According to the Congressional Budget Office, between 1979 and 2011, gross median household income, adjusted for inflation, rose from $59,400 to $75,200, or 26.5%. However, once adjusted for household size and looking at taxes from an after-tax perspective, real median household income grew 46%. A lot of the stats about the stagnation of household income ignore changes in household size, which has declined over the years. Two-earner households currently have a medium income of about $88K. Over the past 20 years, one-earner households have grown much more than any other household size. And then there’s the churn*  in household income: 3/4 of households will make it into the top quintile for at least a year; and just .6% of households in the top 1% stay there for 10 consecutive years. It’s less that there’s a permanent class of the rich than that the returns to age and education are greater than they used to be, so that the relative income of the older and most educated is a lot higher than it used to be.

None of this isn’t to say the poor shouldn’t be helped. But it’s less the case that “the rich are getting richer” than that for any given year, more income is reported at the higher end of the income distribution than it used to be, relative to the rest – but the people  up there change a lot from year to year.

* Reference:

Auten, Gerald, Geoffrey Gee, and Nicholas Turner. 2013. “Income Inequality, Mobility, and Turnover at the Top in the US, 1987-2010.” American Economic Review, 103(3): 168-72.

The problem with providing grants, low-interest loans, tuition waivers, and free tuition is that they exert no pressure on educational institutions to increase efficiencies, productivity, or otherwise keep costs down. They appear to be an important factor in the much-greater-than-inflation rise in college costs over the last several decades.  I’m warming to the idea of giving adults 18 and over up to 6 years of a basic income while enrolled in post-secondary education/training – and then eliminate federal tuition assistance altogether. That way, students become discerning shoppers and institutions have to respond with offering good deals, exerting pressure both on quality and price, i.e., known as the wonders of the marketplace. Not a cure-all, but nothing is a cure-all.

I’ve written a lot about the Basic Income Guarantee, aka BIG, which is a proposal that all adults get some non-means-tested check from the federal government every month. Arguments for the BIG come from both the left and the right. Progressives consider it a compassionate way to eliminate poverty. Libertarians see it as an efficient way to provide a safety net. Of course, the left’s version of a BIG would be more generous than the right’s and would require hefty tax increases to fund. The right’s version would not increase taxes, being paid for by funds previously allotted to safety net programs being replaced. I’m in favor of a modest BIG that wouldn’t increase taxes much. Check out the prior BIG posts for details.

My support notwithstanding, a BIG is fraught with peril. If not done right, a BIG could do irreparable harm to the economy and social fabric, resulting in greater poverty and civil discord than we’ve seen in a long time. A serious BIG proposal would consider all the things that could go wrong and address them one by one. A serious proposal would also acknowledge that we just can’t know all the things that could go wrong, because the BIG is an experiment that hasn’t been done on a large scale before.

In the next several posts, I’m going to address a bunch of things that could go wrong with a BIG – starting with the possible  impact on labor market participation.

The main dictionary definition of “conservative” is “holding to traditional attitudes and values and cautious about change or innovation, typically in relation to politics or religion.”  In European and Latin American history, “conservative” usually referred to supporters of the Church (and sometimes landed gentry), which was opposed to business interests. A strong strain of paternalism runs through the history of the European/Latin brand of conservatives. Pro-business advocates were (and still are) called “liberals” in Europe (if you read the Economist, a liberal is pro-business and has nothing to do with “traditional values”).  In America, due to the vagaries of political coalitions and animosities, being pro-business slowly evolved to be labeled “conservative”, partly due to shared antagonism with traditional conservatives towards the State.

It is true that traditionalists and the pro-business want limited government, but their reasons are different (for the former, it is more to protect sacred values; for the latter, it is more to be free to build and creatively destroy – hardly a “conservative” impulse). But does overlap in some concerns warrant a common label?

In America, pro-business types and social conservatives have formed an alliance. Sometimes common cause and common adversaries lead members of different groups to adopt at least some of the views of one’s allies. But that is not the same as whether these diverse views go together “naturally”.  Separate from its historical association with conservatism in America, is being pro-business inherently conservative? In what sense?

