The Republic of Letters

American Economic Association’s Symposium on The Top One Percent

Abstract from Facundo Alvaredo et al’s paper “The Top 1 Percent in International and Historical Perspective” :

The top 1 percent income share has more than doubled in the United States over the last 30 years, drawing much public attention in recent years. While other English-speaking countries have also experienced sharp increases in the top 1 percent income share, many high-income countries such as Japan, France, or Germany have seen much less increase in top income shares. Hence, the explanation cannot rely solely on forces common to advanced countries, such as the impact of new technologies and globalization on the supply and demand for skills. Moreover, the explanations have to accommodate the falls in top income shares earlier in the twentieth century experienced in virtually all high-income countries. We highlight four main factors. The first is the impact of tax policy, which has varied over time and differs across countries. Top tax rates have moved in the opposite direction from top income shares. The effects of top rate cuts can operate in conjunction with other mechanisms. The second factor is a richer view of the labor market, where we contrast the standard supply-side model with one where pay is determined by bargaining and the reactions to top rate cuts may lead simply to a redistribution of surplus. Indeed, top rate cuts may lead managerial energies to be diverted to increasing their remuneration at the expense of enterprise growth and employment. The third factor is capital income. Overall, private wealth (relative to income) has followed a U-shaped path over time, particularly in Europe, where inherited wealth is, in Europe if not in the United States, making a return. The fourth, little investigated, element is the correlation between earned income and capital income, which has substantially increased in recent decades in the United States.

And here is Greg Mankiw’s abstract from his much discussed (and unjustly maligned) paper:

Imagine a society with perfect economic equality. Then, one day, this egalitarian utopia is disturbed by an entrepreneur with an idea for a new product. Think of the entrepreneur as Steve Jobs as he develops the iPod, J. K. Rowling as she writes her Harry Potter books, or Steven Spielberg as he directs his blockbuster movies. The new product makes the entrepreneur much richer than everyone else. How should the entrepreneurial disturbance in this formerly egalitarian outcome alter public policy? Should public policy remain the same, because the situation was initially acceptable and the entrepreneur improved it for everyone? Or should government policymakers deplore the resulting inequality and use their powers to tax and transfer to spread the gains more equally? In my view, this thought experiment captures, in an extreme and stylized way, what has happened to US society over the past several decades. Since the 1970s, average incomes have grown, but the growth has not been uniform across the income distribution. The incomes at the top, especially in the top 1 percent, have grown much faster than average. These high earners have made significant economic contributions, but they have also reaped large gains. The question for public policy is what, if anything, to do about it.

Tuition Rates Increased Because of Excessive Spending, Not Loss of State Funding

Want of state funding is not the cause of increased tuition rates at our public universities; profligate spending is. In fact, if, per capita, universities spent on students what they spent on them in 2000, tuition rates could be cut, on average, by $1200 per year even without any increases in state funding. Shockingly, even after adjusting for inflation and despite budget cuts, colleges spend more on each student now, during our era of the Great Recession, than they did over a decade ago.  See this post from Yglesias and the underlying study on which it is based.

So on what have colleges been spending? Administrative bloat. Yglesias writes:

Top administrators get paid more than they used to and there are more of them. Schools have invested a lot in information technology, but that’s generally been layered on top of other pieces of infrastructure rather than replacing anything. Schools compete to attract the applicants with the highest SAT/ACT scores so they try to make nicer buildings.

Bottom line:

In the face of budget cuts, prestigious public colleges and universities have started spending more money in pursuit of fairly hazy goals.

This really gets under my craw and should get under yours too. For, by doing this, colleges are doing nothing but erecting barriers against strivers who want nothing more than what is quintessentially American, to move on up.

High Student Debt In Sweden, Even Though College Is Free

Even though college is totally free in Sweden, “…85% of Swedish students graduate with debt versus only 50% in the US.” Wait–what? Read on.

And the stats get even worse. Philips writes:

…new Swedish graduates have the highest debt-to-income ratios of any group of students in the developed world (according to estimates of what they’re expected to earn once they get out of school)—somewhere in the neighborhood of 80%. The US, where we’re constantly being told that student debt is hitting crisis proportions, the average is more like 60%.

So, what gives? According to Philips, Swedes take on massive amounts of debt to pay for rent and other living expenses, which are staggeringly high, since hardly any of them stay at their parental home.  Driving home this point–chuckle; did you get it: parental home and driving home? Yea, it’s dumb, I know, but that’s why I said “chuckle.” And for the record, it wasn’t even intended. Anyway.– Philips relates this interesting factoid:

Swedes, like other Nordic Europeans, have an independent streak. They leave their parental homes earlier than almost all their southern neighbors.

One study found that just 2% of Swedish men lived with their parents after the age of 30. In Spain, a quarter of 30-year-old men still are shacking up with mom and dad; in Italy it was around 32%.

Interesting, no? Well, read the whole thing.

(HT: Tyler Cowen)