Thomas Edsall has a lengthy blogpost on a new measure of income developed by Cornell University Professor and AEI fellow Richard Burkhauser. Burkhauser's measure reverses the widely reported finding that inequality has increased substantially over the last three decades.

While Edsall went to great lengths to include extensive comments from other economists (including me) on Burkhauser's methodology and concluded himself that Burkhauser's methodology doesn't measure up, readers may still be led to believe that there is more ambiguity on this issue than is actually the case. This is because Burkhauser's measure is so peculiar and counter-intuitive, that it is unlikely that many readers would understand what he has in fact done.

Burkhauser does address a legitimate question -- the treatment of capital gains. Usually economists calculate inequality by both taking income without counting realized capital gains (sales of stock, houses, or businesses) and also including the gains. The latter will generally show higher degrees of inequality since wealthy people are likely to have realized capital gains, whereas middle and lower income people are not.

This approach does pose a problem since the decision to sell an asset is an arbitrary one and does not necessarily reflect when the gain actually took place. Also, a lower capital gains tax rate will encourage people to sell their assets more frequently, which by itself would lead to larger reported income. So a methodology that includes realized capital gains is problematic.

However Burkhauser's response, to include unrealized gains, makes no sense in a serious measure of income. The reason is that asset prices (especially stock, but in recent years housing as well) are hugely volatile. For people who have substantial assets, the movement in these prices in any given year will often swamp their other income. Gary Burtless and I both made this point in our comments.

An implication of Burkhauser's methodology is that our measure of inequality would depend hugely on the exact year we picked for our analysis. In his study, the base year for most of his analysis is 1989, a year in which the S&P 500 rose by more than 27 percent. This hugely increased the earnings of the top quintile in his base year. As a result, the change from 1989 forward would be guaranteed to be small. By contrast, if Burkhauser had chosen 1987, when the S&P fell more than 6 percent, he would have a much lower base. This would make the growth in income for the top quintile appear much larger.

To see this, imagine the average income, not counting capital gains, for the top quintile is $200,000 in both 1987 and 1989. Suppose they own $1 million in stock on average. In Burkhauser's methodology their income in 1989 is $470,000. Their income in 1987 is $140,000. (Number corrected, thanks Yoram.) We would be telling a very different story about the growth of income inequality over the next two decades if we opted to choose 1987 as our base year rather than the year picked by Burkhauser. (The year 1989 is often chosen as a base year because it is a business cycle peak. That makes sense in a measure that is primarily reflecting earnings growth which tends to peak at the peak of the cycle. It makes no sense when taking a measure that is moved primarily by capital gains.)

There could be an argument for taking unrealized capital gains averaged over a longer period, which is not the methodology that Burkhauser chose. By this methodology we would average the capital gains for households over the period being investigated and add the annual amount to their income. This would be a considerably more defensible methodlogy, but it still would give very misleading results because of the housing bubble.

While many are celebrating the Supreme Court’s decision granting marriage equality to same sex couples, some have been quick to highlight the potential budgetary costs of this decision. In particular, opponents of the court’s ruling are warning the public that it will lead to much higher costs for Social Security.

Before anyone rushes to push through a constitutional amendment, it would be worth trying to get an idea of the potential costs to Social Security resulting from this decision. Essentially the decision says that same sex couples have the right to be married and enjoy the same benefits and protection that Social Security provides to heterosexual couples.

There would be some issues involving children of spouses of disabled workers or workers who have an early death, but the bulk of the impact will be from spouses in same sex couples who will be entitled to a higher retirement benefit as a result of marriage. This takes two forms. First, in retirement a spouse is entitled to half of their married partner’s benefit if this would be larger than the benefit they would receive based on their own work history. Second, after a spouse dies, a retiree is entitled to the higher of either their own benefit or their spouses. By virtue of the fact that same sex couples will now be able to have the same rights in marriage as heterosexual couples, both of these channels will lead to higher benefit payouts.

Of course in the vast majority of cases, the wage-based benefit of the lower earning spouse will be more than half of the benefit of the higher earning spouse. The reason is that the benefit structure is very progressive. Suppose that a higher earning spouse had an average lifetime indexed-earnings of $100,000 in 2013 dollars.[1] Under the current benefit formula this worker would be entitled to $2,500 a month or $30,000 a year, if he or she waited until age 66 to start collecting benefits.

In order for a worker’s wages to qualify them for at least half of this benefit or $1,250 a month, they would need average earnings of just $29,750 a year (@ $15 an hour for a full-year worker), less than one-third of their high earning spouse’s wages. While there continue to be large gaps between male and female earnings, the gaps are likely to be smaller between the earnings of two men or two women in a same sex marriage. Therefore it is likely that in the case of most same sex couples, the lower earning spouse will have a wage-based benefit that is at least half as high as that of the higher earning spouse. In the cases where this is not true, the bump up to half of the spouses benefit is likely to be small.

Dean Baker
The Exchange (Yahoo! Finance), June 26, 2013
En Español

In an important development today, Amnesty International stated that “The US authorities’ relentless campaign to hunt down and block whistleblower Edward Snowden’s attempts to seek asylum is deplorable and amounts to a gross violation of his human rights.”

This is significant because the international press coverage of the Snowden drama has almost completely ignored the question of whether Snowden’s rights are being violated by U.S. efforts to prevent him from seeking asylum under international law. 

It will be interesting to see if any of the major media outlets covering these events will report on this important and apparently well-grounded legal argument, given that they have reported on the Obama administration’s arguments that countries are legally obligated to hand Snowden over to the United States.  Also, Amnesty International is one of the most important human rights organizations in the world, and its statement should be relevant to news reporting on the Snowden case.

