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The Business Cycle and the 2016 Election

November 9, 2016 Leave a comment

The 2016 election is now over, thankfully, and so it might be a good time to provide some perspective on the electoral outcome. It seems safe to say that voter dissatisfaction motivated much of what happened yesterday and the state of the economy is one part of this voter discontent. In this post, I thought I would provide some data on the business cycle history of the U.S. which I believe was clearly part of the explanation for the election. Along the way, I will give a primer if you will on business cycle measurement. Read more…

Equal Pay and Occupational Choice

September 28, 2016 Leave a comment

It is election season and the bombast is relentless about the so-called problems that politicians need to fix. Equal pay is one such issue. Hillary Clinton contends that, if she is elected President of the United States, she will work to ensure that women are paid equally to men. But the “evidence” that is often offered to support the existence of this problem is simply the incomes of men and women which I have argued in a previous blog post is worthless (that post is here). The reason is that income data must be adjusted for hours worked, occupations, and possibly other reasons to make the comparisons sensible. These adjustments are typically not made and so one wonders if there is really any problem to be solved.

Here I thought I would provide an example of occupational differences which I suspect is at the heart of measured pay differences. The Bureau of Labor Statistics (www.bls.gov) provides data on incomes by occupation. To illustrate the point that occupations matter in equal pay discussions, consider two occupations: chemical engineers and elementary and middle school teachers. BLS reports a mean (average) income for chemical engineers of $103,960 and teachers in elementary and middle schools is $58,060. Now consider the following table.

Teachers Engineers
Man $58,060 Man $103,960
Woman $58,060 Man $103,960
Woman $58,060 Woman $103,960
 Total Incomes
Men $265,980
Women $220,080

In the table, there are three people in each occupation. In engineering, there are two men and one woman and, in teaching, there are two women and one man. Note that within each occupation, each person makes exactly the same income so there is no evidence here about discrimination by employers. But men, in the aggregate, make 21 percent more than women ($265,980 is about 21 percent larger than $220,080). So while there is no discrimination by employers, there is a 21 percent aggregate income gap due to occupational differences between men and women.

The point of this example is that if one is to argue for gender bias, the evidence must involve the choices made by men and women, not just the wages paid by firms employing them. I doubt seriously that this would ever happen. What is more likely to happen is that another layer of bureaucratic oversight will be imposed, involving data that must be provided by the private sector to government searching for discrimination. That raises the supply price of the goods and services we buy, thus raising their prices.

I am willing to believe that discrimination exists in our society but I am not willing to believe it on the basis of worthless analysis.

Dismal Economic Growth Continues

The political primaries seem to reflect the dissatisfaction that many voters feel about the state of the U.S. Some of this discontent is likely to be related to the condition of the economy. As I have stated in earlier posts (read them here and here), economic growth is low by long-run U.S. standards and should be the top economic issue considered by the voters in making their voting decisions in the next presidential election.

The last recession ended in June 2009 (go to the web site for the National Bureau of Economic Research for business cycle dates).  Below is a table listing annual growth rates for real output (GDP) since the last recession ended.

Quarter Growth Rate
2009:3 1.3
2009:4 3.9
2010:1 1.7
2010:2 3.9
2010:3 2.7
2010:4 2.5
2011:1 -1.5
2011:2 2.9
2011:3 0.8
2011:4 4.6
2012:1 2.7
2012:2 1.9
2012:3 0.5
2012:4 0.1
2013:1 1.9
2013:2 1.1
2013:3 3.0
2013:4 3.8
2014:1 -0.9
2014:2 4.6
2014:3 4.3
2014:4 2.1
2015:1 0.6
2015:2 3.9
2015:3 2.0
2015:4 1.4
2016:1 0.5

The data in the table is drawn directly from the Bureau of Economic Analysis, the federal agency responsible for producing the National Income and Product Accounts.

The average growth rate in this table is 2.1 percent. Over the century ending at the beginning of the last recession, real output grew at 3 percent per year. The difference between 2.1 and 3 percent is enormous over long periods of time. Thus there will be enormous losses of real income in store for U.S. residents if the dismal growth rate in the table continues.

Unfortunately, I have not heard a great deal in the press about this unfolding disaster (because a disaster is exactly what it is). But no economic issue is even close in importance to the question of how we can reverse this decline in economic growth.

Ballot Initiatives and Michigan Roads

April 3, 2015 2 comments

Michigan voters will soon be asked to vote on a sales tax increase and other measures partly designed to raise additional revenue for the repair of state roads which are widely regarded to be in poor condition. These initiatives seem to me to be a sign of government incompetence or an inability of government to function to serve the interests of the voters.  In California, a state where these ballot proposals have often occurred, the traditional explanation is that the legislature is unable to function because it is so polarized and, as a result, the voters must step in to get things accomplished that ought to be done by the state government. But there is another aspect of the Michigan ballot which is troubling.

“Logrolling” is a word used to describe a practice in government of attaching laws with weak support to a bill containing other policies with strong support. The idea is to get a weak law passed which would not pass on its own. This seems to happen regularly at the federal level. And so one additional aspect of the Michigan ballot measure will contain an expansion of tax subsidies using the Earned Income tax credit which I suspect is a feature of the state tax code that would not garner widespread support.

I intend to vote against the Michigan ballot proposal despite the fact that I, like most voters, agree that state roads are poorly maintained. My reasons are as follows.

  1. I regard road maintenance as a responsibility of government. If the Legislature can’t meet this basic responsibility, why do I need them?
  2. Voters cannot be well-informed about budget matters compared to politicians. We solve an agency problem when we vote, electing agents (politicians) to represent the interests of the principals (the voters) in the state. Policymaking done by voters can’t possibly be better-informed than when policies are implemented by the managers that we elect. I simply don’t have the time to do the job of politicians that we elect. Poor policies are more likely to occur when ballot initiatives are used.
  3. A sales tax is a poor way to fund roads. User fees are the proper way to do this and so taxes on gasoline are a better way to fund road maintenance.
  4. I am suspicious of the logrolling that is in the ballot proposal. I find it most interesting that there seems to be little discussion of the proposal outside of the road maintenance aspect of it.
  5. Finally a message needs to be sent to the Legislature. Do your job. Or perhaps we need a new set of politicians serving the interests of the voters.

So far, polls show that the ballot proposal is not supported by the majority of taxpayers in the state. I hope this is still true when the vote is actually done. This ballot proposal s a monument to the low quality of government in Michigan.

Political Polarization

June 12, 2014 Leave a comment

A recent study by the Pew Research Center (the study may be found here) provides some interesting data on the public’s political views. The data reveals that there is increasing polarization among U.S. voters as compared to earlier polling that they have done. This is interesting because it reveals the causal link between the polarization in Congress and that of the public.

In an earlier blog post, I pointed out that elections are what economists call an agency problem. In that setting, the voters are the principals who elect agents, the politicians, to represent their interests. So it follows that if government is polarized, so too are the voters who elected them. The Pew study essentially provides the empirical support for this scenario.

Tooting my own horn, I told ya’ so!

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