reduces the chances of getting a future loan). Some simply pack up and send the keys to the bank. For those who want to be certain the relevant paperwork is handled properly, a New York Times story tells of at least one newly-founded company, You Walk Away, that will take care of it for $995.

What is the role of norms here? Traditionally, losing one’s home has carried a stigma. Stigma can be a powerful deterrent to behavior that might otherwise bring financial and/or psychological benefit. Think of use of illicit drugs, divorce, out-of-wedlock childbearing, not attending church on Sunday, abortion, homosexuality.

Frequently, stigma has delayed widespread adoption or public acknowledgment of behaviors such as these for a considerable period of time. That doesn’t seem to be the case with mortgage default. I don’t know what share of people who could afford to keep paying are walking out on their mortgage loan, but the reports suggest it is nontrivial. If so, why hasn’t stigma acted as a more powerful brake?

One possibility is that the rate at which stigma’s influence declines has accelerated. Stigma associated with a behavior tends to recede when it is widely recognized that the behavior is fairly common. It may be that heightened access to information is dramatically shortening stigma’s influence. Mark Thoma suggests this as a possible factor in the rise of mortgage defaults.

My vague sense is that stigma’s influence declined more rapidly for out-of-wedlock childbearing than for divorce, and did so more rapidly still for homosexuality. As one indicator, the following chart shows the share of Americans saying homosexuality is “always wrong” since the early 1970s (the data are from the General Social Survey here). After holding constant during the 1970s and 1980s, the share fell by nearly 20 percentage points in the early 1990s (more discussion here).

Is the apparent acceleration in the pace of stigma’s decline real? Are there other examples?

A parable about the virtue of low tax rates for the rich has circulated on the web for a number of years. It apparently originated as a letter to the editor in the Chicago Tribune in 2001. Here is a recent version:

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.” Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men — the paying customers? How could they divide the $20 windfall so that everyone would get his “fair share”? They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the bar, the men began to compare their savings.

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”

“That’s true!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

The parable is misleading in several ways. (For more commentary see this, this, and this.)

First, though it doesn’t matter much, the numbers aren’t right. See here (table 1b) for the actual shares of federal taxes paid by various groups.

Second, and more important, if the government (the bar owner in the story) reduces tax rates (the price of beer) it usually must do one of two things to compensate for the lost revenues. One option is to reduce its expenditures. In the context of the parable, this means the bar owner lays off a bartender or a bouncer; or perhaps she has the bar cleaned less often or forgoes needed repairs. Some customers won’t care, but others will find the bar a less attractive place to spend time in. They might be happy to pay a little more for beer if it means faster service, nicer surroundings, and fewer bar fights. The same applies to government services such as police, military, schools, roads, bridges, subways, and parks.

The other option is that the government borrows money to finance the tax rate (beer price) reduction. If the bar owner does this and it results in a substantial debt, as was the case for our federal government in the 1980s and in the 2000s, a larger share of her revenues will go to her lenders as interest payments. Eventually she may decide it makes sense to raise prices (taxes) again, as did the first president George Bush in the early 1990s — even though it meant reneging on his “read my lips: no new taxes” pledge.

But set these issues aside. The most important point is this:

The claim made by proponents of equal-percentage tax cuts is that the rich man (the tenth) will stop coming to the bar and paying for a large share of the tab if he doesn’t get the same percentage price (tax) reduction as the others. (Forget about the others beating him up; that’s a distraction from the real point the parable aims to make.) This could conceivably be true. Or it might not be. Many advocates of tax cuts for the affluent believe it’s true. But that doesn’t mean they’re correct.

In my view it’s equally plausible to hypothesize that the tenth man would keep showing up even if he were asked to continue paying $59 — in other words, even if the others get a beer price (tax) cut while he doesn’t. After all, he wouldn’t be paying any more than before. And he could probably afford it; according to Congressional Budget Office data — see table 1c here — average pretax income among households in the top tenth was $340,000 as of 2005.

