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Economics on Main Street: Concepts for American Voters

Economics on Main Street: Concepts for American Voters. May 2012 note: course website. Income Inequality & Jobless Recoveries. Reconsidering Income Inequality. Economic Growth is a Good Thing But It’s Not the Only Thing. quantity of goods vs quality of life

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Economics on Main Street: Concepts for American Voters

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  1. Economics on Main Street:Concepts for American Voters May 2012 note: course website

  2. Income Inequality& Jobless Recoveries Reconsidering Income Inequality

  3. Economic Growth is a Good ThingBut It’s Not the Only Thing • quantity of goods vs quality of life (environmental sustainability, nature of work, traditions, nature of communities, happiness) • assigning value to household production (GDP ignores non-traded goods and services, pursuit of measured growth may be misguided) • distribution of gains (how are the gains from growth distributed? why important as a societal goal? what are implications?)

  4. Market Efficiency is a Good ThingBut It’s Not the Only Thing • markets are not always efficient (monopoly, asymmetric information, third party costs or risks, third party benefits) • efficiency measures total gains (makes no promise as to distribution of gains) • income matters (command over goods & services) (part of consumer response to price changes)

  5. Regulate Prices to Achieve Equity? • beware of unintended consequences (price gouging laws – winners but shortage of ice) (minimum wage – potential tradeoff with jobs) • whose definition of equity? (alternative non-price allocation mechanisms) • letting prices move freely (probably more effective to redistribute income) (taxes & transfers, vouchers, public provision)

  6. Income Redistribution Concerns • government as a leaky bucket (taxing productive activities, quantity distortion) (disincentives for recipients, AFDC vs EITC) • inequality as an incentive system (return to invest in education, innovation, effort) (but . . . how much inequality is sufficient for this?) • equal outcomes vs equal opportunity (willing to accept inequality if “income mobility”)

  7. What Do the Numbers Say? • recall economic growth patterns (nearly 2.5% post WWII through 1979, less than 2.0% from 1979 to present) • have those gains been broadly shared? (labor productivity vs labor compensation) (distribution of income gains over time) (share going to top 1%, historical context) • an uncomfortable reality check

  8. Contributing Factors • individual characteristics region, race, age, household composition education, education, education

  9. Contributing Factors • individual characteristics region, race, age, household, education • labor market opportunities U.S. manufacturing & technological change industry & occupational shifts, earnings reward-based pay & other compensation issues • tax policy historically low rates on top marginal income

  10. And Now . . . Some Really Bad News • opportunities across generations income mobility & national self-image however . . . recent international comparisons U.S. inferior mobility across generations • conditions for recession income on main street, spending on main street extreme inequality vs. reliable consumer spending demand-deficient core of slow recovery

  11. General Policy Implications? • tax policy increase taxation of high income individuals (wasn’t this on the table in 2008 election?) • safety net transfer income or purchasing power (recession surge vs. upcoming budget plans) • human capital expand access, not family income, multi-dimensions (ongoing trends and upcoming budget plans) • jobs SR-LR key to sustainable approach (more after break)

  12. Income Inequality& Jobless Recoveries Where are the jobs?

  13. Unemployment Rate for U.S. monthly, seasonally adjusted, 1968-2010 Oct 2009 10.1% Prof Rich graduates from college My Dad between jobs

  14. notice “jobless recoveries”

  15. sometimes there’s just no need for words

  16. Employment to Population Ratio for U.S. monthly, seasonally adjusted, 1968-2010 note on age composition and gender LFP Dec 2009 58.2% here’s that 1980’s recession again

  17. robust job growth will be slow to reduce the unemployment rate lost production in short term, reduced capacity in long term?

  18. The job seekers ratio (number of unemployed workers per job opening) Dec. 2000–Feb. 2012 this is my happy slide Source: Author's analysis of Job Openings and Labor Turnover Survey data and Current Population Survey data. Note: Shaded areas denote recessions.

  19. Economics of Unemployment • frictional, structural, demand-deficient • frictional imperfect information, labor market flows search, distribution of opportunities, imperfect match • public policy UI policy goals – promote productive search IL-ES efforts – improve search outcomes labor market information (IDES, ALMIS, ISU)

  20. Economics of Unemployment • structural industry & occupation change, labor market transitions changes in consumer demand, technology, trade, etc. mismatch of worker skills & employer requirements observed by industry-occupation-region-local consider required adjustments & constraints • public policy labor market information (employment projections) education (K12, CC, HE, CE), training (public, firm, indiv) mobility (LMI, portable HCI, relocation, public transit)

  21. Economics of Unemployment • demand-deficient labor markets over the business cycle, fluctuations in aggregate demand, employment loss, limited wage flexibility (various causes), unemployment outcomes jobless recoveries from recent downturns (1990-present) • public policy minimize fluctuations in aggregate demand (monetary – manage interest rates to balance activity) (fiscal – stimulus spending (pyramids, tanks, schools) ) (automatic stabilizers (ex: income tax, UI, FS, GS) )

  22. Recession and Stimulus U.S. GDP in 2009 about 8-10% below potential with similar drops in capacity utilization and employment/population ratio (still 5-7% below potential) (eventual impact on PPF) Capital Goods (and other sources of econ growth) m k underutilized resources in a recession a g Consumption Goods

  23. Recession and Stimulus Capital Goods (and other sources of econ growth) stimulus through deficit spending (school repairs, bridge construction, UI & food stamps, tax cuts, etc). m k underutilized resources in a recession a g Consumption Goods

  24. Recession and Stimulus does nature of stimulus matter? (consume vs invest and future growth) Capital Goods (and other sources of econ growth) m k underutilized resources in a recession a g Consumption Goods

  25. GDP Would Have Been Lower Without the Recovery Act...

  26. ...And Unemployment Would Have Been Higher

  27. Sessions & Topics • Income Inequality & Jobless Recoveries competing views on how to strengthen the recovery activists: TARP, automatic stabilizers, ARRA, AJA, more austerians: overtaxed job creators, disincentives from over-regulation, uncertainty from deficits & debt • Public Goods & Sustainable Social Contracts role of government, about deficit spending & debt, concerns going forward, work the problem (hands-on)

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