Lawrence Economics Blog

“Economics is what economists do”

As I was preparing for Econ 100 for next term, I came across a piece by Roger Backhouse and Steven Medema on the definition of economics. Or, to put it more bluntly, what exactly is economics anyway?

Backhouse and Medema run through a bunch of textbook descriptions of what dismal scientists spend their time thinking about, and offer up a few choice quotes. The first candidate is from the indefatigable Paul Krugman and Robin Wells from their intro textbook: “Economics is the study of economies, at both the level of individuals and of society as a whole.”

That seems pretty accurate, but I don’t think economics is nearly as exciting as they make it sound. ;-)

Here’s another from David Colander, a man who knows a thing or two about The Making of an Economist. He says “Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.”

Coordination, indeed. For us market types, scarce resources are generated and distributed via market forces (e.g., prices), and there are all sorts of “agents” running around maximizing this and that — utility, profit, market share, Facebook friends, etc…

Harvard’s Greg Mankiw simply says “Economics is the study of how society manages its scarce resources.” Pithy, to the point, possibly accurate, and consistent with what Robert Heilbronner tells us in The Worldly Philosophers. More on that later.

Or perhaps try the more pro-market friendly Gwartney and Stroup et al.: “[E]conomics is the study of human behavior, with a particular focus on human decision making.”

Couldn’t that describe psychology?

Scarcity, choices, allocation, behavior, decision making — not exactly narrowing down our subject here, are we?

So, for the punch line, here is the classic Jacob Viner quip, “Economics is what economists do.”

That’s it!

Thanks to Mr. T for the tip. You can read the full piece here.

And here is the citation: Roger E. Backhouse and Steven G. Medema. 2009. “Retrospectives: On the Definition of Economics.” Journal of Economic Perspectives, 23(1): 221–33.

Backhouse, by the way, is one of the co-authors of our ECON DS-391 and Econ 601 books. So we’ll be hearing more from him in the coming weeks.

“Get Her Something Expensive and Useless”

It’s that time of year where we bid you Happy Holidays from the Economics profession.

Up first, we have a truly heroic figure, Joel Waldfogel, author of Scroogeonomics.* I don’t know your preferences as well as you do, so whatever I give you is probably sub-optimal, unless you tell me exactly what you want. And even then, wouldn’t you rather just have the cash anyway? For those of you intermediate micro students, you know that kids prefer cash over any in-kind equivalent.

Kudos to Professor Waldfogel for willing to be “that guy.”

Speaking of Scrooge, was he really such a bad guy? Not so, says Steven Landsburg. Let’s give it up for our annual Scrooge endorsement from this classic Slate piece:

In this whole world, there is nobody more generous than the miser–the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer–because you produced a dollar’s worth of goods and didn’t consume them.

Ah, I just feel all warm and fuzzy inside.

Moving on to The Atlantic, where we have “The Behavioral Economist’s Guide to Buying Presents.” Now this is some truly indispensable advice. Like Waldfogel above, the money point is to just give money. But, for the true romantics who feel compelled to give a gift, the behavioralists recommend this:

Buying for a guy? Get him a gadget. Buying for a girl? Get her something expensive and useless.

The gadget I get.** The expensive and useless? That’s from Geoffrey Miller’s, The Mating Mind. Here’s a brief explanation of courtship:

The wastefulness of courtship is what makes it romantic. The wasteful dancing, the wasteful gift-giving, the wasteful conversation, the wasteful laughter, the wasteful foreplay, the wasteful adventures. From the viewpoint of “survival of the fittest” the waste looks mad and pointless and maladaptive… However, from the viewpoint of fitness indicator theory, this waste is the most efficient and reliable way to discover someone’s fitness. Where you see conspicuous waste in nature, sexual choice has often been at work.

This presents something of a conundrum because “expensive and useless” seems to be at odds with Waldfogel’s hyper-utilitarian cold, hard cash suggestion.

So if you want to hedge your bets, give her Euro!

…

* The book is a follow up to the classic, “The Deadweight Loss of Christmas.” Clearly, the book title Scroogonomics can be chalked up to the value-added of the publishing house.

**Conceptually, that is. I generally get ties and socks.

See Euro Future

Here’s Charlie Calomiris from back in 1999, predicting a bad end to the Euro.

