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Subject: How to measure inequality, strengthen the safety net (AEI Economics Ledger) If you have trouble reading

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Income inequality
AEI EVENT VIDEO and TRANSCRIPT — Senator Marco Rubio discusses income mobility and the American Dream TESTIMONY — Income inequality in the US. Aparna Mathur: “The purpose of this testimony is to summarize some ideas that might help policymakers address the current economic crisis facing families and provide them opportunities to be productive participants in the labor market and rebuild their lives. . . . While trying to equalize outcomes for families by attempting to equalize incomes may be an impossible goal, equalizing opportunities for individuals by providing access to good schools and good jobs may be more attainable and realistic.” FROM THE ARCHIVES (2012) — A new measure of consumption inequality. Kevin Hassett and Aparna Mathur: “Income data are not the best measure of overall welfare. What matters for household well-being is consumption, since households are better able to smooth consumption rather than income over their lifetime. To that end, we use two alternative sources of data to assess changes in consumption inequality. Our first source, the Consumer Expenditure (CEX) Survey, shows aggregated changes in consumption expenditures for households at all levels of the income distribution. Using these data, we find that consumption inequality has increased only marginally since the 1980s. ” Mobility is the biggest threat to the American Dream. Jim Pethokoukis: “The problem is not too much income inequality, the GOP will say, but too little upward mobility that endangers the American Dream. As Senator Marco Rubio said last week in an important anti-poverty speech, ‘upward mobility and equal opportunity is not a partisan issue, it is our unifying American principle. ’” The minimum wage is minimal relief for the poor. Abby McCloskey: “It’s far from widely agreed that the minimum wage is a good policy tool. Opponents believe that higher mandated wages will cause employers to fire some workers, or not hire additional ones. Proponents argue that these disemployment effects are small. But this debate misses the key point: Even if the minimum wage works as its advocates claim, it is a highly ineffective anti-poverty tool.”

Strengthening the safety net
Underfunded pensions, underestimated risk. Andrew Biggs: “In cities and states around the country, elected officials, public employees and taxpayers are concerned about the funding of public sector pensions, which are placing increasing pressure on government budgets. But in reality, none of these stakeholders have a clear idea how well funded their plans are, due to accounting rules and disclosures that confuse true funding—that is, money you've actually got—with pseudo-funding based upon money the plan expects to earn in the future.” AEI EVENT VIDEO and summary — More or better? Rethinking Social Security for the 21st century

A slowdown afoot?

A bad month ends a typical year. Michael Strain: “Economists and analysts were reasonably hopeful that the labor market had entered a period of self-sustaining recovery. <Last week’s> jobs report takes a sledgehammer to those hopes. The year ended with a roar of disappointment. The economy added only 74,000 jobs last month. While the unemployment rate fell to 6.7%, the drop was driven by a contraction in the labor force of 347,000.”  VIDEO — Kevin Hassett discusses the disappointing jobs report for December Growth momentum goes away. John Makin: “The Fed has to worry about a worsening employment picture. First, because it can’t do anything about it — monthly employment growth in 2013 was identical to that in 2012 — and second because it has said it can.” Fed risks extend across the pond. Desmond Lachman: “As the Federal Reserve now begins unwinding its unprecedented quantitative easing program, one would think that it would be well served by being mindful of Wall Street’s turkey adage. For never before has global liquidity been as ample as it has been in the past few years. And never before have the countries that have allowed their economic policies to slip in the good times been so important to the global economy as they are today.” The US is no longer a world leader in economic freedom. Ben Zycher: “The 2014 Heritage/Wall Street Journal national ranking index of economic freedom was published yesterday, and it makes for some sobering reading. The recent overall index rankings for the US among approximately 165 nations since 2008 are as follows:        2008: 5th 2009: 6th 2010: 8th 2011: 9th 2012: 10th 2013: 10th 2014: 12th”

Policies for stronger growth in 2014. Phillip Swagel: “Don't expect a grand bargain with entitlement changes to address the structural fiscal imbalance, or a pro-growth tax reform aimed at putting the U.S. economy back onto a permanently better trajectory. The administration's policy horizon has shrunk, meaning that these long-term challenges will be left for the next President. But there is still a chance of movement this year on immigration, trade, and housing finance reform, all of which would constitute meaningful progress toward a stronger U.S. economy.”

Financial reform
AEI EVENT VIDEO and summary – Former Federal Reserve Chairman Alan Greenspan discusses his new book, “The map and the territory: Risk, human nature, and the future of forecasting” Regulators follow the money, but not systemic risk. Peter Wallison: “It is difficult to see how asset managers, of whatever size, could create systemic risk. Losses suffered by a managed fund flow through immediately to investors in the fund. According to the Office of Financial Research, the total amount of funds under management is approximately $53 trillion. This means that no matter how large the losses incurred by funds, there is about $53 trillion in equity that is available to absorb them.” Banks are safer, but regulators are not. Phillip Swagel: “The demise of a large bank will be no minor event, but the financial system is safer than previously and so too is the broader economy as a result. Even if incidents such as Madoff or the Whale do not pose a systemic risk, this still leaves the difficult question of how to ensure that they do not slip past financial supervisors. Even before the financial crisis, regulators already had ample powers to head off harmful behavior.”

Spotlight on innovation
Obamacare’s unclear impact on innovation. Stan Veuger: “A recent research paper by Seth Freedman, Haizhen Lin and Kosali Simon of Indiana University finds that technology adoption can be slowed by expansions of public insurance programs when the newly insured used to be enrolled in plans that offered more generous payments to doctors and hospitals. And that is precisely what the ACA may end up doing if its cost controls work as intended.” Tech companies innovate, Washington seeks to regulate. Daniel Lyons: “Rules like net neutrality, which impose ex ante limits on innovation, may ultimately harm both consumers and competition. The effect is to entrench existing market practices and limit a company's ability to differentiate itself and gain market share by offering potentially better options to consumers unsatisfied with the status quo.”

In other news
Download the free AEI book of the week: Tax policy lessons from the 2000s, edited by Alan Viard Radical European politics. Desmond Lachman: “One of the more striking features of the European political economy over the past three years has been the radicalization of its politics. In Greece, for example, at the start of the economic crisis in early 2010, its two main centrist political parties, New Democracy and PASOK, received around 70 percent of the vote. Today, after six years of painful economic recession, those parties command barely 30 percent of the vote and extremist parties on both the left and the right have ascended.”

Mark your calendar
1.17 AEI Event: Tech policy 2014: The year ahead 1.20 Markets closed for Martin Luther King Jr. Day 1.23 Jobless claims released 1.23 AEI Event: Names, numbers, and network solutions: the monetization of the internet 1.29 AEI Event: Corporate tax reform: Where to from here?

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