Read the full Amnesty International statement here.

As we have previously noted, the Obama administration has reversed course, seeking to lower the profile of the Snowden case after its threats against Russia, Ecuador, and Hong Kong backfired and after apparently realizing that public support for Snowden remains high despite a U.S. government-led effort to demonize him in the media. This has resulted in a litany of mixed messages from senior administration officials.

Is the Obama administration simply disorganized, or has the strategy changed over time as information about the Snowden case and government surveillance reaches wider and wider audiences? Also, what is the overall strategy of the government as an international effort develops to protect the right to privacy and the right to asylum?  We try to answer some of these questions here.

A reporter went after State Department Spokesman Patrick Ventrell at the State Department's Daily Press Briefing today about European anger in response to Snowden's revelations of U.S. surveillance of European officials and citizens. Here we will quote at length because the exchange was amusing and revealing:

QUESTION: When discussing this issue, the – with the Europeans or others who might be upset or are saying that they’re upset, the U.S. position is that all countries engage in intelligence gathering and this shouldn’t come as a surprise to you?

MR. VENTRELL: Again, I’m not going to get into the content of that diplomatic exchange, other than to say that we’re going to have it very directly and privately with the countries concerned.

QUESTION: But --

QUESTION: Change topic?

QUESTION: Hold on, I’m just – but you’re not admitting any wrongdoing, though?

MR. VENTRELL: I didn’t say that. I said we’ll have our --

QUESTION: I know. I want to make sure that I understand, when these conversations happen, you’re not saying, “Oh, sorry.”

MR. VENTRELL: Again, I’m just not going to characterize --

QUESTION: You’re not – you’re explaining what you do, and you’re saying, “This isn’t unusual and you probably do it as well.”

MR. VENTRELL: To take the lens back a little bit, I think a number of these countries are countries we have a very strong relationship with on a number of fronts --

QUESTION: Or you did, at least, have a very strong relationship with.

Yesterday Canadian Minister of Defense Peter MacKay announced that 34 soldiers would be deploying to Haiti as part of the U.N. stabilization mission (MINUSTAH). The announcement, which comes as MINUSTAH is reducing the overall size of its force in Haiti, appears to be as much about strengthening relations with Brazil, as it is about “peacekeeping.”  Lee Berthiaume reports for Canada’s Postmedia News:

But MacKay was quick to confirm that Canada wasn’t re-upping with the UN in any significant way, but that the mission was part of a larger effort to help Haiti while strengthening ties with the emerging political, economic and military powerhouse that is Brazil.

…

MacKay was joined by Minister of State for the Americas Diane Ablonczy, who highlighted “the tremendous potential and the great partners that are available to Canada in Brazil.”

Aside from the fact that MINUSTAH is not truly a “peacekeeping” force, as there is no armed conflict in Haiti, Canada wouldn’t be the first country to use MINUSTAH for diplomatic or political reasons as opposed to legitimate security concerns. In fact, as we have previously noted, diplomatic cables released by Wikileaks show the motives behind Brazil taking the lead for MINUSTAH were largely political. One such cable, from March 2008 asserts:

Brazil has stayed the course as leader of MINUSTAH in Haiti despite a lack of domestic support for the PKO [peacekeeping operation]. The MRE [Ministry of External Relations] has remained committed to the initiative because it believes that the operation serves [Foreign Minister Celso] Amorim's obsessive international goal of qualifying Brazil for a seat on the UN Security Council. The Brazilian military remains committed as well, because the mission enhances its international prestige and provides training and operational opportunities.

And it doesn’t stop there.  In addition to being led by Brazil, MINUSTAH is comprised predominantly by troops from Latin America, making up over 70 percent of the total currently. Wikileaked cables provide insight into the U.S. strategic interests behind MINUSTAH and the advantage of having it be led by Latin American countries.

June 25, 2013

June 25, 2013 (Housing Market Monitor)

Since my comments on Greg Mankiw's defense of the one percent prompted so much response, I thought I should add some clarification on the treatment of patents and copyrights. First off, my main point is that these are government policies designed to meet a public purpose (i.e. promoting innovation and creative work), not natural rights that are an end in themselves. In this sense altering them does not raise questions of rights as would restricting the freedom of speech or assembly.

Those who like to point to the constitutional origin of these forms of property should note where patents and copyrights appear in the constitution. They are listed as a power of Congress along with other powers, like the power to tax. They do not appear in the Bill of Rights where rights of individuals are explicitly described.

The constitution authorizes Congress to create monopolies for limited periods of time "to promote the Progress of Science and useful Arts." In this sense, patents and copyrights are explicitly linked to a public purpose. If it were determined that patents and copyrights are not the most efficient means for promoting innovation and creative work, and therefore Congress decided to stop authorizing these monopolies, individuals would have no more constitutional basis for complaint than if Congress decided that it didn't need to raise taxes.

Once we recognize that patents and copyrights are policies to promote innovation and creative work then the question is whether they are best policy and if so, are they best structured now for this purpose. Neither assumption is obvious and I would argue that the latter is almost certainly not true.

In terms of whether these are the best policies, in my earlier post I was simply pointing out that alternative mechanisms already exist and support a great deal of work. I actually didn't advocate any specific policy, but I have written on alternatives to both. Here's a discussion of alternatives to patent supported drug research and here is a proposal modeled after the tax deduction for charitable contributions for supporting creative work. (By the way, the folks who were arguing for the merits of markets over central planning are in the wrong place. You were looking for Joe Stalin's blog, there is no proposal for central planning in my work.)