How the tenth man will react is an empirical question. There’s some discussion of relevant evidence in previous posts of mine here, here, and here.

Stories resonate with us far more than do impersonal statistics. But in some instances, such as this one, the reason a story resonates is simply that it affirms prior beliefs, rather than because it offers genuine insight.

Barack Obama is ahead of Hillary Clinton in the (regular) delegate count, and it looks almost certain that he will remain so when all of the primaries and caucuses are completed. Still, the gap is not large, and it is possible that Clinton will end up with the most popular votes. Rightly or wrongly, it appears that some — perhaps many — of the as-yet-uncommitted Democratic superdelegates intend to take electability into account in deciding which candidate to support (see here, here, and here).

What information should they consider in making a decision?

Partisans and pundits have suggested a number of reasons why one might stand a better chance than the other of defeating John McCain in the general election. Clinton is more strongly despised by conservatives and thus may generate larger Republican turnout. On the other hand, she appears to have stronger support among working-class voters, women, and Latinos, whereas Obama is stronger among professionals and African Americans. If the latter groups are more likely than the former to vote Democratic regardless of who is the nominee, this is an advantage for Clinton. Obama seems more likely to inspire independents, but Clinton may be better prepared to effectively confront Republican attacks. I’m not convinced that these considerations clearly favor one or the other.

National polls pitting Obama or Clinton vs. McCain are another potential source of information. They often show little difference between the two, but it’s too early for them to be of much use.

If I were a superdelegate trying to assess electability, I’d be inclined to focus on which candidate is most likely to win states that are not solidly “blue” or “red.”

The following chart shows the 24 states in which the popular vote in the 2000 and/or 2004 presidential election was within 10 percentage points. The numbers in parentheses indicate the 2000 and 2004 vote results. A plus sign means the Democratic candidate (Gore, Kerry) won the state; a minus sign means Bush won it. The states are ordered by the number of electoral votes they’ll have in the 2008 general election. The markers (“Ob” and “Cl”) indicate the winner of the state’s primary or caucus.

Consider first the 20 states at the bottom. Together they have 159 electoral votes. All but one have had their primary or caucus already. Of them, Obama has won states that have total of 98 electoral votes, and Clinton has won states with a total of 56 electoral votes. (West Virginia, with 5, holds its primary in May.) These results favor Obama.

One can argue that perhaps some of these states aren’t truly in play. New Jersey seems likely to go Democratic regardless of who is the nominee, and so too do Hawaii, Maine, and New Hampshire. Similarly, neither Obama nor Clinton is likely to win Tennessee or West Virginia. As best I can tell, though, subtracting these types of states would not change the picture much.

What could change it significantly is if all of the “big four” states — Florida, Pennsylvania, Ohio, and Michigan — go for Clinton. These states have 85 electoral votes between them. They decided the 2000 and 2004 elections, and might well do so again this time. If Clinton were to win these four states, she’d have won in-play states with a total of 141 electoral votes, versus 98 for Obama. Though primary results don’t automatically translate into general election performance (see this and this), this would give her a case for claiming greater electability. Otherwise, it seems to me that electability either is a draw or favors Obama.

Clinton won Ohio. Pennsylvania holds its primary April 22nd. If I were a superdelegate concerned about electability, I would want a true primary result from Florida and Michigan.

Addendum:  Jeff Weintraub has some sensible thoughts on what the Democrats should do about Florida and Michigan.

Doug Hibbs has posted an analysis of the implications of his “bread and peace” model for the 2008 presidential election. My earlier, considerably less thorough discussion is here. See also summary and comments by Mark Thoma and Andrew Gelman.

Andrew Leigh suggests that Australia would benefit from an Earned Income Tax Credit. I agree (pdf).

Note: An updated version of this graph is here.

Income inequality in the United States has been rising since the 1970s. What is the most effective way to succinctly convey this fact?

