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March Madness Isn’t Really

I went to Ohio State, a school populated almost exclusively by students who do not like to lose at anything. So when the sixth-ranked Buckeyes lost to 11th ranked Dayton (ugh…Dayton) in the NCAA basketball tournament, it certainly felt like this March, of all Marches, was particularly mad. Our disbelief at the chaos the gods have bestowed upon the basketball world seemed justified by Harvard winning, Syracuse losing to Dayton, and Wichita State’s perfect season ending at the hands of eighth-ranked Kansas.

But is March Madness this year really as especially crazy as it feels?

Turns out, it’s actually pretty average. The mean ranking of a sweet-16 team this year is 4.9 and was 4.4 from  2006-2013 (no, that difference is not statistically significant (t=-1.12, df=124)).

Composition of Sweet 16If the rankings were perfectly prescient, the sweet-16 would be comprised of the teams holding the top four rankings in each of the four brackets. 63.5% of the top four teams made the sweet-16 this year, right in line with the historical average of 67%. There aren’t many more Cinderella teams either. A quarter of teams in the sweet-16 were ranked eighth or lower, not significantly different from on the historical average of 19%.

This year’s March Madness, statistically, isn’t much madder than normal. But when it comes to explaining why my Buckeyes lost, I’m going to ignore the numbers and blame the gods who have clearly gone crazy.

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Abenomics and Inequality: Today’s Solutions and Tomorrow’s Problem

I originally published this post on The Waltham Economy of Asia Review on February 25, 2014.

Much has been written about Japan’s Prime Minister, Shinzō Abe, who took office in 2012. Lovingly or derisively called Abenomics depending on who is writing, Abe is working to jumpstart the Japanese economy through “three arrows”: monetary policy changes, fiscal stimulus, and structural reforms.

Abenomics is both needed and dangerous. It can wake the sleeping Japanese economy, but in doing so, may add income inequality to the long list of social and demographic issues Japan will have to confront in short order.

Like many other commenters, I hope that Abenomics succeeds. For the past two decades, Japan has suffered from sluggish economic growth. Japan’s economy frequently contracted on an annual basis in the years preceding the global financial crisis (see chart below). Similarly, the 2000s were a time of persistent deflation in Japan, despite unconventional monetary policy from the BOJ. In short, there is little doubt that Japan desperately needs a bold economic shift such as Abenomics to increase the rate of growth and defeat deflation.

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Economic growth and a return to low, stable inflation rates, however, is not a panacea for all of Japan’s problems. In fact, success of Abenomics may exacerbate and bring to light a problem that has been latent beneath the surface for years: income inequality. The OECD estimates that from 1985 to 2006, the average annual income of the poorest decile has decreased by 0.5% in Japan while increased by 0.3% for the top decile. Furthermore, it estimates that the Japanese Gini coefficient (a measure of income inequality where a higher coefficient means more inequality) has consistently been higher than the OECD average since 1996 and has been increasing faster since 2003. Chances are the only reason why Japanese income inequality is so rarely talked about is because other social issues such as the rapidly aging population, draconian immigration laws, and an incredibly highly leveraged government overshadow it.

Income inequality is positively associated with inflation because households at various income levels have different capabilities to insulate themselves from the loss in the value of cash due to inflation. Proportionately, the poor and middle class rely more on their wages, which do not change with inflation. In practical terms, this means that the real wealth of poor and middle class households is likely to be eroded as inflation increases. On the other hand, the wealthy are more likely to invest their paychecks and to have significant existing investments. Investments mean that the value of money can grow with (or, hopefully, more than) the rate of inflation. Inflation can create winners and losers, which means that the wealth landscape changes.

There are a number of reasons why income inequality is a concern. Though plenty of commenters feel that there is a moral argument to be made for less inequality, I am compelled by the economic argument. Berg and Ostry of the IMF argue that while countries may be able to grow in the short-term with inequality, more inequality is associated shorter periods of sustained growth.

Considering how long Japan has suffered from sluggish growth, it is certainly grasping for sustained growth. If income inequality is associated with shorter periods of growth, the inflation caused by the success of Abenomics could ultimately prove deadly.

As Shinzō Abe aims his three arrows, he should be careful to avoid his foot.

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On Inequality: What Exactly Are We Trying To Do Here?

From the State of the Union to Janet Yellen to countless articles (1, 2, 3, 4), income inequality has emerged as a defining part of American political and economic discourse. For all of its negative effects on the social and moral (not to mention economic and political) identities of America, it is little wonder that there are calls for a “fix” to income inequality.

However, I was struck by the ambiguity of the word “fix”. What does success look like? Can we fix it if we don’t know what the goal is?

To find out, I surveyed 40 people that I reached through Twitter, Facebook, and email (the survey). The results, while admittedly unscientific, were surprising.

The respondents tended to reflect my peer group: educated young professionals working in finance, economics, or education. I recognize that this sample is too small and selected to represent the population but if anything, this sample should over represent those interested in the topic with the know-how to understand what the heck we’re talking about.

The first surprise was how unconfident the respondents were. Only 17.5% rated their knowledge a 4 or 5 out of 5, while about half gave themselves a 3. My guess is that if this non-random group, of all groups, is either uneducated on the issue of feels uneducated, then the general population must be even worse. We are not able to confidently speak on the issue, which can be changed, but is not an encouraging sign to leaders hoping to awaken a movement immediately.

Self Declared Knowledge

The second (and biggest) surprise is that there is no consensus on what success looks like. I asked what the ideal income distribution looks like. For the most part, the respondents agreed that no one should be poor, but that’s where the similarities stop. After about $45,000 in household income, respondents quickly diverged. Some  wanted everyone to be rich while others wanted to retain some inequality (I fall into the second camp- I’d like income as an incentive for work once basic needs are met).

Income Inequality Ideals Responses

The diversity of responses signals that even within a group of seemingly similar people, there is yet to develop an agreement of where we should point the ship. There also was no significant relationship between how knowledgeable respondents reported they were and the likelihood of them putting most or all of the income in the top four income brackets.

Nevertheless, there is a general perception that income is too unequal now. I compared the survey results to the actual US household income distribution in 2012 (Table HINC-06): respondents wanted fewer households at either extreme overall. In 2012, 13% of US households earned less than $15,000 while the mean ideal was 1.25%. At the other extreme, 12.5% earned more than $135,000 while the mean ideal was 5%.

Census data from CPS Survey Table HINC-06. Downloaded 2/12/14.

Census data from CPS Survey Table HINC-06. Downloaded 2/12/14.

There is little disagreement that income inequality is a problem. Almost everyone wants something to change. Figuring out what should change and to what end, however, is a bit more complex.  As the Saint-Exupèry saying (now clichè) goes: “if you want to build a ship, don’t drum up the men to gather wood, divide the work, and give orders. Instead, teach them to yearn for the vast and endless sea.” The issue with income inequality is that we all yearn for different seas.

Recognized Data Issues:

The full set of responses (excluding comments) can be found here. Some issues I recognize with this survey include a small non-random sample, limited response options, limited and inexact income/wealth brackets, a the lack of the “household” qualifier in the questions.

I’d love to hear what you think about income inequality, the survey, or the analysis, so don’t hesitate to reach out.

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2013 in Review

I love Year in Review lists. And I mean love them. They’re not simply Buzzfeed-esque listicles (though I hope there is one with GIFs). Instead, they offer a chance to reflect on all of those momentous events that get pushed to the back of our memories after a couple of months. Here is my mini-Year in Review (click on the images for a full description).

Six Biggest Moments of 2013:

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