Wednesday, October 29, 2014

Values: are you truly living yours?

Source: Pamela Slim
It is hard to escape the inequality so visible in San Francisco. Walk down one side of Fillmore Street and you are greeted by row upon row of designer labels. Walk down the other side and you are greeted by the down and outs. The vast divide captured in less than a mile got me thinking. Have we each created two different worlds in which to live in? Let me explain.

We have a deep set of values that we are proud of. These include fairness, justice, empathy, generosity, judgement and curiosity about the unknown. We cultivate these within ourselves and support our family and friends in doing the same. Our homes are filled with love and warmth. They are well-maintained and welcoming. We encourage our children to speak their minds but also to listen carefully. We ensure that they share with those who live in and enter our homes. We build relationships with our neighbours and look after each other in times of need.

But here's the confusing part. We are not inherently self-interested, yet support a world that rewards self-interest. We are fair by nature, yet allow an economy to exist that distributes income and opportunity unequally. We enjoy forming balanced judgments based on reasoned arguments, yet accept one-sided rhetoric from politicians and businesses. We empathise with the suffering of those nearest to us but easily walk past a homeless person on the street. We care for plants and animals at home, yet consume goods that are harmful to the planet or involve animal cruelty.

How can we simultaneously operate in one circle for our friends and family and an entirely different circle for our fellow humankind? Does this simple division drive the outcomes for society that we most want to avoid - income inequality, poverty, environmental degradation, political stasis? Perhaps it does. We divide our world into things we think we can control and those that we think we can't. But the outer circle will eventually creep up on the inner circle. We suffer the consequences of inaction.

It doesn't have to be like this. We can be proactive and create change for everyone. Gandhi said "whenever you are in doubt or when the self becomes too much with you...recall the face of the poorest and the weakest man whom you may have seen and ask yourself if the step you contemplate is going to be of any use to him." If we identify our core set of values - fairness, justice, equality, sustainability - and apply them to every action that we take, then we can shift these circles so that they cross. In time, they might even merge. The private demands that we have would be equal to the social demands. Clean air. Decent pay for a decent day's work. Tax justice. Effective social security support. The way to achieve change is to truly live our values. 

Tuesday, October 21, 2014

We all make bad choices

We all make bad choices. We are impatient in the face of saving money. We buy items which we know will come down in price in a future sale, but that we must have now. We procrastinate as deadlines loom. We check Facebook and Twitter instead of getting on with the job at hand. We see tomorrow as the time for reform. After all, that's when our diet will begin.

We all have the ability to make worse choices. When we are stressed or anxious, chemicals are released into our brain that diminish our capacity to think. We react on impulse rather than with rationality, using the same techniques our ancestors used when decided to fight or take flight, but without the corresponding danger.

In making better choices, we often need the help of outside forces. To improve our incentive to save towards retirement, our employer matches any contribution that we make (up to a certain level). To help us make better food choices, we sign up to programs that provide menus, calorie counters and even ready-prepared meals to our doors.

Some people just don't have that kind of help. A lot of employers in low-wage industries do not offer benefits like pension plans. Working two jobs because one minimum wage job doesn't pay enough means not having the time to think beyond bills to health or well-being. Tax breaks on savings aren't worthwhile because wages are so low. The mental burden of being poor makes it harder to make good decisions (it is estimated to be the equivalent of losing 13 IQ points). So a bad financial choice for some might mean having to skip a dinner out. A bad financial choice for others might mean skipping dinner altogether.

But here's the punchline: tomorrow looks the same... for everyone. That's why it's hard to change. We don't expect our apartment to disappear overnight. We don't expect our employer to fold. We don't expect our family to disintegrate. And so it is with those living on the edge. If you don't expect to have any more time tomorrow than you did today, surviving on convenience foods makes sense. If you don't expect to come into money in order to afford to go back to school, sticking to the job(s) at hand seems like the only option. Our best guess of what will happen in the future is based on our experience now. And if today is not filled with hope, then there is no room for change tomorrow.

Tuesday, October 14, 2014

The 'Force of Philanthropy

The wealthiest 400 Americans are estimated to be worth over $2 trillion. That's as much wealth as the bottom 50 per cent of American families combined. Redistribution of this wealth has the potential to transform society for the better. Welcome to the "Golden Age" of philanthropy.

In 2010, a "Giving Pledge" was announced, where billionaires agreed to give away one half of their wealth to charitable causes. Its major proponents were Bill and Melinda Gates, and Warren Buffett, three of the richest individuals in the world. By 2014, 127 signatories had pledged more than $0.5 trillion. To those billionaires who did not sign up (and were not actively involved in philanthropy), Warren Buffett wryly said, "maybe I should write a book on how to get by on $500 million. Because apparently there's a lot of people that don't really know how to do it".

Any initiative of this scale, and involving such an exclusive club, is open to criticism. There were those that pointed out that the limit of one half of wealth was chosen because of the tax deductions it offered. There were those who said that the pledge enabled billionaires to donate to private family-run foundations that were opaque and were slow to deploy funds. And because the US relies more heavily on philanthropy to support social problems than Europe, there were those who worried that large-scale donations blurred the line between private and political interests. It simply made already powerful business people even more powerful.

At a conference last week on business ethics hosted by Claremont Lincoln University, I asked why billionaires were waiting until they gained membership to this club in order to donate? What if philanthropy was built into the culture of business to begin with? This is what the current generation joining the workplace - the Millennials - are demanding. They want to work for companies with a conscience. By 2020, Millennials will make up 1 in 3 Americans. By 2025, they will account for three-quarters of the labour force (Winograd and Hais, 2014). They matter.