I predict that the euro will be a weak currency (one that will not retain its value against the dollar), and that it will not be a permanent currency. Ultimately, the euro will most likely be remembered neither as a textbook example of the social gains of properly defining the optimal currency area nor as the harbinger of global exchange rate stability, but rather as an illustration of the importance of fiscal discipline for monetary credibility, and as a monetary example of the tragedy of the commons.

European union will likely strengthen the attraction of the dollar as a numeraire and a store of value. Countries outside of Europe will continue to peg their exchange rates to the dollar. And when the European Monetary Union ultimately collapses, it will itself provide a positive shock to the real dollar exchange rate that will hurt countries that have pegged to the dollar. All of this is unfortunate from the standpoint of global macroeconomic stability—an example of how political constraints that limit rational policy and encourage public profligacy make the global economy less stable than it otherwise would be.

I picked that up from Marginal Revolution, where Tyler Cowen points out that economists from Paul Krugman to Milton Friedman were pessimistic on the long-term prospects.

Here’s Freidman:

I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy. On purely theoretical grounds, it’s hard to believe that it’s going to be a stable system for a long time.

If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give
it time to develop its troubles.

The snake?

At any rate, Cowen’s point is that economists may have whiffed the financial collapse, but they seemed to hit the ball on the Euro.

Johnson on Stigler on Regulation

Simon Johnson is the co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, which we wrote about here. This week, Russ Roberts interviews Johnson on EconTalk, and a summary of the interview. Here’s a taste:

On Regulatory Capture: Prof. Johnson says he is a follower of George Stigler, who made the point that when you regulate industry, industry will attempt to capture the regulators. Bankers are able to capture the regulation and get themselves huge commissions to take on risk. We witnessed one of the most sophisticated episodes of regulatory capture in the history of humankind.

On who benefitted: The benefit of this kind of rent-seeking accrues to executives in the bank – and not to shareholders.

Interesting point, that we also brought up here.

Economics Department Read, Winter 2012

We have been sponsoring a reading group (DS-391) in the economics department over the past four terms, and we will continue that with two books during the winter term. If you have some spare time in the next five weeks, you might try getting a jump on these.

The first is Roger Backhouse and Brad Bateman’s Capitalist Revolutionary: John Maynard Keynes. The authors’ names might sound familiar from a couple of posts ago where I briefly discuss their op-ed in the New York Times about the need for economist as “worldly philosopher” rather than “dentists” (Keynes’ term) honing in on the intricacies of the little picture. Indeed, the book portrays Keynes both as a deep thinker and an accomplished technical theorist.

The second is Tyler Cowen’s brief yet epic e-book, The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better. This is one of the most thoroughly reviewed pieces I have ever seen, with scholars and bloggers and otherwise lining up to weigh in. There is plenty to talk about with this one.

Both books should be accessible to economics students at any level.

Black Friday View from Briggs 2nd

I just looked out my window and saw a flock of seagulls (no, not that Flock of Seagulls) antagonizing one of the resident bald eagles.

I guess this isn’t all that unusual from the seagulls. Did you know:

Herring gulls dive-bomb predatory birds at a steep angle from above and behind, as they make a piercing shriek – “kaiow!”.

Some gulls also defecate or even vomit on the predator for good measure.

My emphasis, as if any was needed. Ick.

Click the pic for the full story and a bigger picture.

Via MR.

The Economics of Black Friday

Is Black Friday a day to give thanks for low prices, or a symbol of the gross excesses of retail capitalism? Robert Frank discusses:

In recent years, large retail chains have been competing to be the first to open their doors on Black Friday. The race is driven by the theory that stores with the earliest start time capture the most buyers and make the most sales. For many years, stores opened at a reasonable hour. Then, some started opening at 5 a.m., prompting complaints from employees about having to go to sleep early on Thanksgiving and miss out on time with their families. But retailers ignored those complaints, because their earlier start time proved so successful in luring customers away from rival outlets.

