I have a new paper out with Dan Andrews and Christopher Jencks, on the relationship between inequality and growth. We reach a finding that is pretty standard in this literature [base ']Äì when we restrict the sample to 1960-2000, more inequality seems to be good for growth. However, if the inequality arises from a transfer from the bottom 90% to the top 10%, we[base ']Äôre skeptical that the bottom 90% get enough back in growth to make up for their loss in share.

Here[base ']Äôs the abstract:

Do Rising Top Incomes Lift All Boats?
Dan Andrews, Christopher Jencks & Andrew Leigh
Pooling data for 1905 to 2000, we find no systematic relationship between top income shares and economic growth in a panel of 12 developed nations observed for between 22 and 85 years. After 1960, however, a one percentage point rise in the top decile[base ']Äôs income share is associated with a statistically significant 0.12 point rise in GDP growth during the following year. This relationship is not driven by changes in either educational attainment or top tax rates. If the increase in inequality is permanent, the increase in growth appears to be permanent, but it takes 13 years for the cumulative positive effect of faster growth on the mean income of the bottom nine deciles to offset the negative effect of reducing their share of total income.

The paper was written up in the Wall Street Journal last Tuesday, under the headline [base ']ÄúTrickle-Down Economics Fails to Deliver as Promised[base ']Äù. Here[base ']Äôs a snippet:

The paper does not argue that trickle-down economics is without merit. It[base ']Äôs just that it doesn[base ']Äôt appear to generate enough bang for the buck. It was written by Harvard[base ']Äôs Dan Andrews and Christopher Jencks, and Australia National University[base ']Äôs Andrew Leigh.

[base ']ÄúIncreases in inequality lead to more growth,[base ']Äù the paper[base ']Äôs authors wrote. [base ']ÄúThere appears to be some trickle-down effect in the long run, but since the impact of a change in inequality on economic growth is quite small, it is difficult to be sure from our estimates whether the bottom 90% will really be better off or not.[base ']Äù

In an interview, Jencks said it[base ']Äôs a real challenge to gather the information needed to determine whether trickle-down economics works as its advocates believe.

But he concludes the evidence shows [base ']Äúit certainly didn[base ']Äôt deliver as much as many said[base ']Äù and to the degree it did work, [base ']Äúthe effects are really small.[base ']Äù

The paper[base ']Äôs findings were based on data from 12 developed nations, observed over most of the last century into the current century.

Trickle-down economics[base ']Äô day is probably done, for now at least. The financial crisis will bring not just stricter regulation and tighter oversight for many markets. The massive budget deficits that the U.S. will be left with as a consequence of the bailouts and economic stimulus spending will require tax hikes that are likely to reach beyond the rich.

9:48:05 PM    

I have an opinion piece in The Age today on Government 2.0.

Joshua Gans, The Age, 6th July 2009 (see also WA Today)

The Government’s tight control of public information is outdated.

UNLOCKING the information collection by governments [base ']Äî and deciding what information could be of social value [base ']Äî is the aim behind the new ‘Government 2.0′ taskforce headed by economist Nicholas Gruen.

The taskforce’s mission results from a key recommendation in the Cutler Review on Innovation [base ']Äî a taskforce that Dr Gruen served on.

In BusinessDay last August , I highlighted an example with regard to the free availability of public toilet location information [base ']Äî also mentioned in the Cutler review because that information had actually been collected as part of the National Continence Management Strategy and gave Australia perhaps the most comprehensive toilet location map in the world.

However, that information was provided only in ways the Federal Government chose to and it could not easily be viewed on a mobile device.

That has improved, but not to the extent of allowing developers to match the information with devices in a truly usable manner.

Google Maps might have been invented in Australia and they can pull all manner of data [base ']Äî except our toilet locations.

But this is just the tip of the iceberg. Schedules for public transport, TV and radio programming, emergency room information and traffic sits locked within the Government. So the mission of the taskforce to find ways of bringing it out is clearly a critical one.

They will face challenges. Politicians and bureaucrats do not give up control of information lightly. The taskforce will hear excuses.

First, it will be claimed that free use of the data means the Government cannot certify its integrity. That may be the case, but is it really necessary for it to give such certification?

Surely our consumer laws are strong enough to accept clear labelling from those repackaging the information that things may not be up to date. Search for exchange rates on free sites and the disclaimer is there.

Even so, the taskforce should not settle for that. It should be the duty of the Government to not just post some spreadsheets on a website but to work out protocols that, if changes occur, allow those drawing from the information to update it accordingly.

Twitter and Facebook provide developers with this ability in real time. Surely, the Government should be expected to do the same thing?

Second, there are issues of privacy.

Dr Gruen highlighted NSW information on popular baby names from the Registry of Births, Deaths and Marriages as an area where governments are getting it right. But that same information excludes really unpopular names because they might identify (presumably the birth year) of certain people.

That might be possible if your name is derived from Klingon but surely that isn’t a strong reason to limit searches. For instance, you could identify unpopular names by decade rather than year.

These demonstrate the challenges that might come from complacency. But Dr Gruen’s baby names’ example highlights another. He was enamoured with a particular representation of the data as a graph showing 1200 baby names over time. You can hover over bits of it and find out just how many NSW babies had a name in a given year. Perhaps it was neat technologically but it was, in many respects, of no real value. At best, it told you trends of gender-based names around certain areas of the alphabet.

The point is that it shows us that we can do better and indeed, it is precisely why the Government needs to free the information so that others can provide it in a useful form and improve on it.

The problem is that when it comes to NSW baby names, despite the flashy graph, that data is locked within Government. You cannot request a database with the underlying information. And so no one other than Government can present it to us in a form that is actually of use.

I won’t speculate on what that use might be. I just hope this is not what the taskforce has in mind because it highlights precisely the problem rather than the goal.

To be fully successful, this taskforce will have to change the default position of government from tight control to open access. That said, I would be happy if beside every representation of information, there was a ‘click here to download a spreadsheet’ button. If they can’t get that, this taskforce cannot claim to have succeeded in any measure.

Joshua Gans is an economics professor at Melbourne Business School. He contributes to the economics.com.au blog.

9:46:04 PM    

The unemployment numbers yesterday were again remarkably good relative to what is happening elsewhere in the world. The headline u/e rate is up to 5.8%. Since July last year we’ve lost about 160,000 full time jobs, but part time jobs are up about 127,000. Of course we need to create jobs to stop the unemployment rate from rising, but compare these numbers with the US. Paul Krugman this week pointed out that the US has lost ¬[sgl dagger]more than 6 million jobs since the recession started, and it needed to create 8 million jobs to stop the unemployment rate from rising over the same period. The US labour market is roughly 12 times bigger than ours, so equivalent job losses in the Australian market would be roughly 500,000 jobs – instead we’ve lost only about 30,000. The number of unemployed has risen from 484,000 to 662,000 in Australia – thankfully, in terms of labour market behaviour we have become very much decoupled from the US.

9:42:36 PM