Tag Archives: arthur okun

11.22.2010 | Inequality and Movie Stars

Did you know that Academy Award winners live longer than losers? Much more than a trivia fact, Academy Award winner longevity provided researchers with data about inequality.

As reported in the May 15, 2001 issue of The Annals of Internal Medicine, researchers gathered mortality statistics for 1649 people. They looked at all “actors and actresses ever nominated for a leading or supporting role…For each, another cast member of the same sex who was in the same film and was born in the same era was identified…” Their goal was to determine whether relative success correlated with a person’s lifespan. Their answer was, “Yes.” They concluded that winners had approximately 4 extra years of life and that “…movie stars who have won multiple Academy Awards have a survival advantage of 6.0 years over performers with multiple films but no victories.”

I know that you might have many questions. The researchers did also. But our key here is to think about whether inequality among all of us in the U.S. warrants remedial action from our government.

This takes me to a recent NY Times column from economist Robert Frank. Comparing 1976 and 2007, he tells us that the top 1% of earners moved from an 8.9% share of total income to 23.5%. Then, he also points out that counties with rising income inequality experience higher divorce rates, more bankruptcies, and longer commute time. His point? Because “…greater inequality causes real harm…” more income equality through higher taxes is a valid goal for our leaders.

During an Econtalk podcast, George Mason University economist Russ Roberts disagreed with Dr. Frank’s conclusions. Dr. Roberts said that economic growth was constrained by income redistribution and a “bigger pie” will help everyone.

The Economic Lesson

Taxes are all about income redistribution. If we promote equality, we will have more income redistribution through taxes, more fairness, and a common living standard. However, economic efficiency will suffer and our economic pie will grow more slowly. By contrast, economic competition leads to more efficiency, more entrepreneurial energy, more economic growth and a bigger pie. And, is it fairer to be able to keep more of what you earn?

You might want to look at economist Arthur Okun’s Equality and Efficiency: The Big Tradeoff.

Posted by: adminEcon
Tags: Academy Awards, arthur okun, economic growth, inequality, Robert Frank, Russell Roberts, taxes
Comments (0) Add a Comment

10.01.2010 | The Big Tradeoff

During the 2008 presidential campaign, when asked who is rich, John McCain jokingly said the dividing line was $5 million while Barack Obama said $150,000. Now, referring to proposed tax legislation, President Obama says that a family earning $250,000 is rich and should not get a Bush tax cut extension.

Some history: The year was 2001 and the nation was in a recession when the Congress passed the largest tax reductions in 20 years. Impacting such areas as income, estate, and capital gains taxes, selected parts of the law were scheduled to expire on December 31, 2010.

Here we are and what to do? Taxes are all about income redistribution. Economist Arthur Okun has said that we should consider Equality and Efficiency: The Big Tradeoff. If we promote equality, we will have more income redistribution through taxes, more fairness, and a common living standard. However, economic efficiency will suffer and our economic pie will grow more slowly. By contrast, economic competition leads to more efficiency, more entrepreneurial energy, more economic growth and a bigger pie. And, is it fairer to be able to keep more of what you earn?

Yes, there are countless other issues. They include the deficit, income inequality, innovation, the role of government, defining who is rich, and the unemployment rate. But still, I wonder whether it all comes down to the side you take for “the big tradeoff”.

The Economic Lesson

One way to look at U.S. income distribution is a Lorenz Curve. Created by statistician Max Lorenz, the Lorenz Curve divides the total number of U.S. families into 5 equal groups. Then, Lorenz used coordinates to show how much of the total income each fifth of families earns. For example, on a graph a dot at (20,20) would mean that 20% of all families received 20% of the income. Continuing the same idea, we could place a dot at (40,40), (60,60), (80,80) and (100,100). The result would be a straight line reflecting totally equal income throughout that society. Displaying inequality, the actual U.S. curve for 2007 is bowed to the right.

Arthur Okun said that when we try to affect income inequality by taxing the more affluent, we have a “leaky bucket” problem. Assume, for example, that the “rich” pay a $100 tax. Society will benefit from less than $100 because of administrative distribution costs and skewed spending incentives.

