Monday, August 25, 2014

A Universal Basic Income and Work Incentives: What Does the Empirical Evidence Tell Us?

In Part 1 of this series, I outlined some basic economic theory regarding a universal basic income
(UBI) and work incentives. By a UBI, I mean an income support policy that provides a set monthly benefit to every citizen. A UBI, as I define it, would to everyone, regardless of income, wealth, or employment status. In that respect it differs from means-tested income support policies (MTIS), such as current US welfare system programs or a negative income tax (NIT), which reduce benefits as the recipient’s income increases.

The fear that a UBI would undermine work incentives is among the most important sources of resistance to the idea. In Part 1, I argued, on theoretical grounds, that replacing the existing welfare system with a UBI would tend to increase average work effort. This part will look at several sources of evidence that support the theory, beginning with the famous income maintenance experiments (IMEs) of the 1970s and 1980s.

What we can learn from the IMEs and what we can’t learn

The income maintenance experiments in question followed a method known as randomized field trials. Each of the experiments enrolled from several hundred to several thousand households and divided them into two groups. They assigned one group to an experimental income support policy while a control group continued to be covered by existing welfare programs, including Aid for Families with Dependent Children (AFDC), food stamps, and others. IMEs testing various policies took place in New Jersey, Iowa, North Carolina, Indiana, Colorado, and Washington. They covered both urban and rural areas; both single parent and two-parent households; and various ethnic groups. >>>Read more

Monday, August 18, 2014

Universal Basic Income and Work Incentives: What Can Economic Theory Tell Us?

Everywhere you look, it seems, people are talking about a Universal Basic Income (UBI)—a monthly cash benefit paid to every citizen that would replace the existing means-tested welfare system.

Supporters maintain that a UBI would not only provide income support to people in need, but would also increase work incentives. That is because, unlike the current welfare system, it would not claw back 50, 70, or even 100 percent of the earnings of low-income workers who make the effort to get a job. Opponents are more skeptical. They fear that if everyone were given a basic cash income with no requirement to work, people would quit their jobs in droves and we would end up with a nation of layabouts.

Who is right? This post examines the relevant economic theory. Part 2 will look at the evidence. >>>Read more

Wednesday, August 13, 2014

Krugman vs. the Libertarians on Phosphorus, Freedom, and Environmental Economics

Paul Krugman is at it again with a stunningly ignorant NYT op-ed on libertarians and the environment, “Phosphorus and Freedom.” As the author of a book on the libertarian perspective on environmental policy, I would like to respond.

Phosphorus comes into the picture in the form of agricultural runoff that pollutes Lake Erie, recently making the Toledo water supply temporarily undrinkable. Krugman blames this kind of thing on libertarians, who, he says, endorse an idea of freedom that includes the freedom to pollute one’s neighbor’s water supply.

Sadly, Krugman’s knowledge of the libertarian position on environmental economics seems to be limited to what he hears on talk radio and what he reads on conservative web sites like Red State. That is problem No. 1: Krugman pretends not to understand the difference between conservatism and libertarianism. He should start by reading Friedrich Hayek’s classic essay “Why I am Not a Conservative,” but maybe he can’t tear himself away from Red State.

According to Krugman, libertarians believe that “anyone who worries about the environment is engaged in scare tactics to further a big-government agenda.” In truth, real libertarians care very much about environmental issues. They just see them through a different lens than Krugman does. >>>Read more

Wednesday, August 6, 2014

How Many Miles Can You Drive on One Hour's Wages? From the Model T to the Prius in One Chart

Recently I came across this assertion in a comment box on one of my favorite websites: “The cost to fuel your car has never been higher as a percentage of disposable income.” 

Really? I know gasoline prices are high, but you just can’t make that assertion without looking at incomes and fuel economy, too. I decided to check the data.

I was able to put together 50 years of pretty consistent data for the key variables, with only a little stitching together to make the starting points and end points fit. The series I used were:
  • Nominal wage in dollars per hour for production and nonsupervisory workers.
  • Average fuel economy of cars on the road, old and new, based on a series from the Department of Transportation for 1980 to 2012 and estimates from various sources to fill in the earlier years.
  • Average gasoline prices from the Bureau of Labor Statistics and Department of Energy.
For  years before 1964, data are harder to come by. Instead of trying to put together a complete series, I decided to go with spot estimates for three iconic cars of yore: A 1919 Model T (About 17 MPG), a 1935 Ford V-8 (about 15 MPG), and a larger 1950 Ford V-8, about 14 MPG.