Nowhere is this more relevant than in San Francisco, where technology has created both winners and losers (see this great illustration by journalist and illustrator, Susie Cagle, for the facts). There are some signs that things are changing. Salesforce, a cloud computing company, operates a 1:1:1 model of philanthropy. 1% of its equity, 1% of its product and 1% of employee time are donated to charitable causes. So far, the company has given $68 million and individual employees have provided 680,000 hours in community service. This includes supporting skill development, like coding. At AirBnB, employees put their technological know-how towards solving social problems. In 2011, its engineers matched hosts who wanted to donate their places with those needing shelter after Hurricane Sandy. Both firms have seen rapid growth in market share and sales. More companies should follow such examples. Profit and philanthropy can go hand in hand. Social problems don't wait for tomorrow. Neither should philanthropy.  

Tuesday, September 23, 2014

Why don't we care about the poor?

Source: US Census Bureau, 2014.
Last week saw the release of the annual US poverty and income statistics.  On the face of it, they make for pretty terrible reading. The top fifth of the income distribution held nearly 50 per cent of all income, the bottom fifth just over 3 per cent (Figure 1b). If income was equally shared out across the population, the top fifth would only hold 20 per cent. A longer sweep of history shows how everyone except the top has lost out over the past 40 years, with only the income share of the top growing (Figure 1a).

It's a pretty lonely place down there at the bottom. 15 per cent of Americans are in poverty*. Many more are in near-poverty, struggling on the edge of hardship. Single mums and children fare the worst. Young children are five times as likely to be in poverty if they live in a family headed by a single mother compared to married parents. And despite a small tick down in poverty rates for children and those of Hispanic descent, poverty remains stubbornly high.

You'd be forgiven for blinking and missing this publication. The data are only published once a year and are already a year out of date. They don't move markets or grab headlines.  In fact, those that get most impassioned about the data are people already working at the coal face of poverty alleviation, who are able to demonstrate through statistics what they already know through experience.

Why don't these facts and figures about the harsh reality of life in America grab more attention?

Is it because the average person is also under pressure?  In 2013, the median household was 8% poorer than it was in 2007, just before the financial crisis began. That means that even though we might have made up for all the jobs that we shed in the Great Recession, we haven't made up for all the money we lost.  If the average family is worse-off, and are themselves struggling to stay afloat, they probably don't have the time, or money, to worry about the very poor.

Or is it because poverty's very existence goes against the ideal of the American dream? That if we really believe what they show, then we have to accept that opportunity is not equal for all. That hard work and determination alone are not enough to move out of hardship. By accepting poverty, we accept that there are barriers in-built into our institutional architecture that mean non-Whites are more likely to be born into poverty, live in a deprived area, eat poor-quality food, attend poor-quality schools, drop out of college (if indeed they apply), hold a minimum wage job, not have access to childcare, suffer from poor health outcomes and die early.

Perhaps these reasons are two sides of the same policy coin. If ordinary people are struggling to stay afloat, and those at the very bottom are sinking, then only active government policy can generate a tide that will lift all boats. An increase in the minimum wage, for example, would benefit the majority of people living in poverty but it would also create a corresponding increase in pay further up to maintain pay differentials. A concerted effort to improve the quality of K-12 education would benefit those who in poverty who are most likely to fall behind, as well as creating positive spillovers to all students within that learning environment. Those in poverty may be in the minority but solutions to their problems would definitely benefit the majority.

*According to a more comprehensive measure, the supplementary poverty measure, poverty rates are higher still. The 2013 estimate will be published later this year.

Tuesday, September 16, 2014


Source: CIA World Factbook (life expectancy) and
Wilkinson and Pickett, 2009 (income inequality) 
Higher inequality means poorer health outcomes. The US is a case in point. It has the highest level of income inequality in the industrialised world. And at birth, Americans can typically expect to live shorter lives - around 79 years compared to 82 years in Switzerland (Figure 1) and nearly 90 years in Monaco (not shown in Figure 1). So why is inequality associated with adverse health?

In health, it's all about hierarchies, whether by income, education, social status or race. Those higher up the hierarchy report more favourable health outcomes than those lower down. Even those at the very top report better health than people just a notch below them. There is a 'gradient' effect of your position in society on your health (Adler et al, 1994;  Marmot et al, 1991).

Towards the middle and top of the income distribution, this is attributed to a 'keeping up with the Jones'' mentality. People are under pressure to compete with each other in jobs, wealth and possessions. These behavioural factors cause stress and stress-related illness.    

Towards the bottom, this is attributed to the more straightforward relationship between absolute deprivation and health. Material factors matter. The conditions of modern-day poverty in the US - working two jobs to make ends meet, living in over-crowded accommodation, living in neighbourhoods with few healthy eating options, low probability of having health insurance - all contribute to poor health outcomes. This becomes self-reinforcing for today's working families. Those who suffer from poor health are less likely to be able to hold down a long-term job. It also impacts on tomorrow's workforce. Children born into deprivation are more likely to suffer short and long-term health problems like obesity and asthma.

Healthcare reform will go some way to fixing these problems for the poor and uninsured. By opening up the market for healthcare, expanding government-funded medical programs and subsidising insurance premiums, coverage has already ticked up. The hope is that as more people sign up for medical insurance, they will be able to access timely and cost-effective care [a future blog will provide critique of the US healthcare system].

But tackling the hierarchies that generate unequal health outcomes requires reform of a wider set of institutions. That is because health is simply a window into the world of inequality. We need to flatten structures elsewhere. That might be in our schools and universities, where we need to ensure equality of opportunity. That might also be in our workplaces, where we need to ensure fair pay and progression. That might be in our neighbourhoods, where we lean against the creation of wealthy and less wealthy clusters. All of these actions would help break down the hierarchies that create inequality. Fixing health is only the first step.

Tuesday, September 9, 2014

An economy that works together, stays together

Source: Steve Breen / Creators Syndicate
The US economy is experiencing its slowest recovery in 70 years. We just can’t seem to give the economy the kick-start it needs. Why? Because we are held back by inequality. Only by tackling inequality head-on can we secure the sustained economic recovery that we are looking for.