Posted by: adminEcon
Tags: arthur okun, Bush tax cut, income distribution, Lorenz Curves, Max Lorenz, taxes, The Big Tradeoff
Comments (0) Add a Comment

06.15.2010 | Is Fannie Mae Your Friend?

I was surprised to hear that when Fannie Mae was created in 1938 as a federal agency, a part of her mission was to move money. At the time, because of the 1927 McFadden Act, interstate banking was prohibited. As a result, there could be (and was) insufficient money for mortgages in California and too much unused mortgage money on the East Coast. By buying mortgages from banks and brokers, Fannie Mae was able to move money to areas that needed it. Meanwhile, by selling the mortgages she purchased, she could attract funding from the areas that had it to lend.

Fundamentally, Fannie Mae was supposed to help people buy homes. During the 1930s, she made 30 year mortgages more common when 5 year mortgages were the norm. Yes, she typically required a 20% deposit and strict credit guidelines but she guaranteed the mortgages that she purchased. She let people live the American Dream.

30 years later, everything changed. In 1968, under President Johnson, Fannie Mae became a private corporation but retained a connection with government as a GSE (government sponsored enterprise). No longer a federal agency, she was a profit seeking business with stockholders. Still though, the federal government implicitly guaranteed the mortgages she purchased.

As a result, especially since 2003, when Congress asked her to assist the effort to extend home ownership, Fannie Mae reduced her credit requirements. Initially, profits and home ownership soared but both depended on home prices rising. When prices started to fall, recipients of NINJA mortgages (No Income, No Job or Assets) and 3% down payment mortgages defaulted. The result? The government’s implicit guarantee has become an $84 billion dollar bailout reality.

The Economic Lesson

Arthur Okun’s Equality and Efficiency:The Big Tradeoff (Brookings, 1975) discusses the tension between our democratic heritage and our economic aspirations. Equality implies a smaller economic pie while with efficiency we get a bigger pie and more individual wealth and power.

Do you support the smaller pie that would accompany a government that facilitates widespread home ownership?

Posted by: adminEcon
Tags: American Dream, arthur okun, Fannie Mae, home ownership, housing bubble
Comments (0) Add a Comment

02.13.2010 | The Debate Between Equality and Efficiency

Speaking about the current political climate in “The Populism Problem”, James Surowiecki, New Yorker columnist, cites our contradictions:

• Solve unemployment but cut the deficit
• Implement health care reform but limit government
• Help your society but protect yourself

Surowiecki’s comments reminded me of Arthur Okun’s Equality and Efficiency: The Big Tradeoff (Brookings, 1975). Always, we have demonstrated a tension between our democratic heritage and our economic aspirations. Equality implies a smaller economic pie. With efficiency we get the bigger pie but also greater individual wealth and power.

Comments?

The Economic Life
The Okun tradeoff is reminiscent of the debate between Alexander Hamilton and Thomas Jefferson. Willing to accept the cost, Hamilton’s priority was stimulating business and industry. Indeed, we could call Hamilton the father of our economy. Jefferson, by contrast worried more about democracy and the virtue of the “yeoman” farmer.

Posted by: adminEcon
Tags: Alexander Hamilton, arthur okun, economic populism, efficiency, equality, Thomas Jefferson
Comments (0) Add a Comment

12.20.2009 | A New Kind of Misery Index?

11.84 is the current level of our “misery index” if we use what Arthur Okun (economic advisor to Lyndon Johnson) created. November unemployment + inflation rates = 11.84.
However, according to Floyd Norris, a new index might be more appropriate. Suggested by Pierre Chilleteau, it combines a nation’s budget deficit as a percent of GDP with its unemployment rate.

The Economic Lesson

A misery index reflects an economic dilemma. Each has a different opportunity cost for less unemployment. Each requires a tradeoff. For Okun, if we solve unemployment, we get more inflation (or the opposite). For Chilleteau, a Keynesian solution to unemployment means an even higher budget deficit or less spending means (Keynes again) more unemployment.

Posted by: adminEcon
Tags: arthur okun, budget deficit, floyd norris, inflation, misery index, opportunity cost, unemployment
Comments (0) Add a Comment