The latest data, courtesy of the Census Bureau, which released its annual update on incomes and poverty yesterday, showed that median household income increased a whopping 5.2 percent in 2015 to an inflation-adjusted $56,516. As the New York Times, noted, it was “the largest single-year increase since record-keeping began in 1967.”

Some killjoys will note that median household income was $57,909 in 1999. That’s true, but the dot-com crash, housing bust and the credit crisis managed to cut that a lot. Median incomes fell 2.59 percent from 2000 to 2004, before almost rebounding to the pre-crisis peak. After 2007, the collapse was greater — a 4.94 percent drop that bottomed in 2013.

Positive Surprise

Ignore the naysayers; the most recent numbers were a huge positive surprise, showing that incomes for all Americans are rising in a meaningful way. Unlike in recent years, when much of the gains went to an increasingly narrow group at the top of the economic strata, last year’s improvements were broad.

Gains were spread across the income spectrum and by race, while women’s earnings inched closer to men’s.

This is yet more evidence of a job market that, as we previously noted, is not getting weaker but stronger — despite the occasional disappointing number.

Of particular surprise to many was that the strongest gains were found among the lowest earners. To what shall we attribute these gains? Two things deserve most of the credit:

More people working: The big year-over-year change in employment, with almost 2.5 million more Americans working now than a year earlier, contributed to a meaningful change in total household income.

Corporate pay increases: Some of the U.S.’s largest employers, such as McDonald’s and Wal-Mart, have played a significant role in raising incomes at the lower end of the income distribution. Wal-Mart in particular made substantial increases in wages for its lowest-paid employees. These increases stand in sharp contrast to the company’s pay policies of just a few years ago. Note that the increases are not just a public-relations effort, but due to the competitive labor environment; higher pay is needed to recruit and retain workers (and because workers demoralized by the low pay and unappealing employment conditions were hurting the shopping experience for Wal-Mart customers).

The latest data is unequivocally good for households; what investors need to do is consider what this might mean more broadly. Rising incomes have ramifications for inflation, Federal Reserve policy, interest rates, retail spending, auto sales and residential real estate.

—

Post from Bloomberg

The post Income Increase Shows the Recovery Is Very Much Real appeared first on Tripeak.

The key was the explosion of affordable information technology that made it easier to gather and analyze data. By the ’90s, there was such a huge stock of untested theories and such a wealth of new data that it made more sense for young, smart economists to turn their efforts in empirical directions. Unlike in physics, where theory and experiment call for very different skill sets, most economists found they could switch from theory to data relatively easily. Prizes like the prestigious Bates Clark Medal awarded to rising economics stars under age 40 started to flow to people whose work emphasized data.

But there’s a second shift in progress — a sort of Stage 2 of the data revolution in economics. The tools of economists are changing.

The core of economics theory, as it’s practiced today, is based on individual optimization. For example, economists often assume that businesses maximize profits or minimize costs. This is known as a structural model, because economists usually assume that this sort of optimization represents the deep, fundamental structure of the economy, just like everything in your body is made up of atoms and molecules. Comparing this kind of model to data is called structural estimation, and for a while it formed the core of empirical economics.

Structural models

But structural estimation has its limitations. Since structural models are usually very complicated, the answers they give to simple questions — for example, “How many people will lose their jobs if we raise the minimum wage?” — can be very sensitive to the assumptions of the model. Tweak one assumption, and the answer might come out completely wrong.

So in recent years, many economists have been turning to an alternative approach and chucking theory out the window entirely. Instead of a complicated model about optimization and utility functions and blah blah blah, just look for a case where some kind of random change in the economy — a so-called natural experiment — offers a window into some important question. For example, you could study a random influx of refugees to answer the question of how immigration affects local labor markets. You don’t need a complicated theory of how workers and companies behave — all you need is a simple linear model of how X affects Y.

The chief evangelists of this approach are economists Angrist and Jörn-Steffen Pischke. They have called the advent of natural experiments — also called quasi-experimental methods — the “credibility revolution.” And their book about the subject is titled “Mostly Harmless Econometrics.” The implication is that quasi-experimental studies, because they are more humble than structural models, are also less likely to give us the wrong answers to our most important questions.

—

Post from Bloomberg

The post Data Geeks Are Taking Over Economics appeared first on Tripeak.

But in the age of digital-account management, this cost is nonexistent. The same is true of so-called menu costs, a name for the hassle of companies changing their posted prices. In the modern world, these things just don’t matter that much. A more sophisticated argument against inflation is that when companies want to change their prices but for some reason can’t, inflation distorts prices from what they should be, which decreases economic efficiency.