Inequality sends a signal about the economy’s potential to grow today. Income among the poorest can be stagnant if people have given up looking for a job because opportunities are so scarce. The recent fall in US unemployment masks record falls in the participation rate, the number of people actually looking for a job. Fewer people in the labour force leads to lower per head growth rates and lower social cohesion. We are wasting our best resource – people. 

Source: Chan Lowe / Tribute Content Agency
Inequality also matters for the economy’s growth potential tomorrow. Richer families can afford to spend more time with their children, investing in their learning and development. Poorer families, who are more likely to work longer hours in minimum wage jobs, simply don’t have the time. But if you think that talent is randomly distributed, then this means that many children's potential will be left untapped. These young people are also more likely to drop out of high school or college, either because of cost or because they simply don't believe that people like them can succeed. This impacts on their ability to secure a job and makes it more likely that they will also fall on hard times.  

What can be done? If inequality is defined as a gap, then let’s build bridges that enable people to close this divide. Raising the minimum wage would enable everyone to earn a basic income. On-the-job training would improve career progression and lifetime income for those in work, and back-to-work training would improve job prospects for those out of work. A more progressive tax and social security system would provide much-needed resources to low-income families to invest in themselves. 

None of these policies constitute a hand-out. Raising the wage, for example, would actually increase tax receipts and reduce welfare expenditure as fewer people require income support. All of these policies can help children as much as adults. For example, women who joined the workforce following welfare reform in the UK spent the extra income earned on books and activities for their children. And each one would increase the productive potential of the economy. An economy that can produce more is likely to grow.  

Tuesday, September 2, 2014

Let's talk about tax, baby

Tax has got everybody talking. Warren Buffett famously declared that it was not right that he and other billionaires paid next to no tax. President Obama has since introduced changes to reduce taxes for the middle class and increase taxes for high earners. But not all of these have been successfully passed. So what is to be done with a system that appears to perpetuate, rather than ameliorate, inequality? Let's start with a little myth-busting.

Myth 1 – The richest Americans pay the most tax

Source: Citizens for Tax Justice, 2013.
False! It is true that the richest Americans, those in the top 10% of the income distribution, pay around 70% of all tax. But as a share of income, their tax burden is much lower. In fact, the share of tax paid by each income group is broadly similar to their share of income (Figure 1). In other words, the tax system does very little in closing the gap between the rich and the poor. It is only mildly progressive.

Some taxes explicitly benefit those on higher incomes. The most obvious is capital gains. The majority of US assets – houses, factories, stocks and shares – are held by the top half of the income distribution. Because of the level that capital gains tax is set, when these assets are sold at a profit, owners can end up paying a lower effective tax rate than low-income people who pay only wage and consumption taxes. So the rich move even further away from the poor.

Myth 2 – The US tax system unfairly penalises corporates

False! It is true that the US has the highest corporate tax rate across advanced economies - 39.1% compared to an average of 25.1%. However, corporate income tax raised is only 2% of GDP, much lower than in other countries. Why? Because corporations take advantage of tax loopholes to locate their headquarters overseas or attribute income to overseas sources, benefiting from lower tax rates. In allowing loopholes, the government penalises its own bottom line, not that of the corporates.

Myth 3 – The US tax system is supporting sustainable fiscal finances

False! Here’s where the debate gets interesting. The Congressional Budget Office says that US government finances now look in pretty decent shape over the next decade. They measure this by looking at the size of debt relative to national income, an affordability ratio. Once the economy has fully recovered and unemployment has fallen further, the deficit should be manageable, as long as the government sticks to agreed spending caps. 

Why should we be worried about this? Some highly-regarded economists, like Bob Gordon, are arguing that the US might be growing at a permanently slower rate. The economy won't recover in the way that we think. In part, this is because people are dropping out of the labour force (either because they cannot get a job or because they have reached retirement age).  It is also because the majority of income is tied up in the hands of the rich who save rather than spend (see previous blog). This means lower national income, lower tax revenues and a higher government debt ratio. Reforming the tax system today would allow the government to maximise its revenue, in preparation for a risky tomorrow. Part of this money could be spent on re-engaging those who have left the workforce, and who are more likely to be in poverty. 

More on that, next week.

Tuesday, August 19, 2014

To tip or not to tip, that SHOULD BE the question

Tipped workers are more than twice as likely to be in poverty as the average worker. Yet tipping remains an accepted norm in America because people believe that tips reward hard work. Don't they? 

It turns out that tipping is only weakly correlated with good service. Michael Lynn has shown that it is more strongly associated with social norms and the appearance of the server themselves. White, 30-something, blonde, females receive the highest tips. Black people are less likely to both give and receive tips. So the likelihood of receiving a tip is more or less out of a server's hands, even though servers believe that better service is rewarded with higher tips. 

Tipping can also be confusing and uncomfortable. Tourists in America are often puzzled about how much to tip. Stories are told of patrons being chased out of restaurants by servers who were unsatisfied with their tip, claiming that they needed the money to survive. The obligation falls to the customer to pay the server enough.

Why are tips so important to the server? Because their base wage rate ($2.13 an hour, unchanged for 20 years) is set assuming that tips will be received. In theory, tipped workers should take home a minimum wage ($7.25) because employers are obliged to make up any difference between base wage plus tips and the minimum wage. In practice, the process appears complicated and reliant on employers acting promptly to pay the difference in the two, without error.

Source: Council of Economic Advisers available here.
Occupations shown are predominantly tipped.
But even the minimum wage ($7.25 an hour) is too low to meet a basic standard of living, as previous blogs have argued. So if a server wishes to earn above this level, the only way that they can do so is to earn tips to take their total wages over and above the minimum wage. But tips are irregular and never guaranteed. As a result, the median tipped wage ($10.64) is much lower than the median across all wages ($17.12) (Chart 1, left-hand diamonds). Tipping isn't working as a way to increase income. In poorer areas, where income of the clientele is itself low, tipped workers are even less likely to earn a decent amount.  