Frank is in the “race to the bottom” crowd, and while even if the bottom is economically “efficient,” it seems to me that he would disagree with the distributional implications — low-income wage earners being exploited, crass consumerism running amok, dogs and cats living together, etc…

Champion of commercial culture, Tyler Cowen, counters:

This is portrayed as a zero-sum or negative-sum game, but I view the matter, at least in efficiency terms, more optimistically. The alternative to waiting in line and fighting the crush is to go shopping some other day, hardly a terrible fate. More analytically speaking, the average return in other endeavors limits how bad these rent-seeking games can get, otherwise just switch and stay home and read your blogs, as some of you perhaps are doing right now.

In fact it seems that early December has in general the cheapest prices of the year, not Black Friday.

Dare I suggest that some people like waiting in those lines with their thermos cups and stale bagels. You could try to argue they are “forced to do so,” to get the bargains, but in a reasonably competitive world each outlet will (roughly) try to maximize the consumer surplus from visiting the store, including the experience of waiting in line.

Whole thing here.

Contrary to popular belief, black Friday is not the day I turn in my grades. But now that the term is over, we will have some time to do some blogging!

The Future of College Admissions

Every year, thousands of students enroll at thousands of colleges in the US. Is the outcome of that process efficient? Or could students and colleges be matched in a way that makes everyone better off? Companies like ConnectEDU are building their business model on the answer being “Yes.” A recent article in the Washington Monthly ponders the future of the college admissions scene.

In 2009, the former Princeton University president William Bowen documented the pervasive problem of “under-matching” in higher education. Bowen examined a group of North Carolina high school students from across the income spectrum whose grades and SAT scores were good enough to get them into a top-tier university. Seventy-three percent of wealthy high performing students actually enrolled in such a university.

Only 41 percent of low-income high-performing students did the same. The under-matching rates for minority students and those whose parents never graduated from high school were similarly low. And under-matched students were significantly less likely to earn a college degree.

There are a number of reasons for this. Bad high schools usually lack the guidance counselors and visiting college recruiters that well-off students take for granted. Parents who haven’t been to college can’t use their experience to guide their children toward higher education. Plus, elite colleges are often very expensive and are becoming more so every year.

But there’s another culprit at work: the college admissions process itself. If you want to buy shares of stock, bid on antiques, search for a job, or look for Mr. Right in 2011, you will likely go to a marketplace driven by the electronic exchange of information. There will be quick, flexible transactions, broad access to buyers and sellers, and powerful algorithms that efficiently match supply and demand. If you are a student looking for a college or a college looking for a student, by contrast, you’re stuck with an archaic, over-complicated, under-managed system that still relies on things like bus trips to airport convention centers and the physical transmission of pieces of paper. That’s why under-matching is so pervasive. The higher education market only works for students who have the resources to overcome its terrible inefficiency. Everyone else is out of luck.

Though the article is a bit too long and meandering, it raises some very interesting questions, and it is not difficult to believe that the college admissions process is inefficient. How would it impact colleges if this process became much more efficient, and if information became much more easily available and usable? Would colleges become much more responsive to consumer needs?

The Washington Monthly also publishes rankings of colleges, based on three (equally weighted) criteria: “Social Mobility (recruiting and graduating low-income students), Research (producing cutting-edge scholarship and PhDs), and Service (encouraging students to give something back to their country).” Lawrence University comes in 99th overall (well below Beloit and Ripon), but ranks 46th in producing PhD’s (well ahead of Beloit and Ripon).

HT: Market Design

The Cartoon Road to Serfdom

Speaking of The Road to Serfdom, here is a handy link to the Mises Institute’s reprint of the “cartoon” guide to the Hayek classic.

Over the past four terms, we have focused on books that focus on the dynamics of the capitalist system. We started with Schumpeter’s biography and followed that up with Capitalism, Socialism, and Democracy. These really gave us a 10,000-foot view of where Schumpeter thought the system might head coming out of World War II. Schumpter seems sanguine about the “inevitability” of socialism, while Hayek gives us a much different, quite chilling vision of the meshing of politics and the economic system. Certainly, I would attribute part of this to Schumpeter and Hayek’s respective views of the importance of the price system — Schumpeter asserting that it is overplayed, whereas Hayek underscores its importance.

Next term, we will continue to sponsor an economics read, though our focus will likely shift to the future of the system coming out of the current crisis. I will be posting those books shortly in the event that you want to get a head start over break.

