Monthly Archives: October 2014

The Wedge Between Compensation and Wages

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Mark Warshawsky and Andrew Biggs write,

Most employers pay workers a combination of wages and benefits, the most important of which is health coverage. Economic theory says that when employers’ costs for benefits like health coverage rise, they will hold back on salary increases to keep total compensation costs in check. That’s exactly what seems to have happened: Bureau of Labor Statistics data show that from June 2004 to June 2014 compensation increased by 28% while employer health-insurance costs rose by 51%. Consequently, average wages grew by just 24%.

The kicker:

Health costs are a bigger share of total compensation for lower-wage workers, and so rising health costs hit their salaries the most. The result is higher income inequality.

I don’t think you can blame company-provided health insurance as a first-order cause. Suppose that there were no company-provided health insurance, and everyone instead bought health insurance on their own. In that case, more of the compensation of employees would have been in the form of wages and salaries. If health insurance in the individual market had gone up as rapidly as it has in the company-provided market, then this would have a stronger effect on the cost of living for low-income workers. So even if you did not have company-provided health insurance, you would still have the “wedge” between compensation and disposable income after health insurance.

As a second-order effect, you can argue that company-provided health insurance, and its tax exemption, push in the direction of raising health care costs. But that is not such a compelling argument.

I do think that it is increasingly misleading to speak of a single “cost of living,” when so much of the market basket consists of medical procedures and college expenses that not everyone undertakes. That is, I still believe that Calculating trends in the real wage is much harder than we realize, because every household has different tastes.

Related, from Timothy Taylor:

it’s also intriguing to note that since 1984, the share of income spent on luxuries is rising for each income group, and the share of income spent on necessities is falling for each income group.

He refers to a study by LaVaughn M. Henry.

Financial Report of the U.S. Government

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The report is here. It looks interesting, but I find it difficult to parse. Liqun Liu, Andrew J. Rettenmaier, and Thomas R. Saving parse it this way:

The liabilities reported in the FRUSG at this time last year included $12 trillion in debt held by the public, $6.5 trillion in federal civilian and military employees’ accrued pension benefits and other retirement and disability benefits, and $1.3 trillion in other liabilities, producing total liabilities of $19.9 trillion.

They point out that the liabilities for Social Security and Medicare seem suspiciously small, because the report acts as if these could be erased quickly with the stroke of a (legislative) pen. Technically, that is true, but realistically it is not. Instead, Liu, et al, propose to include benefits payable to current retirees.

Adding the $16 trillion in accrued Social Security and Medicare benefits payable to current retirees produces a total of $35.8 trillion in federal liabilities. These accrued Social Security and Medicare benefits are larger than the debt held by the public and are 45 percent of the total.

Pointer from James Pethokoukis.

This is still not very satisfying.

1. The liabilities to pay benefits to those of us not yet eligible ought to be included.

2. If we are going to include future government expenditures as liabilities, then we ought to include future tax revenues as assets.

3. We ought to use a discounted present value concept, rather than treat dollars that will be spent or received 10 years from now as equal to dollars that will be spent or received today.

Conceptually, I believe that what we want is a present discounted value of assets (including future tax revenues) and liabilities under current law (or what CBO projects law to be under its more-plausible “alternative scenario”). You can then look at the change in these values from year to year as an accrual-accounting measure.

Isabel Sawhill’s New Book

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Generation Unbound. I am reading it–may have finished by the time this is posted. In short, her thesis is that many twenty-somethings are having unplanned children out of wedlock, with detrimental consequences, particularly for the children.

Possibly related: This chart from Frances Woolley, showing Canadians’ intentions to have children, sorted by gender and age. What stands out is that among 15-24 year-olds, females are much keener on children than males.

Certainly related: Ben Casselman on a recent Pew survey of marriage patterns. Pointer from Jason Collins.

Robert Litan’s New Book

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It is called Trillion Dollar Economists. The concept is to show how useful the ideas of economists have been in business, finance, and public policy. For example, auctions have been used in business (Google’s ad words, e-Bay’s classified ads), price discrimination is very important in the real world (I like to tell students that “price discrimination explains everything”), option pricing is important, etc.

I like the concept, and I like much of the material. Litan’s taste in economics–what he considers to be valid and useful–is much closer to mine than that of just about anyone else who might attempt a similar project. However, this is one of those books that I wish had been structured differently. I will put my extended remarks below the fold. Continue reading →

Creative Class or Creative License?

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I started with Peter Lawler’s post.

Are we dividing, maybe more than ever, into a “creative class” and a “service class?”

I followed the link to Emily Badger’s piece.

Their analysis separates workers into three classes, derived from Florida’s research: the “creative class” of knowledge workers who make up about a third of the U.S. workforce (people in advertising, business, education, the arts, etc.); the “service class,” which makes up the largest and fastest growing sector of the economy (people in retail, food service, clerical jobs); and the “working class,” where blue-collar jobs in industries like manufacturing have been disappearing (this also includes construction and transportation).

I am inclined to accuse Florida and his colleagues of using creative license in defining the occupations that constitute the “creative class.” As I stated this summer, I view the process of urban gentrification as being driven by hospitals and universities. They have the money, they are expanding in cities (during my road trip this summer, I saw this in Pittsburgh, Cincinnati, and St. Louis), and they hire people with lots of education credentials, who then move into the city.