In addition, tipped jobs attract more women than men, exposing them to the irregularity of income streams that tipped work brings. Nearly three-quarters of tipped workers are women, even though they account for just under half of total employment (Chart 1, left-hand bars). Women may be attracted to these jobs because they offer flexible hours that allow them to work around childcare. But the low-paid nature of this work makes it more likely that women, particularly single mothers, will find themselves in poverty.

Given how inefficient, confusing and poverty-creating tipping can be, why not eliminate the practice altogether? Some restaurants have already instigated such a practice. Examples include increasing base salaries and making clear that tips are optional, or adding a service charge to all tables and taking the decision out of the customer's hands altogether. Bringing tipped workers onto the minimum wage would eliminate one obstacle in the path to ensuring better pay. The next would be to secure a substantial wage increase for all low-paid workers. In the meantime, customers can revert to tipping because they want to, not because they have to.  

Monday, August 11, 2014

I think, therefore I learn

Source: US Census Bureau
Minorities in the US have a much higher chance of living in poverty than Whites. This has not changed materially for 40 years (Figure 1). In other words, poverty persists.

To tackle the inequality debate head on, we need to address this racial divide, starting by shifting the mindset of minority children themselves. Children show a strong understanding of racial stereotypes from an early age. By 3, they are aware of ethnicity and gender. By 6, they begin to infer beliefs held by an individual. By 10, they are able to relate these beliefs to a more broadly-held stereotype (McKown and Weinstein, 2003). 
These stereotypes become self-fulfilling.

"Stereotype threat", as this is known, is a belief that an outcome is pre-determined by the student's background. Experiments have shown that reminding children that they are black before they sit a test reduces their subsequent score. The same is true for females and other minorities. It is no wonder then that Black and Hispanic students are more likely to drop out of high school, despite the overall improvement to completion rates (Figure 2). They think they are going to perform badly. Therefore, they do. 

Source: US Department of Commerce, Census Bureau,
Current Population Survey (CPS)
But children can be persuaded to change perceptions about themselves. This comes from a realisation that intrinsic ability is not fixed or pre-determined by their ethnic background. For example, middle-school minority students who were encouraged to believe that knowledge and intelligence are malleable - that they can be grown over time - showed an improvement in test scores (Good, Aronson and Inzlicht, 2003). First-year college students who received letters from older students about their initial struggles and the way in which they overcame them, in turn were less likely to fall behind. 

These interventions are not costly. They can be carried out within the school or college gates, by teachers or older students (as David Yeager at the University of Texas has shown). But they are exceptionally powerful. By breaking the perceived link between background and intelligence, it is more likely that minority groups will do better at school and develop the emotional and psychological tools they need to succeed in the workplace. In time, this could go a long way in breaking the inter-generational persistence of poverty. 

Tuesday, August 5, 2014

The Robin Hood method of tax and redistribution

Source: Spark Studio via Getty Images
Robin Hood famously took from the rich to give (back) to the poor, to the despair of the Sheriff of Nottingham. But could taxing high-earners actually increase economic well-being and decrease income inequality simultaneously? Could Robin Hood have been right? 

Economic theory tells us that our appetite is satiable. The first slice of pizza when you’re hungry is delicious but the fourth just gives you a stomach ache. And so it is with money. The marginal utility of money – the additional “happiness” we feel from an extra $1 in our pockets – falls as the total amount of money we have rises. $1 to the richest person means much less than $1 to the poorest. In fact, a 2010 study by Daniel Kahneman and Angus Deaton estimated that the average person requires around $75,000 to be happy. Additional income does not add to their emotional well-being.

Economic theory also tells us that those on lower incomes spend more of every $1 they earn than the rich. Their marginal propensity to consume is higher. All families need to meet basic needs. But for the poor, this takes up a higher fraction (if not all) of their income. This drives demand for goods and services. The rich, meanwhile, have a higher propensity to save.

Combining these two observations implies that taxing those on the higher incomes – say above $75,000 – and redistributing to those on the lowest could actually improve overall well-being. If the evidence is to be believed, those on high incomes would not be made worse-off.  And those on the lowest incomes would be made better-off.  

How might this redistribution occur, in a way that does not disincentive those on low incomes from working? One way is to make use of the negative income tax built into our system. Everyone who works has a tax-free allowance, the amount they can earn before they start paying income tax. But many people are unable to work sufficient hours or earn enough to meet their income tax threshold, so part of their benefit is unused. An income transfer could address this gap provided the person is working (the Earned Income Tax Credit effectively does this in the US on a smaller scale).

Opponents of higher taxes argue that those with a higher propensity to earn will have a lower incentive to work or invest in high-return activities because any income would be taxed away. As a result, economic growth would slow and we would all be worse-off. But a report by the Congressional Research Service, which provides unbiased research for the US Congress, found that there is little evidence of a relationship between income tax and hours, savings or investment. Furthermore, the IMF has demonstrated that lower inequality achieved through redistribution can in most cases produce more stable, durable growth rates. That is likely to be because it enables more of the population to participate fully in society. And neither Robin Hood nor the Sheriff could have argued that stable and durable growth was a bad thing.*

Tuesday, July 22, 2014

Subsidise fruit not fries: addressing food insecurity in America

1 in 6 American families are food insecure. Put simply, they are going hungry.

The Federal government has relied on food assistance programs to meet the needs of the poorest families. Last year, it spent $80 billion on its Supplemental Nutritional Assistance Program alone. But budgets have been cut, reducing the amount of money in people's pockets. Reliance on non-profit food banks has increased sharply but they are unable to provide nutritionally-balanced food, like fruit and vegetables, because they are perishable.

In addition, hunger is no longer confined to the poorest or those who are unemployed. Two-thirds of food-insecure families with children have at least one adult in work. The problem, once again, is that wages have failed to keep up with the rising cost of living. After rent, bills and other necessities have been paid, there is often little left over for food.