Here is my choice (a pdf version is available here):

The chart shows average inflation-adjusted incomes of the poorest 20%, middle 60%, and top 1% of households since the 1970s. The incomes include government transfers and subtract taxes. For the bulk of American households, incomes have increased moderately or minimally. For those at the top, by contrast, they have soared.

Why This Chart?

Here are what I think should be the principal considerations. Some are obvious, others perhaps not.

1. Tell the substantive story clearly. The graph does a good job of conveying the two key aspects of the rise in income inequality over the past generation. One is the dramatic increase in incomes for households at the very top. In 1979 household income among those in the top 1% averaged $325,000 (in 2005 dollars). By 2005 that had increased to nearly $1.1 million.

The other is stagnation at the bottom and modest growth in the middle. Among the poorest 20% of households, average income was $14,500 in 1979 and $15,500 in 2005. Among the middle 60% of households, average income rose from $42,000 to $51,000.

2. Use the best available data. There are various sources of income data, including the annual Current Population Survey (CPS), the decennial census, IRS income tax records, and others. The data used in this chart are from the Congressional Budget Office (CBO), which has merged tax records with the Current Population Survey. They’re available here. Tax records are incomplete, because many low-income citizens do not file tax returns. But they have the advantage of providing relatively good data on those with high incomes. The CPS data are from interviews of 50,000 or so households. They are more representative of the population. But for various reasons the CPS data are not as good for those at the top of the income distribution. Also, the CPS data are for pretax income. The CBO data arguably combine the best features of these two sources.

The main disadvantage of the CBO data is that they begin in 1979. It’s thus not possible to see the contrast with earlier periods. I say more about this below.

3. Show incomes, rather than a summary inequality measure. Common inequality measures include the Gini coefficient, percentile ratios (e.g., P90/P50 and P50/P10), and income shares (e.g., the income share of the top 1%). They are quite useful. Nice examples from the Economic Policy Institute’s The State of Working America are here, here, and here. But they have two drawbacks. One applies to the Gini index, which is the most commonly-used inequality statistic. It doesn’t identify where in the income distribution the rise in inequality has occurred. For example, suppose the Gini rises over time. Is that because those at the top have pulled farther away from everyone else? Because those at the bottom have fallen behind? Because of a widening spread in the middle? All three? Something else?

To address this problem analysts often turn to percentile ratio or income share measures. These, however, fail to provide information about trends in actual incomes. Suppose, for example, that the 90/50 ratio increases over time. Is that because the incomes of those at the top have risen faster than the incomes of those in the middle? Because incomes at the top have risen while those in the middle have been stagnant? Because both have decreased but those at the top have done so less rapidly? Something else?

Showing trends in actual incomes — adjusted for inflation, of course — overcomes these problems. A potential drawback of doing so is that it may not be obvious from the raw income data whether or not inequality has increased, or by how much. If the magnitude of the rise in inequality is small, it may be preferable to use an inequality measure. For the United States over the past generation, however, the increase in inequality is easy to spot from data on incomes.

4. Show income levels, rather than growth rates. A common and helpful inequality graph is a bar chart showing rates of growth of real incomes during different periods for households at various points in the income distribution. See here for an example. This gives a good sense of the magnitude of the change in inequality, but it doesn’t convey anything about the magnitude of the level of inequality.

5. Show the full trend, rather than snippets or period averages. A frequent choice is to show the level of inequality in selected years, or averaged over groups of years (e.g., business cycles). That’s fine in many instances, but when there is relative stability within periods it is usually preferable to show all data points.

A Helpful Supplement

The chief limitation of the above graph is that it doesn’t fully convey what has happened at the bottom of the distribution since the 1970s. It is clear from the chart that incomes for those in the top 1% have jumped dramatically and that incomes for much of the bottom half of the distribution have been stagnant. But the latter aspect is not highlighted to the degree it could be.

Here is a second chart that helps to flesh out this point:

This chart shows trends in real incomes for families at the 20th, 40th, 60th, 80th, and 95th percentiles of the income distribution. In order to go back to the 1940s we have to accept two data limitations: the income data, from the CPS, are pretax; and the units are families rather than households, so adults living alone are not included. These data are available here.