To calculate the miles that you could drive per hour worked (MPHW), just divide your wage by the price you pay for gasoline and multiply by your car’s fuel efficiency in miles per gallon. >>>Read more

Friday, August 1, 2014

US Job Market Records Best Six-Month Gains in Years

Today’s report from the BLS showed that the US economy added 209,000 payroll jobs in July. With
upward revisions for May and June, total job growth for the past six months comes to 1,400,000, making it the best six-month stretch since the recovery began. Private sector employers added jobs in both goods and services. The government sector reported 11,000 new jobs, all at the local level. Federal employment was unchanged while state governments shed 1,000 jobs.

The household survey also showed solid gains. The civilian labor force grew by 239,000, well above the average monthly gain of recent years. Total employment increased by 131,000. (Because of sampling error and methodological differences, the number of new payroll jobs in the survey of employers often differs from the change in employment according to the household survey.) With so many workers entering the job market, the number of unemployed increased by 197,000, sending the unemployment rate up slightly to 6.2 percent. The broad unemployment rate, U-6, which takes discouraged workers and involuntary part-time workers into account, also rose by a tenth of a percentage point. >>>Read more

Follow this link to view or downward a brief slideshow with additional charts of the latest employment situation

Wednesday, July 30, 2014

First GDP Data for Q2 2014 Show US Economy was Stronger Than Previously Thought

Today’s report from the Bureau of Economic Analysis shows the US economy to be much stronger than previously thought. The advance estimate for the second quarter of 2014 showed real GDP expanding at an annual rate of 4 percent. The new data revised the dip in GDP for Q1 from -2.9 percent to -2.1 percent, and raised the estimated growth rate for three out of four quarters in 2013. The following chart shows previously reported and revised data for the past seven years.

As the following table shows, the turnaround in the economy was very broadly based. Consumption contributed 1.69 percentage points to the growth of GDP, a little above the average of the past two years. Investment was very strong, contributing 2.57 percentage points to growth, far above its recent average. Both fixed investment and inventory investment reversed their declines of Q1. >>>Read more

Follow this link to view or download a short slideshow with additional charts related to this post

Wednesday, July 23, 2014

US CPI Rises at 3.1 Percent Annual Rate in June. What Does That Mean? An Increase in the Cost of Living, or Inflation?

On Tuesday, the Bureau of Labor Statistics announced that the US Consumer Price Index (CPI) rose Mike Bryan on the Atlanta Fed’s Macroblog has made me think again.
at a seasonally adjusted annual rate of 3.13 percent in June. What does such a figure really mean? Is it a measure of inflation or of the change in the cost of living? Until recently, I would have answered that there was no difference, but a recent series of posts by

What’s the difference?

As Bryan explains it, the cost-of-living concept arises from the role of money as a medium of exchange. When we say the cost of living increases, we mean that it gets harder to maintain a given standard of living on a given income. Either we have to be satisfied with fewer goods or services, or save less, or work harder. In the language of economics, a change in the cost of living is a real phenomenon.

On the other hand, we can best understand inflation as a change in the value of our unit of account, the dollar. When there is inflation, the value of the unit is smaller each day than it was the day before, for all transactions. This earlier post includes a chart showing how dramatically the value of our unit of account has changed over the past 100 years.

Imagine that you woke up one morning to find that someone had chopped an inch off all our rulers, so that today’s foot was now only as long as yesterday’s eleven inches. You might go from being six feet tall to six-foot-six, but it wouldn’t be any easier for you to reach the top shelf in the kitchen without a footstool. Similarly, if inflation raises both your income and the prices of everything you buy by the same percentage, the value of a dollar as an economic ruler shrinks, but it is neither harder nor easier to maintain the same real standard of living. In that sense, inflation is a purely nominal phenomenon. >>>Read more

Follow this link to view or download a brief slideshow with charts of the latest CPI data