The consequences of food insecurity are greatest for children, because health problems that set in early on are difficult to reverse. In areas where money is tight, the demand for luxuries falls, reducing the supply of supermarkets and increasing the prevalence of cheap fast-food restaurants. For this reason and others, hungry children are at a higher risk of obesity. Over a lifetime, child obesity costs $19,000 per child in medical costs ($14 billion for all current 10 year olds). Worse, many will have shorter lives than their parents.

Obesity, caused by food insecurity, has the potential to reduce the capacity of the future US workforce exactly at the time when a larger, more skilled workforce is required to support an ageing population. This is a multi-faceted problem, that captures costs, family income, lifestyle and parental education. But here are just two solutions that would tackle it at source.

To deal with rising costs, subsidise the production of fruit and vegetables. Currently, agricultural subsidies for US corn production end up inadvertently reducing the price of corn-based products like fizzy drinks or corn-fed meat, which results in cheap meat and snacks in our shops. So an adjustment to expenditure (not new money) could change consumption behaviour.

To deal with falling real incomes, raise wages. Company profitability would be supported because the workforce can afford a healthier lifestyle and are less likely to take sick days. Government finances would be boosted because higher wages lead to higher tax contributions and falling levels of income support. And tomorrow's growth is secured because higher take-home pay increases investment into children, reducing the future burden, and increasing the future capacity, of tomorrow's workforce.

Tuesday, July 15, 2014

Brazil's World Cup still half empty

Source:  Fédération Internationale de Football Association
As many on social media have pointed out, the World Cup 2014 emblem looked like a man hanging his head in shame (Figure 1).*

Not the shame that came from losing 7-1 to Germany (though that was pretty painful). The shame that came from knowing that hosting the World Cup reportedly cost the country $4.2 billion but more than half of Brazilians believed it would hurt the economy. That 50 per cent of Brazilians thought now was a bad time to find employment despite the government saying that the World Cup would create 710,000 jobs. That the number of poor people living in Brazil could have filled its World Cup stadiums 30 times over.**

After the dust settles, and the spotlight dims, the facts will re-emerge. The International Monetary Fund forecasts that the Brazilian economy will grow by 1.8 per cent this year, compared to a 10-year average of 3.5 per cent, because of weakness in manufacturing, consumer spending and export performance. Others are more bearish still. The central bank has raised interest rates in recent months, because of above-target inflation, leading to worries that economic growth will be choked off. Social discontent led to a number of high-profile protests in the months leading up to the World Cup.   

Brazil appears to have lost grip on the solid macroeconomic framework it established over the last decade. This platform generated high single-digit growth rates, funded active redistribution policies and contributed to a rapid fall in inequality. Between 2004 and 2012, poverty rates more than halved from 22 per cent to 9 per cent. Conditional cash transfer programs that provided monetary rewards in exchange for attendance at school and health centres improved outcomes for those on the lowest incomes. Between 1999 and 2009, the increase in per capita income of the poorest 10 per cent was nearly four times that of the richest 10 per cent. Out of a general rise in income, grew a substantial middle class.

This middle class is now demanding action. Brazil needs to take this opportunity to re-establish its credibility and tackle the hard problems that are preventing it from achieving sustainable and inclusive growth. It needs to push forward on much-needed reforms to infrastructure that would reduce local bottlenecks and improve the quality, not just quantity, of public education and healthcare. It needs to tackle wasteful corruption, which is estimated to cost between 1.4 and 2.3 per cent of GDP a year, and enables favours to the 'haves' at the expense of the 'have-nots'.         

Brazil will play host to the Olympics in Summer 2016. It is likely that between now and then we will see more protests from a discontented population. But, if the country undertakes substantive reform, we may also see a very different country when the spotlight returns.

* The green hands form the shape of a head, which is held in the yellow hand
** Author's calculation based on data from the World Bank and the Stadium Guide

Friday, July 4, 2014

Righting a Wrong on the Fourth of July. Period.

On this Fourth of July, when the country celebrates its right to "life, liberty and the pursuit of happiness", have we got the role of government in securing these rights... wrong?

Source: National Archives via The New York Times
"...We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed..."

New research by Danielle Allen (Princeton) on the Declaration of Independence has called into question the accepted emphasis on individual rights. She argues that an errant period was added in hand-made copies (Figure 1, highlighted). This meant that the second sentence in the Declaration (quoted) became entirely about the individual. By referring back to the original document, where the period is apparently missing, and individual and government are in the same sentence, "the logic... moves from the value of individual rights to the importance of government as a tool for protecting those rights".*

This re-interpretation of the government's role is philosophical. But consider the facts. Last year, the government provided an estimated $212 billion in welfare payments to support the poor and vulnerable. But substantially more - $335 billion - was donated by the public to US non-profits, the majority of whom exist to support education, human services and health.  

A population served predominantly by non-profits is one that has been let down by the mainstream system and fallen into the gap between the government and private sectors. Today, 1 in 7 people live in poverty. A more accurate measure shows it could be higher still. Non-profits report rising demand for services, particularly those that serve the most vulnerable. It would appear that not everyone has the right, or the opportunity**, to pursue happiness.

On the one hand, non-profits operating at the coal face are in a better position to understand local issues. On the other hand, they often deal with the consequences, rather than causes, of disadvantage. When they advocate for change, it is to the government. Only the government has the incentive, scale and investment horizon to deal with these underlying causes: more jobs; higher wages; affordable housing; higher-quality education. In the extreme, when government has done its job, charity should cease to exist. On the day that America reflects upon its "unalienable rights", for many, that concept is indeed alien.

* As quoted in the New York Times
** Or the capability, to use Amartya Sen's language

Tuesday, July 1, 2014

The Forgot-Teen Generation

There is widespread evidence that poor children in the US do not have a fair start in life. By age 2, there is a 6 month gap between children of low and high socioeconomic status in processing skills that are important for language development. By age 4, children in very poor families will have heard 30 million fewer words than their better-off peers. These differences persist. Variations in high school test scores between low and high-income children can be predicted from elementary school performance. As a result, many campaigns have focused on the importance of early years intervention in improving a child's life chances.

