The Unassuming Economist

The recent McKinsey American Opportunity Survey (2021) highlights interesting observations about American beliefs on the availability of economic opportunity, obstacles, and the path ahead to create a more inclusive economy. A sample of 25,109 adults aged 18 and older from the continental United States, Alaska, and Hawaii was interviewed online in English and Spanish. Excerpts from the report’s findings:

“Americans report that their financial situations have deteriorated over the past year, and at the time of our survey, only half of all respondents reported being able to cover their living expenses for more than two months in the event of job loss. Americans reported facing numerous barriers to economic opportunity and inclusion—among them, inadequate access to health insurance and physical and mental healthcare, as well as to affordable childcare. Moreover, many respondents said that they feel their very identity limits their access to jobs and to fair recognition and reward for their work.

Yet amid the challenges, our survey also revealed optimism. First- and second-generation immigrant respondents were among the most optimistic respondents about economic opportunity. Black and Hispanic/Latino respondents were also among the most optimistic respondents, despite being more likely to report barriers to opportunity.”

Click here to read the full report.

In the latest blog for The Conversable Economist, author Timothy Taylor examines the merits of the statement whether the US needs a sound industrial policy to fuel economic growth like its counterparts like China or not. While the modern version of this argument states that the US needs to subsidize key industries to counterbalance China’s growing economic influence in the world, he also discusses the historical context to this backed by strong macroeconomic fundamentals. The author quotes excerpts from a report by the Peterson Institute of International Affairs:

“The World Bank’s acclaimed volume, East Asian Miracle: Economic Growth and Public Policy (Birdsall et al. 1993), while acknowledging industrial policies, emphasized sound macroeconomic policies (later labeled the “Washington Consensus”), together with superior education and land reform, as drivers of remarkable growth in Hong Kong, Japan, South Korea, Singapore, and Taiwan. A decade earlier, Chalmers Johnson (1982) had published MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975, giving outsized credit for Japan’s spectacular postwar economic growth to government support for specific firms and industries. These two volumes set the stage for prolonged debate, still underway, on the role of industrial policy in East Asian economic prosperity. Numerous academic articles and books have dissected contributing factors. This brief section merely skims the surface of a substantial literature.”

Click here to read the full blog.

In a recent column (2021) for Project Syndicate, Professor Dani Rodrik (Harvard Kennedy School of Government) writes that strengthening workers’ bargaining power and increasing the supply of good jobs for those who most need them is the way for boosting workers’ incomes and ensuring a fairer share of the prosperity pie for them.

“In advanced economies, earnings for those with less education often stagnated despite gains in overall labor productivity. In developing countries, where standard economic theory predicted that workers would be the main beneficiary of the expanding global division of labor, corporations, and capital again reaped the biggest gains.”

The article then moves on to discuss strategies that can counteract this problem such as firms’ investment in the happiness and productivity of their workers, increasing organizational power of workers, expansionary macroeconomic policies that can generate derived demand for labor, etc.

Click here to read the full article.

A recent article in the Financial Times by Martin Sandbu discusses in detail the state of inequality prevalent in the world today. Taking a cue from the World Inequality Report released by the World Inequality Lab on December 7th, 2021, the author makes an important point about the premature fiscal austerity of rich countries exacerbating inequalities after a pandemic (Furceri, Loungani, Ostry, Pizzuto, 2021).

Some other trends highlighted in the article include:

“First, global inequality (between countries) was pretty constant in 2020 compared to the year before — but that stalled a trend of falling inequality since the early 2000s.

Second, global inequality of individual wealth took a jump last year, when the share of global wealth owned by the world’s billionaires increased by half (from 2.2 to 3.3 percent) and that of the top 0.01 percent wealthiest individuals increased by about a percentage point (from 10.3 to 11.1 percent). At the same time, the wealth of the broader top 1 percent group remained stable, both in the US and Europe, so the winners of greater wealth inequality were extremely concentrated at the very top.

Third, Europe is the most egalitarian continent, whether measured by income inequality, wealth inequality, or inequality of individual carbon emissions, the WID’s data on which are fascinating and important. (They show that middle-income people in rich countries emit less than the top 10 percent in some poorer regions.)”

It then goes on to discuss some reasons which explain why Europe is more egalitarian than the US, the role of taxation and public spending for measures to promote equality, etc.

Click here to read the full article.

From a NBER paper by Rebecca Diamond and Enrico Moretti:

“Income differences across US cities are well documented, but little is known about the level of standard of living in each city—defined as the amount of market-based consumption that residents are able to afford. In this paper we provide estimates of the standard of living by commuting zone for households in a given income or education group, and we study how they relate to local cost of living. Using a novel dataset, we observe debit and credit card transactions, check and ACH payments, and cash withdrawals of 5% of US households in 2014 and use it to measure mean consumption expenditures by commuting zone and income group. To measure local prices, we build income-specific consumer price indices by commuting zone. We uncover vast geographical differences in material standard of living for a given income level. Low-income residents in the most affordable commuting zone enjoy a level of consumption that is 74% higher than that of low-income residents in the most expensive commuting zone.

We then endogenize income and estimate the standard of living that low-skill and high-skill households can expect in each US commuting zone, accounting for geographical variation in both costs of living and expected income. We find that for college graduates, there is essentially no relationship between consumption and cost of living, suggesting that college graduates living in cities with high costs of living—including the most expensive coastal cities—enjoy a standard of living on average similar to college graduates with the same observable characteristics living in cities with low cost of living—including the least expensive Rust Belt cities. By contrast, we find a significant negative relationship between consumption and cost of living for high school graduates and high school drop-outs, indicating that expensive cities offer a lower standard of living than more affordable cities. The differences are quantitatively large: High school drop-outs moving from the most to the least affordable commuting zone would experience a 26.9% decline in consumption.”