Per the Bureau of Labor Statistics News Release (March 30, 2016), the total number employed in the US for All Occupations was 137,896,660. Here is the breakdown of number employed in each occupational group:

1. Office and Administrative Support: 21,846,420
2. Sales and Related (including Retail): 14,462,120
3. Food Preparing and Serving: 12,577,080
4. Transportation and Material Moving: 9,536,610
5. Production: 9,073,290
6. Education and Training: 8,542,670
7. Healthcare Practitioners and Technical: 8,021,800
8. Food and Beverage Serving Workers: 7,054,960
9. Business and Financial Operations: 7,032,560
10. Management: 6,936,990
11. Construction and Extraction: 5,477,820
12. Installation, Maintenance and Repair; 5,374,150
13. Building and Grounds Maintenance: 4,407,050
14. Personal Care and Service: 4,307,500
15. Computer and Mathematical: 4,005,250
16. Healthcare Support: 3,989,910
17. Protective Service: 3,351,620
18. Cooks and Food Preparation Workers: 3,147,210
19. Architecture and Engineering: 2,475,390
20. Community and Social Service: 1,972,140
21. Arts, Design, Entertainment, Sports, and Media:1,843,600
22. Life, Physical, and Social Science: 1,146,110
23. Legal: 1,062,370
24. Farming, Fishing, and Forestry: 454,230

What I find interesting here is that administrative support jobs are by far the biggest occupational group. And yet for decades, prognosticators have been saying the computer will make office work near obsolete. So why are there more office jobs than ever? And what bearing does this have on the “robots will be taking your job soon’ argument?

For most Americans, a major contributor to wealth is home equity, which comprises about a quarter of the wealth of individuals 65 and older. Retirement accounts and mutual funds are also important sources of wealth.  According to the ICI Fact Book, an estimated 90 million individual investors owned mutual funds in 2014. These investors held 89 percent of total mutual fund assets, directly or through retirement plans. About 53.2 million households (43% of all households) owned mutual funds. Among households owning mutual funds, the median amount invested in mutual funds was $103,000. Most households that own mutual funds have moderate incomes – 91% below $200,000/year. Most investors are over 50 and a large majority (91%) is saving for retirement.

One reason the age profile of income and wealth matters is that a lot of proposed solutions to inequality focus on making “the rich” pay more in taxes. But consider: at age 65, life expectancy is about 20 years and uncompensated healthcare expenses will average $20,000 a year. That’s $400,000 total.

Except for homes, most assets can be readily turned into revenue streams at retirement. These include the value of bank accounts, bonds and securities, savings bonds, stocks and mutual funds, life insurance policies, IRAs and KEOGH accounts, defined contribution accounts, real estate holdings, and business equity.  Just 26% of Americans have at least $300,000 of such assets at or near retirement age. With an average life expectancy of about 20 years after 65, and assuming a retirement age of 65, $300,000 would translate to roughly $1700 extra a month. Perhaps enough for property taxes, home insurance, utilities, home repairs, and paying  the mortgage  – the latter still owed by  two-thirds of the 65 and older crowd.  Then Social Security would pay for remaining expenses. In theory.

Affluence is mostly a matter of age and education in the US. The median net worth (2011) of young adults (less than 35 years) is $6,676; for 65 to 69 year-olds, it’s $194,226; for 75 and older: $155,714. Basically, people start accumulating wealth in their late 30s and then slowly deplete it after retirement. As with wealth, so with income: the top 1%  for 25-29 year-olds starts at $140,010 a year; for 30-34 year-olds it’s $185,760; incrementally going up with each age group, ending with 55 and over: $331,590. And then, income plummets after retirement – and with income, wealth begins its slow drain.

These days it takes longer to accumulate wealth. By age of household head, younger and middle-aged households are comparatively poorer than they were 30 years ago. Older households are 40% wealthier. This reflects more difficult economic conditions for younger cohorts, as well as the fact that peak earnings occur later in life than they used to (especially for professionals).

As for education, the difference in median wealth between individuals with two-year and four-year degrees is almost $100K; likewise the difference between the latter and holders of graduate or professional degrees. A bachelor’s degree also confers a significant income advantage – 45% higher than possession of an associate’s degree.

Denmark’s generous safety net is made possible by high taxes – and not particularly progressive taxes at that.  Kicking in at incomes of roughly $6300/year, the lowest tax rate is 37.5%. The highest rate is 59%, starting at about $50,400/year. Counting all sources of taxation, taxes comprise 49% of GDP – the highest in Europe.