In addition, academic research into the high returns to investing in young children has influenced a policy shift.  James Heckman, a Nobel-prize winning economist, has argued that if the foundations of cognitive and non-cognitive development are not set early on, there will be nothing to build upon in teenage years.  He points to the seminal Perry pre-school project, an early intervention program designed to improve the outcomes of disadvantaged African-American youth in the 1960s.  The return to intervening at such a young age is estimated to be between 7 and 10 per cent, calculated as the sum of private gains (e.g. staying on in education and earning a higher wage) and social gains (e.g. costs saved from reduced crime rates).  President Obama has therefore emphasised the importance of early intervention in reducing inequality.

But there is a danger that such rhetoric leads to older children being forgotten. This blog does not dispute the evidence that early years intervention is important. But the US is not at the point at which all children start school equal. Furthermore, some schools are failing to help them catch up. An emphasis on mainstream standardised testing is detrimental to those who are not used to such discipline. Disadvantaged students are more likely to be disengaged, and have less drive, motivation and self-belief, leading to higher drop-out rates.
In addition, things are getting worse for older children, who neither appear as cute as babies nor as vulnerable as the elderly in advocacy campaigns. As mentioned in last week's blog, if you are a high-school drop out, your chance of being employed is at its lowest level since records began (in 1970). The likelihood that you are out of the workforce altogether is at its highest level for over a decade. Worse, the US schooling system is not even equipping its average student with the skills necessary to succeed in today's information economy. In a wider test of attributes of 15 year olds - the Programme for International Student Assessment - the US ranked 27th out of 34 countries. US students are, it would appear, unable to "think outside the box".
What we need to do is borrow the early years philosophy - which focuses on cognitive development - and apply it to young people, disadvantaged or otherwise.  The standardised testing approach leaves little room for the development of critical thinking and challenge. Finland, by contrast has all but eradicated standardised tests, opting for a more equitable and relaxed school experience. If we made school more enjoyable and inclusive then, in theory, students from every background could flourish, not just those who benefited from early years intervention. By doing so, we can increase the likelihood that all students finish high school more equally than they started.

Tuesday, June 24, 2014

The $haring eCONomy

The sharing economy can be considered as both a response, and a possible solution, to rising inequality. The distribution of ownership of assets may be unequal. But the distribution of access can be made more equal. It also allows for new employment opportunities in the form of the micro-entrepreneur. Your Uber driver. Your Airbnb host. Your TaskRabbit handyman. All products of a new economic paradigm.

There is emerging evidence of its positive economic impact. In a global study, Airbnb found that one-half of hosts were of low to moderate income and that hosting enabled them to earn sufficient money to stay in their own homes. In San Francisco, Airbnb guests stayed for approximately 2 days more than hotel guests and spent 25 per cent more on their trip, much of it in areas not typically frequented by tourists. Uber drivers talk about putting themselves through higher education or saving to start a business of their own. In the future, a city full of such drivers might eliminate the need for cars entirely. Abandoned car lots could be turned into much-needed affordable housing or open space in over-populated cities.

In addition, and perhaps more importantly, the sharing economy builds social capital. In an era of growing individualism, these companies are bringing people closer together again, driven by values such as collaboration, trust, empowerment and community.* Companies like Airbnb and Uber have created a platform based on these values. Feedback on performance creates transparency and accountability.** Ties are formed between previously unknown individuals. Consumers are confident enough to enter into financial transactions with people that they may never even meet.

In doing so, traditional marketplaces and ways of thinking are disrupted. This is music to the ears of the "Millennial" generation - those that think power is concentrated in the hands of the few, that existing companies cannot be trusted, who look for job opportunities that may pay less but are rooted in social justice. 

But let's be clear that what we are seeing is the growth of a new type of "big business", based on renting, not sharing. In a recent round of fundraising, Uber secured $1.2 billion of new capital, valuing it at around $17 billion. Power is shifting to those that can harness new marketplaces. This includes existing players. In 2013, Avis Budget, one of the largest car rental firms, bought Zipcar, a car-sharing company. In addition, one-half of Airbnb hosts are not of low to moderate income. These are not the people who have been negatively affected by rising inequality.

Meanwhile, the emergence of the micro-entrepreneur reflects the concurrent increase in young people ill-equipped to join the mainstream workforce. If you are a high-school drop out, your chance of being employed is at its lowest level since records began (in 1970). The likelihood that you are out of the workforce altogether is at its highest level for over a decade.  So the migration to sharing-economy employment makes sense. But employees of such firms do not have access to the standard benefit structure offered by mainstream employers, such as healthcare, pensions and human capital investment. This is designed to improve the well-being and productivity of the workforce, producing private and social gains. In that respect at least, sharing is not caring.

* For a thoughtful discussion of the origins of sharing norms, see Deaton (2013) on hunter-gatherer societies. At that time, individuals had no way of storing leftovers from a hunt. Instead, they shared their spoils with their neighbours, in the hope that next month, their neighbours would reciprocate. "Our current deep-seated concerns with fairness, as well as our outrage when our norms of fairness are violated, are quite possibly rooted in the absence of storage options for prehistoric hunters" (pp76).

** Accountability is a big thing. Uber provides credits almost instantly if something goes wrong with your journey. Airbnb promises to cover any damage caused by unruly guests and guarantees alternative accommodation if you turn up to a castle and it turns out to be a caravan.

Tuesday, June 17, 2014

Machine Age II: Dawn of the unemployed

US retailers donate excess clothing (made cheaply in Asia and shipped back) to homeless charities to help down-and-out Americans. There is no denying the generosity of such an act. But what is this chain of events telling us? That emerging economies have "taken our jobs"? Or that the US has failed to adapt to a changing world economy and create new job opportunities?