Between the late 1940s and the mid-1970s incomes increased at roughly the same pace throughout the distribution; they doubled for each group. Since the 1970s the story has been quite different. At the 95th percentile, incomes have continued to rise. At the upper-middle levels (the 80th and 60th percentiles), they’ve increased at a moderate pace. In the bottom half of the distribution (the 40th and 20th percentiles), they’ve been fairly stagnant.

This chart makes it clearer that a defining feature of rising inequality in the United States is the stagnation of incomes in the lower half of the distribution. Even at the 95th percentile, where incomes have increased appreciably since the 1970s, the rate of growth did not accelerate relative to earlier years; the average growth rate of family income at the 95th percentile was 1.5% per year between 1979 and 2005, compared to 2.4% per year between 1947 and 1979.

Other Nominations?

If you’ve seen an inequality graph that is as good or better, please let me know.

Change has been the dominant theme of this presidential campaign. Barack Obama’s mantra has proved extremely popular among voters, so much so that other candidates in both parties have signed on.

The change they’ve embraced is political change. When it comes to economic change, enthusiasm is decidedly more muted. Many Americans would be happy with a change in our economic policies. But the notion that we should get used to — and perhaps even welcome — continuous, regular economic change is a tougher sell. This is particularly evident with respect to globalization. To many, change isn’t terribly appealing if it refers to more imports and outsourcing. For them this type of change equals disappearing jobs and smaller paychecks.

Globalization — much like technological advance, another key form of economic change — clearly does result in job loss and falling real wages for some Americans. Researchers disagree about the magnitude of the damage (see here). Some say it is tiny; others view it as small but growing; others conclude it is already large.

Yet on the whole economic globalization is a good thing. We benefit as consumers by having greater choice and paying lower prices. Citizens in other countries, especially poor ones, benefit from greater access to jobs and rising wages. The latter is beneficial not just on altruistic grounds. It is in Americans’ self-interest for poor countries to get richer. As countries develop economically they are more likely to become democratic, and to stay democratic. And democratic countries are less likely to attack one another. Also, as citizens in poor nations become richer they will be able to buy more goods and services produced here.

Yes, there are exceptions. But in the aggregate the advantages of globalization for Americans outweigh the costs. That, rather than because they are acting at the behest of corporate lobbyists, is the main reason why many Democrats are favorably disposed toward globalization.

Too often, though, they don’t talk that way. Especially when campaigning in states like Ohio, where large numbers of residents have lost a job in recent years or fear that may happen soon, Democratic candidates tend to say less about the benefits of economic change and more about the shortcomings of trade agreements such as NAFTA.

This is understandable as an election tactic. And on one view, it is largely innocuous. David Leonhardt of the New York Times aptly likens Democrats’ orientation toward globalization to the way many Republicans approach abortion: strong oppositional rhetoric during the campaign primaries, but little action once in office. If political leaders campaign against globalization but their later policy choices tend not to impede it, why worry?

The reason is that if leading Democrats instead were to advocate that we embrace economic change, they could stimulate a thorough discussion about, and likely generate greater public support for, policies that compensate for the adverse consequences of that change.

Most Americans who worry about globalization are not dead set against economic change. They just want government to do something to help. And government can do something. It can broaden eligibility for unemployment insurance. It can make benefits like pensions and health insurance more portable. It can help offset the cost of retraining and relocation. It can assist with job placement. It can offer wage insurance to limit income loss if getting a new job entails a pay cut. It can invest in infrastructure improvement to help rebuild hard-hit communities. It can gradually increase the minimum wage and the Earned Income Tax Credit. (More discussion here, here, here, and here.)

None of these policies would be inordinately expensive. None would require massive interference with markets. Each has considerable merit in its own right. And each would help to make globalization, technological advance, and other forms of economic change win-win.

But for this type of policy approach to make real headway in our political debate, we need our most visible political leaders to encourage us to embrace change.