Measuring these costs

Economists have tried to measure these costs, and found that they’re just as small as we might expect. In 1981, and again in 2000, University of Chicago economics professor Robert Lucas — sometimes cited as the father of modern macroeconomics — investigated the costs of inflation. Lucas’s chosen model told him that inflation doesn’t put much of a dent in human welfare — according to his 2000 paper, 10 percentage points of inflation is only about as harmful as a 1 percent reduction in gross domestic product. In other words, according to Lucas, even a mild recession is worse for people than the inflation of the 1970s.

Lucas’s model didn’t take into account the menu costs mentioned above. But economists Ariel Burnstein and Christian Hellwig looked at those in 2008, using data on how often companies change their prices.

They find that, as one might expect, inflation has almost no perceptible impact on productivity — and hence, on well-being.

So the typical arguments for why inflation is bad don’t stand up. A better argument is that when prices rise fast, they also tend to be more volatile — high inflation equals uncertain inflation. If inflation is predictable, lenders and borrowers can build it into their financing deals; nominal interest rates simply rise to take into account the shrinking value of money.

Workers can ask for cost-of-living increases in their paychecks, effectively indexing wages to inflation. And businesses can build inflation into their investment plans. But when inflation bounces around from month to month, it’s harder to plan for the future. That makes financing, investing, hiring and any decision that involves forward-looking planning much more of a gamble. Naturally, that will tend to hurt growth.

Historical correlation

Although the historical correlation between inflation and inflation uncertainty is well-documented, that doesn’t mean the one causes the other. If the Federal Reserve had a 4 percent inflation target, and managed to hit that target every year — thus eliminating uncertainty — we wouldn’t really be any worse off than if it hit its current 2 percent target.

So what does this imply about Fed policy? A lot, actually. The Fed’s so-called dual mandate, as laid out by Congress, is “to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” But that says nothing about the relative weights that the Fed should put on maximum employment versus stable prices. The central bank is perfectly free to worry about this.

—

Post from Bloomberg

The post Overcoming Our Inordinate Fear of Inflation appeared first on Tripeak.

This may be happening with the concept of a universal basic income. The notion that government should guarantee every citizen an annual stipend of, say, $10,000 — no strings attached, no questions asked — is being studied by politicians, economists and policy experts worldwide.

Think of it as Social Security for all. In the social democracies of Europe, Canada and South America, experiments are planned or underway. In the U.S., it’s still little more than a concept — one that appears to have more conservative backers than liberal ones.

Bernie Sanders says he’s “sympathetic” to the theory behind a universal basic income but stops well short of advocating it. Hillary Clinton seems even less enthusiastic. By contrast, conservative economists, politicians and think-tank scholars are not as hesitant. Marco Rubio, for example, proposed the beginnings of a basic income in his 2015 tax plan.

The rest of the world is taking the lead

Switzerland will hold a June 5 referendum on whether to give every adult citizen 2,500 Swiss francs (about $2,600) a month. Ontario, Canada, will conduct an experiment with a basic income later this year. The city of Utrecht in the Netherlands is conducting a pilot program, and Finland is planning a two-year trial. A British proposal is gathering interest. In May, a nonprofit group will start giving 6,000 Kenyans a guaranteed income for at least a decade and follow the results.

Basic-income proposals come in many varieties, and have myriad rationales.

Some progressives see it as the ultimate expression of what a developed economy can achieve: a way to lessen poverty and inequality, and ease the pain of job loss and economic stagnation. But in the U.S., many liberals see it as naive and a distraction from more practical priorities, such as a $15 minimum wage and paid family leave.

For conservatives, the attraction is smaller government. Dozens of social-welfare programs now costing U.S. taxpayers about $1 trillion a year could be folded into a basic-income program, they argue.

With no eligibility criteria or enforcement needed, administrative costs would be bare-bones. Waste, fraud and abuse would be greatly reduced, the argument goes, if not close to zero.

In the 1960s, a basic income was part of the mainstream political discussion. President Richard Nixon even proposed an income floor, based on ideas developed by Daniel Patrick Moynihan, then a domestic-policy adviser. The proposal died in part because of liberal opposition to a work requirement and obstruction by a well-organized welfare lobby, Moynihan would later write.

The earned-income tax credit, a form of basic income, took its place, but only to supplement the earnings of the working poor. The tax credit was first proposed in 1962 by conservative economist Milton Friedman. One of his aims was to end the “earnings cliff,” in which government aid disappears once income exceeds a cap. Such a limit discourages recipients from working, a consequence that keeps them dependent.

—

Post from Bloomberg

The post A Basic Income Should Be the Next Big Thing appeared first on Tripeak.