Over the past 20 years, some middle-skilled jobs did migrate to countries that were able to provide labour at a lower cost than at home. At the last count, China accounted for 40 per cent of all clothing imports into the US. Such a shift was unsurprising. Making clothes required some skill but relied on repetition across dozens of lines. A Chinese middle-skilled labourer was in all ways identical to a US labourer except one - cost. Wages paid to Chinese workers were lower than their US counterparts.* In order to increase profits, firms chose to locate production in an area with the cheapest operating costs. Thanks to globalisation, which reduced geographical barriers between countries, it no longer mattered where in the world that was.

But other middle-skilled jobs have disappeared because of technological progress - particularly in IT - that automates tasks and renders the job obsolete. Sales assistants at grocery stores have been replaced by self-checkout kiosks. Secretarial pools have been replaced by computers. The speed of such change feels rapid. The US Bureau of Labor Statistics predicts that it will continue to be so - some of the fastest falls in occupations between now and 2020 will be in middle-skilled occupations.

Source: Tuzemen and Willis (2013)
The gap left behind in the US labour market has not been filled by equivalent jobs. Instead, there has been a rise in the share of high-skilled jobs - professional and managerial roles - that computers cannot yet perform because of the cognitive and non-cognitive skills they require. This is known as skills-bias technical change** because securing these jobs requires advanced qualifications and so favours those who have - or can obtain - such skills. Between 1983 and 2012, the share of high-skilled jobs in the US labour market increased from 26 per cent to 37 per cent (Figure 1). These skills earn a premium in the form of higher wages.

There has also been an increase in the share of low-skilled jobs (Figure 1). These tasks are manual and service orientated (think cleaners, waiters, security staff) and today cannot be automated or relocated offshore. But because these jobs require fewer skills, they are open to more people, including those who would have previously taken on middle-skilled jobs. Competition has increased, reducing the wage premium (see last week's blog for a discussion of trends in low wages). Inevitably, this will lead to some people being out of work. Worse, it might lead to people dropping out of the workforce altogether. Indeed, the participation rate - the fraction of people aged 16 and over actively looking for work - fell to 63 per cent in May from a high of 66 per cent prior to the last recession.  

Looking ahead, some think that the speed with which the US economy could be upended by technological change might be even faster than in previous years. The dawning of the so-called "second machine age" would eliminate the need for many more occupations, perhaps even some low-skilled ones. The idea that everyday tasks will be completed by a robot may be a bit far-fetched today. But 20 years ago, it would have seemed strange to think that we wouldn't talk to a cashier while they scanned our groceries or dictated a letter to a secretary to print, sign and send by post.

To keep pace with such change, and to prepare our future workforce, we must adapt our learning environment today. This includes investing in K-12 and higher education. But it also means embracing new forms of online learning, like mass open online courses, that open up high-quality education to the whole population. This will enable the future generation to have the right skills to participate in the "second machine age". Not doing so risks leaving an increasing share of the population behind. Who knows where their clothes will be made.

Though given a rising middle class in China, labour costs are creeping up, which is leading to shifts in production to other parts of Asia.
** Link to earlier publicly-available version.

Tuesday, June 10, 2014

Inequality: seed of the crisis, thorn in the recovery

The US economic recovery is being built on fragile foundations. The average consumer might be spending more but the extra money isn't coming from substantial wage growth. Consumption is being financed by running down savings and building up debt. Savings ratios are back to levels last seen on the eve of the 2008 financial crisis. The consumer debt ratio - debt payments (excluding housing) as a proportion of disposable income - is on the rise (Figure 1).

Source:  Federal Reserve Board
This pattern is not new or sustainable. In the years prior to the financial crisis, wages of low-income households in the US failed to keep up with rising living costs. In order to maintain spending, these households took on more debt. Meanwhile, incomes at the top grew rapidly. Rising income inequality created political pressure to encourage borrowing (particularly in housing) to maintain demand in the economy. Such action built on the underlying "fault line" that inequality represented rather than resolving it (Rajan, 2010).  

Borrowers bet on higher wages being just around the corner, which would allow them to continue to service their debt. In 1989, the US household debt-to-income ratio was around 60 per cent for the top 10 per cent and around 80 per cent for all other groups. In 2007, the ratio was around 80 per cent for the top 10 per cent and 250 per cent for the bottom fifth. But wages failed to keep up with growing debt burdens. Default rates picked up, the inequality fault line was exposed and the financial crisis ensued.    

Today, for expenditure to be affordable, wages need to rise in line with living costs. One way to do this is to mandate for above-inflation increases in the minimum wage, so that low-paid workers can catch up. In February, President Obama signed an Executive Order increasing the minimum wage for federal contract employees to $10.10 an hour. He also called on Congress to pass a similar proposition for all Americans (the current federal minimum wage is $7.25). Some jurisdictions have implemented or announced their own above-average increases, for example, San Francisco ($10.74) and Seattle ($15). The Center for Economic Policy and Research has demonstrated that if the minimum wage had kept up with labour productivity since 1960, then it would have reached $21.72 by 2012.* 

A reasonable increase in the minimum wage would have a positive impact on the individual and economy. According to the Congressional Budget Office (CBO), an increase in the federal minimum wage to $10.10 by 2016 would lift 900,000 individuals out of poverty. But it is not just those in poverty that benefit. All low-income, and some middle-income, households stand to gain. The CBO reports that the cost of expected job losses that would arise from a higher minimum wage to $10.10 would be more than offset by overall gains.** An increase in consumption that follows from a rise in wages would stimulate business investment. An increase in tax contributions from better-paid workers would improve the state and federal balance sheet.   

But in the medium-term, increasing the wage packet of low-income households does not fully tackle the problem. As a result of technological progress and cheaper labour overseas, many middle-skilled jobs in the US have been eliminated (see "An earthquake on inequality is coming").  What remains are low-skilled and high-skilled jobs.  This makes it very difficult for those at the bottom to progress up the income ladder. What is required to bridge this gap is investment into training and job creation. This would enable low-income individuals to secure decent progression, pay and improve job quality. In turn, this would make it more likely that they are able to participate in the recovery, and not be left behind... again.