But these credentialed workers are not necessarily creative. They are not opening new vistas or making new discoveries or overthrowing social conventions. Many of them are administrators who, if anything, get in the way of the creative individuals in their institutions.

Look, I think that Florida and his colleagues are spot-on in their observation of the changing geography of social class. But the term “creative class” grates on me, because I think it is misleading.

QE and Fiscal Offset

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Tony Yates writes,

As Summers reportedly put it, while the Fed was engaged in quantitative easing, the Treasury was doing ‘quantitative contraction’. And surely the two arms of government should be better coordinated than that.

Pointer from Mark Thoma. My remarks.

1. Read the rest of his post.

2. Larry Summers is quite late to the party. Some of us have been talking about this issue for years. For example, almost four years ago, James Hamilton wrote,

since 2008, the Treasury has been issuing more long-term debt faster than the Fed has been buying it… What we find in the latest data is that this trend has continued over the last 3 months, even with QE2.

3. Wikipedia defines superstition as

the belief in supernatural causality—that one event causes another without any natural process linking the two events—such as astrology, religion, omens, witchcraft, prophecies, etc

I think that belief in the macroeconomic impact of the Fed can be properly regarded as a superstition. The Fed’s rules and regulations affect the allocation of credit, and it can aid particular banks when they get in trouble. However, its ability to control interest rates and nominal GDP is far less than most economists and investors believe.

Note that, as with the vast majority of my posts, this was written a few days ago and scheduled to be posted at this time. I find that staying away from immediate publication encourages me to evaluate the wisdom of a post using my “future self.”

Slowing Medical Innovation

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Scott W. Atlas has the bad news.

The CEO of one of the largest health-care companies in America recently told me that the device tax his company paid last year exceeded his company’s entire R&D budget. Already a long list of companies—including Boston Scientific , Stryker and Cook Medical—have announced job cuts and plans to open new centers for R&D, manufacturing and clinical trials overseas.

The bureaucrats at the Food and Drug Administration are also hindering medical-technology and drug development. According to a 2010 survey of more than 200 medical-device companies by medical professor and entrepreneur Josh Makower and his colleagues at Stanford University, delays of approvals for new medical devices are now far longer in the U.S. than in many other developed countries. In the European Union—not exactly known for cutting through red tape—it takes on average seven months to gain approval for low- to moderate-risk devices. In the U.S., FDA approval for similar devices takes on average 31 months.

The FDA is no longer safe and effective.

Economists Heart Uber

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The IGM forum asks its elite economists to react to the assertion that,

Letting car services such as Uber or Lyft compete with taxi firms on equal footing regarding genuine safety and insurance requirements, but without restrictions on prices or routes, raises consumer welfare.

Of those who respond, 2/3 “strongly agree” and the remainder “agree.”

Let me suggest the next poll question: “Letting unlicensed medical providers compete with doctors and other licensed practitioners on equal footing regarding genuine safety requirements, but without restrictions on prices or services, raises consumer welfare.”

Or, more puckishly: “Letting unaccredited professors compete with Ph.D’s on equal footing using tests devised and graded by the same third party, but without restrictions on prices or services, raises consumer welfare.”

I wanted to title this post “economists heart markets,” but I fear that is not always true.

Again, I schedule posts in advance, so others have already mentioned this poll, but more favorably.

John Cochrane on Inequality

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He writes,

They believe that raising tax rates and a large increase in state direction of economic activity will reduce rent-seeking and cronyism. I assert the opposite, which is the rather traditional conclusion of the vast literature on public choice as well as obvious experience. If I were trying to be polite, I might say it’s an interesting new theory to be debated and investigated. But I’m not, and it isn’t. It is the cream on the cake of amateur ad-hoc assertions of cause-and-effect relationships in human affairs, changing the sign of everything we know.

There are some good thoughts in the piece, but there is too much ranting and too much asymmetric insight (believing that you know why your opponents hold their views better than they do themselves). When you engage in asymmetric insight, you are encroaching on Krugman’s turf. Best to stay out of there.

I think that the phenomenon of inequality is a poster child for what Jim Manzi calls “causal density.” Picture a causal relationship diagram with inequality in a circle in the center and arrows leading in and out from other circles.

There would be many arrows pointing to the inequality circle, representing possible causes. Some of them are bad things, like effective rent-seeking by wealthy people. Some of them are good things, like globalization, which reduces global inequality even as it increases inequality within counties.

There would be many arrows pointing out of the circle, representing possible effects. Some of them are bad things, like greater concentration of political power. Some of them are good things, like more saving. Note that I talk of these as possible effects, not necessarily actual effects.

Going directly at inequality by confiscatory taxation means you give up on trying to differentiate good from bad and just hope that you do more good than harm. In the context of causal density, this strikes me as a case of blind hope. For purposes of public policy, I think it is more likely better to focus on promoting the good things and thwarting the bad things. And if you say that you are not sure how to promote the good things and thwart the bad things, then I fail to see how you can be confident that confiscatory taxation will be beneficial.

Cochrane’s blog post is adapted from remarks he gave at a conference in honor of Gary Becker. John Taylor summarizes the conference.