A brief stint for homo faber

The latest issue of The Economist looks at technocrats in charge:

EVEN before Plato conceived the philosopher-king, people yearned for clever, dispassionate and principled government. When the usual run of rulers proves cowardly, indecisive or discredited, turning to the wisdom and expertise of a technocrat, as both Italy and Greece have done in recent days, is particularly tempting.

Those of us who just finished reading The Road to Serfdom read those words and sense the cozy comfort of an argument close to our hearts. When the article goes on to say: “Crankishness aside, technocracy and autocracy have long been natural bedfellows,” we expect HAYEK to jump off the page any moment—he is lurking between the lines no more. But, curiously, this venerable British weekly ran an article on technocracy and autocracy without mentioning that most famous economist to stroll the halls of the London School of Economics.

Their conclusion? “History suggests that technocrats do best when blitzing the mess made by incompetent and squabbling politicians.” Perhaps the reason for the omission of Mr. Hayek was not so much a conscious decision as unfamiliarity. If a few others throw in a buck, I’m happy to do my part in sending The Economist a copy of TRtS. The Reader’s Digest version.

Early Holiday Book Recs

Ah, Winter Break is almost upon us, which means that it is almost time to get to my pile of books. I’m not sure what came over me, but I just went out and bought a whole bunch more that I can’t possibly get to.

Here’s the latest in the queue:

Roger E. Backhouse and Bradley W. Bateman Capitalist Revolutionary: John Maynard Keynes. I picked this one up after reading this New York Times piece where the authors argue that contemporary economists are lacking in the “worldly philosophers” department (see also the previous post).

Douglas W. Allen The Institutional Revolution: Measurement and the Economic Emergence of the Modern World. A perfect little something for the New Institutionalist that has everything. Allen is an expert on transaction cost economics, co-author of some great work on agriculture contracts, and one of the funnier economists you are likely to ever meet. I will bet dollars to donuts that the book contains at least one example that you’ll be dropping at your next mixer (From the publisher: “Allen provides readers with a fascinating explanation of the critical roles played by seemingly bizarre institutions, from dueling to the purchase of one’s rank in the British Army”). It says available December 1, but I got my copy in the mail today.

Eugene Fitzgerald, Andreas Wankerl, and Carl Schramm. Inside Real Innovation: How the Right Approach Can Move Ideas from R&D to Market – And Get the Economy Moving. Schramm is from Kauffman, one of our recent visitors to the innovation class touted this as a must read, and I hear rumors that this will rear its head in Econ 405 next term. A convincing trifecta!

Michael Lewis Boomerang: Travels in the New Third World. If you read this blog semi-regularly, you’ve probably seen something about Lewis’ new compilation of economic disaster tourism writing. I was going to recommend this as an e-book, but it has an unusually awesome dust jacket. Great for the plane.

Gretchen Morgenson and Joshua Rosner Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon. This was on my wish list and I no longer remember who tipped me off to it. Looks great, if a bit thick.

I have some course-related pieces that probably aren’t such fab holiday gift ideas, but I will get to them as I get to them.

Enjoy!

NPR Profiles Rand, Hayek, and Keynes

Following a couple of articles last week on how economists don’t do the “Big Think” anymore, NPR offers us up some stories on “thinkers who have had a lasting influence on economic policymakers.”

Who are these thinkers, you ask? Well, first up is Ayn Rand, the notable “objectivist” author of the classics The Fountainhead and Atlas Shrugged. Probably wouldn’t have been my first choice as a big economic thinker, but she is certainly still making headlines. Ouch.

Next up for the NPR listeners is Austrian school economist, Frederich Hayek. Hayek is a would-be macro rapper, market proponent, and author of The Road to Serfdom — this term’s group read. Is it ironic that National Public Radio is profiling him?

Finally, NPR gives us John Maynard Keynes himself, another would-be macro rapper. Keynes would no doubt agree that NPR is on to something with their profiles of influential economists:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

Keynes himself is hardly a defunct economist, his lasting influence prompted Richard Nixon’s lamentation, “We are all Keynsians now.” Indeed, the venerable General Theory of Employment, Interest, and Money spawned Keynsianism, New Keynsianism, Post Keynsianism, and a lot of other Keynsianisms. The links all seem good to me.

I’m giving this one the upstart “people you should know” tag.

So get to know them.