But then there’s the basic security of universal health care, paid parental leave, free college, and unemployment compensation for up to two years. The Danes are making a trade-off: in exchange for that basic security, their after-tax income is lower and the cost of living a lot higher than what we have in the US.  They live in smaller houses (half the size of US homes, on average) and have less stuff.

The Danes are what I’d call comfortable but not affluent. The American middle class has much more discretionary income than their Danish counterparts. Even with stagnating wages.

I think the Danish trade-off is worth it. Vibrant business sector, committed to the free market and free trade, balanced by high individual taxes and a basic security for everyone. Who needs big houses and big cars? Doesn’t help the soul and it’s not good for the planet.

Of course, Americans will never go for it. At least not in the near future.

For more:  http://www.dailyfinance.com/2014/03/26/would-americans-be-happier-if-u-s-were-more-like-denmark/

Denmark draws the lines differently. Pro-union doesn’t mean anti-business. Having a strong safety net doesn’t mean squeeze the rich.  Maybe it’s more accurate to say that the lines are not there to begin with- that the ideal of ending poverty, facilitating economic mobility, and making sure everyone has access to the basics – healthcare, education, and family services – doesn’t have to pit Most of Us against a Despised Other (or at least an Undeserving Other).  In Denmark, it’s more We’re All in This Together for the Long Haul.

Take unions and business: most workers belong to unions, but the unions are much less adversarial in Denmark than in the US.  Unions, employers and the government work together in the spirit of “flexicurity”.  Unions negotiate pay and working conditions, resolve disputes, and administer unemployment insurance programs. Employers pretty much have the ability to hire and fire at will, allowing them to flexibly respond to changes in production and market conditions. Corporate taxes are low (about 22%). Business regulation is minimal.

Thanks at least in part to Danish flexicurity, labor market participation in Denmark is considerably higher than the EU average (65% to 57%).  Young people in particular have an easier time finding jobs than in most other European countries. Employers are less afraid of taking risks on inexperienced workers, because they aren’t contractually bound to retain them if they prove unproductive or market conditions change. As a result, youth unemployment is low in Denmark:  just 10.3%, compared to a Euro area average of 22%.

In exchange for job security, workers get a more basic sense of security: the knowledge that if they get sick, lose their jobs, or have a child, the State is there to make sure they’ll be taken care of.

This is a continuation of the Denmark explorations. This time around, we’ll be checking out Denmark’s pension system.

Some basic information about Denmark’s public pension system, from Pensions at a Glance/2013 – OECD and G20 indicators, (hardly a ‘glance’ – the thing is 368 pages long!). Denmark has four types of government-funded or government-mandated pension programs:

Basic Pension Benefit: full basic pension amount is DKK 5713 per mo ($857), equivalent to around 17% of average earnings but a lot less for higher earners. (DKK = .15 US $)

Targeted Supplemental Pension Benefit: pension supplement is up to DKK 5933 ($890) per mo – for the poorest pensioners who have few other financial resources.

Occupational Pension Scheme: fully funded defined-contribution scheme (like 401Ks) agreed between the social partners. Coverage is almost universal. Contributions are typically between 10% and 17% of earnings.

The Other Defined Contribution Pension Scheme: statutory, fully funded, collective insurance based. Contributions are split, with two-thirds paid by the employer and one-third by the worker.

Taking the 4 types together, net earnings replacement rate for median earners in Denmark is 83%; in US, it’s 50% (but for US, that’s SS only).

Denmark’s pension system takes up 6.1% of GDP, compared to 7.8% OECD average and 6.8% of GDP in US. It is one of the most highly rated pension systems in the world.­ Denmark’s system is not currently is danger of going bankrupt (although low birth rates and aging of the population will likely require future adjustments for it to remain financially solvent).

One reason for the financial soundness of the Danish pension system is that except for the Basic benefit, which everyone receives (pretty small amount) and the Targeted benefit (which relatively few people receive), much of the system is paid through defined contributions, rather than “defined benefits”. Pension funds are also conservatively invested, primarily in safer bonds (80%, compared to just 20% in riskier stocks).

Bottom line: Denmark’s pension system is generous and well-run. It is financed through defined contributions and high taxes. There are trade-offs of course: Danes pay a lot to live in relatively comfort in old age.  So they have a lot less money to spend in the prime of life. Then again, most Danes can expect to live a decade or two after retirement. And who needs all that stuff anyway?