This isn't necessarily an argument for increasing the minimum wage to $21.72. But it does demonstrate nicely that much of the gain produced by ordinary workers in recent years has been channeled away, towards senior executives and capital-owners, contributing to rising income inequality.

** Seattle has agreed to raise its minimum wage gradually to $15 by 2021.  As the population of low-paid workers is fairly small in the city, the benefits may outweigh costs arising from unemployment and higher operating expenses.  But further evidence is required before coming to a definitive conclusion.

This post was updated on 12 June, to clarify developments in low, middle and high-skilled jobs in the US.

Tuesday, June 3, 2014

I want YOU for the U.S. dream

The beauty of the American Dream is that the accident of birth does not determine a child's life chances. Those born into a poor family can become rich. Those raised by parents without education can go to college. Those growing up in rented homes can become homeowners. The future is in one's own hands.

Source:  The Pew Charitable Trusts (2012)
But there is strong evidence that the American dream is, well, just that, a dream. Social mobility is low. Children born into the poorest quintile are more likely to earn below average incomes (Figure 1, left, shows that 70 per cent of Americans born into the bottom quintile will remain below the middle in adulthood). They are less likely to go on to higher education. They are less likely to own their own home.

How then do we tackle a problem that appears to be ingrained in our society? One excellent suggestion is for Congress to create an Office for Opportunity. Establishing such a Federal institution would protect social mobility from the waxing and waning of political attention. The Office would define and target a single measure or set of measures. These could cover early childhood development, K-12 and college results, labour market participation and / or family circumstances, to track progress over a lifetime. It would also publish commentary on how well the USA was doing against these measures.

But this might not be enough. The UK government has set up a similar body, the Social Mobility and Child Poverty Commission. The Commission sets out targets for, and reports on progress against, a set of indicators. The trouble is that the general public have little awareness of its existence and so do not protest when goals are not met. Few know that the UK government has also committed in legislation to eradicate child poverty by 2020. Fewer still know that because of severe cuts to social security, the number of children in poverty could rise to 5 million by that time. For this reason, Save the Children UK recently launched its campaign, "A Fair Start for Every Child", asking for specific measures to ensure that a child's birth does not determine its chance in life. (Disclosure:  I was the lead author on their report).

What is required is a society-wide strategy to hold governments to account on their commitments. Such an approach was taken with the Millennium Development Goals (MDGs), which were publicly agreed by participating members. Armed with the knowledge of what their government had promised, developing country citizens were empowered to push leaders to deliver on specific promises. Learning from this, the US government should publicly commit to a set of SMDGs (Social Mobility Development Goals). It should undertake an extensive public awareness campaign to garner action by civil society. This would also ensure that ruling parties are held to account by the public. Only by doing so can we get America moving and have a decent shot of turning the American dream into a reality.

Tuesday, May 27, 2014

An earthquake on inequality is coming….

In the debate about rising inequality, the behaviour of Chief Executive Officers (CEOs) has been cited as a major cause.  They are accused of putting short-term (shareholder) interests ahead of long-term (firm) interests.  Their actions are hardly surprising considering that CEO remuneration has historically been tied to short-term objectives such as annual shareholder returns.

But are politicians equally guilty of short-termism?  Consider that their time horizon is the electoral cycle.  Their objective is to be re-elected.  Their method is policies that target the median voter.  A problem that, until recently, affected only a minority, is unlikely to be adequately addressed by the political process.  Cue civil society.  Over the past few years, as a direct response to the discontent caused by rising inequality, we have seen the emergence of the Occupy movement, the UK Living Wage campaign and the Arab Spring. 

Grass-root movements have a long history of affecting change in the United States and beyond.  Giving women the right to vote in the UK, the campaign for equal rights in the US, the fall of the Berlin Wall in Germany.  Activists were drawn together by a shared set of principles, which helped spread their reach and eventually spurred national and global campaigns. 

But in generating a sufficient mass, they also drew the attention of political parties.  The slow rumblings of discontent transformed into substantive political pressure, that forced the hand of politicians into declaring an active policy response.  Such events mimic the “stick-slip” dynamics of an earthquake, where the forces below the earth’s surface eventually generate enough strength to push against the forces holding the plates together, to produce an earthquake (Jones and Baumgartner (2012)).  In this case, the political system with its procedures, rules and norms acts as a retarding friction against the public movements that generate information about pressing issues of the day that require action.
The rise of the Occupys, the election of Bill de Blasio to Mayor of New York on an agenda of tackling inequality, the rejection of the Conservative-led coalition in recent UK elections, all suggest that the time is ripe for a major political earthquake.  Yet, the world is still waiting for a major set of policies to resolutely tackle income inequality in the US and beyond.  In the language of our earthquake analogy, what further information is required to overcome such political frictions, taking into consideration the time horizon over which politicians operate? 

First, dispelling the myth that monetary and fiscal stimulus have put the economy on a path of stable, inclusive growth and that no further action is required.  In the US, the wealthiest one per cent captured 95 per cent of post-financial crisis growth between 2009 and 2012, while the bottom 90 per cent became poorer (Oxfam (2014)). The vulnerabilities that formed the basis of the 2008 financial crisis still exist and could generate another crisis in the near-term.  
Second, agreeing that reducing inequality can be growth enhancing, as the IMF has strongly argued.  Elections have been won and lost on the state of the economy.  The 2015 election in the UK and the 2016 Presidential election in the US will be no different.      

Third, an acceptance that, because of the nature of technological progress that is driving rising income inequality, for the first time, our children could be worse-off than us (Kotlikoff and Sachs (2012)).  This, unlike the first two, may fall outside of a politician's traditional time horizon, but is surely the strongest argument for action.