(Some) Harvard Econ Students Unhappy

The “Ec 10 Walkout” at Harvard has garnered some media attention—Ec 10 being the famous introductory economics course at Harvard, “taught” by Gregory Mankiw. Only about 10% of his class walked out, which comes out to be about 70 students. (Yes, that means that the intro econ lectures at Harvard have 700 students, and they see Mankiw about 5 times and from far away.) The revolution was, in fact, televised. When I was in 7th grade, we did something similar in math class, but nobody paid much attention. Probably because we didn’t have youtube.

NPR managed to find a freshman who went on the record with this statement: “I’m someone who lives below the poverty line, my family’s extremely poor. And having a class like this that promotes gaining at the expense of millions of people disturbs me and bothers me at my core.” A few more students made similar statements: “Their specific criticisms are that economics as taught in this class, formally called Economics 10, failed to prevent the financial crisis and does nothing to narrow the gap between rich and poor.” Read more. These quotes confirm that even at Harvard, one can apparently find students who are clueless about economics yet feel that they are in a strong position to criticize it. Mankiw’s blog has a post on the event, including the students’ open letter, and another post on the NPR interview with Mankiw on the subject. Finally, take a look at this defense of Ec 10 from a student.

Tweakers, not Inventors

A recent New Yorker piece by Malcolm Gladwell argues that Steve Jobs was a tweaker, not an inventor. He quotes a paper in which Meisenzahl and Mokyr make the argument that England took the lead during the industrial revolution partly because it had more “tweakers.” In explaining England’s success, they say people “who had the dexterity and competence to tweak, adapt, combine, improve, and debug existing ideas, build them according to specifications, but with the knowledge to add in what the blueprints left out were critical to the story.”

HT: Cheap Talk

The Long and Winding Road

As we continue On the Road with Hayek this term, we are faced with questions such as “what is capitalism?” and “what does it mean to have economic freedom?” These are questions that we tend not to get at when we are teaching the nuts and bolts of supply & demand or getting to the bottom of a subgame perfect equilibrium. But a nice piece in the New York Times argues that maybe we should pay more attention to the former than the latter. It is on the role of economists and economics in the face of radical economic and social change:

Perhaps the protesters occupying Wall Street are not so misguided after all. The questions they raise — how do we deal with the local costs of global downturns? Is it fair that those who suffer the most from such downturns have their safety net cut, while those who generate the volatility are bailed out by the government? — are the same ones that a big-picture economic vision should address. If economists want to help create a better world, they first have to ask, and try to answer, the hard questions that can shape a new vision of capitalism’s potential.

The whole article is well worth the read and also worth thinking about as we continue our lifelong quest in developing an economics ciricullum.

Also fundamental seems to be this piece by Luigi Zingales on meritocracy and democracy.

[M]eritocracy is a difficult principle to sustain in a democracy. Any system that allocates rewards on the basis of merit inevitably gives higher compensation to the few, leaving the majority potentially envious. In a democracy, the majority generally rules. Why should that majority agree to grant a minority disproportionate power and rewards?

… Even the most meritocratic people, then, can vote against meritocracy when it damages their own prospects. No wonder meritocracy is so politically fragile.

However, two factors help sustain a meritocratic system in the face of this challenge: a culture that considers it legitimate to reward effort with higher compensation; and benefits large enough, and spread widely enough through the system, to counter popular discontent with inequality.

Certainly, we can see rather vocal and enthusiastic segments of our population questioning both of these assumptions. What are the implications for American-style capitalism?

Daylight… Savings?

These days we don’t set back clocks very much any more, but instead our cell phones tell us that it must be the end of daylight saving time (although our cell phones do set us back quite a bit).

Dali clocks — Dali: The Persistence of Memory

The idea of daylight saving is famously attributed to Benjamin Franklin, but it was first introduced only about a hundred years ago. It has been policy in most of the US for about 50 years.

But does it really save energy? Surprisingly little research seems to have been done about that question. A 2008 NBER working paper considers the issue, taking advantage of a “natural experiment” in Indiana, where some counties used DST while others did not until 2006, when DST was sanctioned for all of the state. (Since it is often not possible to create lab experiments to resolve empirical questions in economics, we must rely on so-called “natural experiments” and a mysterious practice called “econometrics.”) Here is what the authors, Matthew J. Kotchen and Laura E. Grant, find:

The history of DST has been long and controversial. Throughout its implementation during World Wars I and II, the oil embargo of the 1970s, more consistent practice today, and recent extensions, the primary rationale for DST has always been the promotion of energy conservation. Nevertheless, there is surprisingly little evidence that DST actually saves energy. This paper takes advantage of a unique natural experiment in the state of Indiana to provide the first empirical estimates of DST effects on electricity consumption in the United States since the mid-1970s. The results are also the first-ever empirical estimates of DST’s overall effect.

Our main finding is that—contrary to the policy’s intent—DST results is an overall increase in residential electricity demand. Estimates of the overall increase in consumption are approximately 1 percent and highly statistically significant. We also find that the effect is not constant throughout the DST period: there is some evidence for an increase in electricity demand at the spring transition into DST, but the real increases come in the fall when DST appears to increase consumption between 2 and 4 percent. These findings are generally consistent with simulation results that point to a tradeoff between reducing demand for lighting and increasing demand for heating and cooling. According to the dates of DST practice prior to 2007, we estimate a cost to Indiana households of $9 million per year in increased electricity bills. Estimates of the social costs due to increased pollution emissions range from $1.7 to $5.5 million per year.

Addendum: Watch your step!

No Nukes is Good Nukes? Or, No Nukes is Bad Air?

The first Economics Colloquium is November 9 at 4:30 in Steitz 102. Here are the details:

No Nukes is Good Nukes? Or, No Nukes is Bad Air?

Paul S. Fischbeck

Carnegie Mellon University

What if the U.S. phased out its nuclear power plants? Where would the power come from? Would the reliability of the electricity system suffer? What about the effects on emissions of carbon dioxide and criteria pollutants?

Paul Fischbeck provides his approach to addressing these questions, along with some provocative results, in the inaugural lecture of a new Economics Colloquium series. He is professor in both the Departments of Engineering & Public Policy and Social & Decision Sciences at Carnegie Mellon, and an expert on quantitative risk assessment and the treatment of uncertainty.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Wednesday, November 9

Steitz Hall 102

4:30 p.m.

Jim Lyon and the World of Money and Banking

Thursday, you will have two opportunities to engage with Jim Lyon, Lawrence alum and First Vice President of the Federal Reserve Bank of Minneapolis. He will be discussing “Too Big to Fail” and the Dodd-Frank Act response at 9:00 in Money and Monetary Policy (Briggs 225). He also will chair a mock Federal Open Market Committee meeting in which students in the course will represent members of the Board of Governors and Presidents of the 12 district Federal Reserve Banks. You are welcome to join us for either part of the class.

At 4:30, we will have an Econ Tea with Mr. Lyon as well. This will be an open and free-wheeling session for which the topic will be “Everything you always wanted to know about money and banking and ARE NOT afraid to ask.” Come for the discussion or just come for the cookies and tea.

Income Inequality Dynamics Matter

In a post two days ago, I highlighted the CBO report on the change in income inequality in the United States between 1979 and 2007. The last sentence of that blogposting opines that the households represented in each quintile change over time; therefore, it’s not necessarily those who were in the top 1% in 1979 who made the massive gains in share of income and remained in the top 1% in 2007.

A recent Federal Reserve Bank of Minneapolis report highlights the dynamics of household movement across income quintiles during the 2001 to 2007 period. The chart below shows that 44% of those in the bottom bracket in 2001 escaped to higher brackets by 2007 and that 34% of those in the highest quintile fell to at least the second quintile. Longitudinal studies of particular households are most useful if we wish to understand what has happened to the distribution of household incomes over time. The CBO study does not address the question, but the Panel Study of Income Dynamics selects a relative short and volatile period for its reference points.

How does this all matter? It matters in that policy makers respond to such information to reshape both the regulatory structure and income tax policies. Given budgetary impasses that have characterized the past year, our legislators have not been able to reach any sort of consensus on how to do three things 1) ensure that the tax system creates appropriate incentives for generating growth, 2) put the US budgetary future on a sustainable path, and 3) create an efficient and equitable tax structure. Will we again fail to take the opportunity to reach such desiderata? What do you think?

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