Category Archive for: Income Distribution [Return to Main]

Tuesday, July 29, 2014

Why the Rich Should Take the Lead Income Redistribution

I have a new column:

Why the Rich Should Call for Income Redistribution: After the craze over Thomas Piketty’s Capital in the Twenty First Century, nobody should be surprised to learn that inequality has been increasing over the last several decades. The question is what to do about it.
One answer is to do nothing and hope the problem fixes itself, or to deny it is a problem at all. But that is a dangerous approach. - See more at: http://www.thefiscaltimes.com/Columns/2014/07/29/Why-Rich-Should-Call-Income-Redistribution#sthash.V51AksZQ.dpuf

One answer is to do nothing and hope the problem fixes itself, or to deny it is a problem at all. But that is a dangerous approach. ...

Saturday, July 26, 2014

'Are the Rich Coldhearted?'

Why are so many of the rich and powerful so callous and indifferent to the struggles of those who aren't so fortunate?:

Are the Rich Coldhearted?, by Michael Inzlicht and Sukhvinder Obhi, NY Times: ... Can people in high positions of power — presidents, bosses, celebrities, even dominant spouses — easily empathize with those beneath them?
Psychological research suggests the answer is no. ...
Why does power leave people seemingly coldhearted? Some, like the Princeton psychologist Susan Fiske, have suggested that powerful people don’t attend well to others around them because they don’t need them in order to access important resources; as powerful people, they already have plentiful access to those.
We suggest a different, albeit complementary, reason from cognitive neuroscience. On the basis of a study we recently published with the researcher Jeremy Hogeveen, in the Journal of Experimental Psychology: General, we contend that when people experience power, their brains fundamentally change how sensitive they are to the actions of others. ...
Does this mean that the powerful are heartless beings incapable of empathy? Hardly..., the bad news is that the powerful are, by default and at a neurological level, simply not motivated to care. But the good news is that they are, in theory, redeemable.

Thursday, July 24, 2014

Meritocracy won’t happen: the problem’s with the ‘ocracy’

Andrew Gelman:

Meritocracy won’t happen: the problem’s with the ‘ocracy’, by Andrew Gelman, Monkey Cage: I’ve written about this before but I think the topic is worth returning to, because it comes up a lot in our political discourse.

For example, consider this recent post by Robert Reich (link from Mark Thoma):

The “self-made” man or woman, the symbol of American meritocracy, is disappearing. Six of today’s ten wealthiest Americans are heirs to prominent fortunes. . . . We don’t have to sit by and watch our meritocracy be replaced by a permanent aristocracy . . .

I don’t disagree with Reich on the data..., the data seem to support Reich’s point that lots of rich people come from rich families.

But I want to dispute Reich’s other statement, which is that this is somehow contrary to the spirit of “meritocracy.”

I claim the opposite: that inherited privilege is an intrinsic and central aspect of meritocracy. ...

Sunday, July 20, 2014

Tyler Cowen on Global Inequality

Dan Little:

Tyler Cowen on global inequality: Tyler Cowen sounds a bit like Voltaire's Pangloss when he argues, as the New York Times headline puts it, that we are living "all in all, [in] a more egalitarian world" (link). Cowen acknowledges what most people concerned about inequalities believe: "the problem [of inequality] has become more acute within most individual nations"; but he shrugs this off by saying that "income inequality for the world as a whole has been falling for most of the last 20 years." The implication is that we should not be concerned about the first fact because of the encouraging trend in the second fact.

Cowen bases his case on what seems on its face paradoxical but is in fact correct: it is possible for a set of 100 countries to each experience increasing income inequality and yet the aggregate of those populations to experience falling inequality. And this is precisely what he thinks is happening. Incomes in (some of) the poorest countries are rising, and the gap between the top and the bottom has fallen. So the gap between the richest and the poorest citizens of planet Earth has declined. The economic growth in developing countries in the past twenty years, principally China, has led to rapid per capita growth in several of those countries. This helps the distribution of income globally -- even as it worsens China's income distribution.

But this isn't what most people are concerned about when they express criticisms of rising inequalities, either nationally or internationally. They are concerned about the fact that our economies have very systematically increased the percentage of income and wealth flowing to the top 1, 5, and 10 percent, while allowing the bottom 40% to stagnate. And this concentration of wealth and income is widespread across the globe. (Branko Milanovic does a nice job of analyzing the different meanings we might attach to "global inequality" in this World Bank working paper; link.)

This rising income inequality is a profound problem for many reasons. First, it means that the quality of life for the poorest 40% of each economy's population is significantly lower than it could and should be, given the level of wealth of the societies in which they live. That is a bad thing in and of itself. Second, the relative poverty of this sizable portion of society places a burden on future economic growth. If the poorest 40% are poorly educated, poorly housed, and poorly served by healthcare, then they will be less productive than they have the capacity to be, and future society will be the poorer for it. Third, this rising inequality is further a problem because it undermines the perceived legitimacy of our economic system. Widening inequalities have given rise to a widespread perception that these growing inequalities are unfair and unjustified. This is a political problem of the first magnitude. Our democracy depends on a shared conviction of the basic fairness of our institutions. (Kate Pickett and Richard Wilkinson also argue that inequality has negative effects on the social wellbeing of whole societies; link.)

The seeming paradox raised here can be easily clarified by separating two distinct issues. One is the issue of income distribution within an integrated national economy -- the United States, Denmark, Brazil, China. And the second is the issue of extreme inequalities of per capita GDP across national economies -- the poverty of nations like Nigeria, Honduras, and Bangladesh compared to rich countries like Sweden, Germany, or Canada. Both are important issues; but they are different issues that should not be conflated. It is misleading to judge that global inequality is falling by looking only at the rank-ordered distribution of income across the world's 7 billion citizens. This decline follows from the moderate success achieved in the past fifteen years in ameliorating global poverty -- a Millenium Development Goal (link). But it is at least as relevant to base our answer to the question about the trend of global inequalities by looking at the average trend across the world's domestic economies; and this trend is unambiguously upward.

Here is a pair of graphs from The Economist that address both topics (reproduced at the XrayDelta blog here). The left panel demonstrates the trend that Cowen is highlighting. The global Gini coefficient has indeed leveled off in the past 40 years. The right panel indicates rising inequalities in US, Britain, Germany, France, and Sweden. As the second panel documents, the distribution of income within a sample set of national economies has dramatically worsened since 1980. So global inequalities are both improving and worsening -- depending on how we disaggregate the question.

The global Gini approach is intended to capture income inequalities across the world's citizens, not across the world's countries. Essentially this means estimating a rank-order of the incomes of all the world's citizens, and estimating the Lorenz distribution this creates.

We get a very different picture if we consider what has happened with inequalities within each of the world's national economies. Here is a graph compiled by Branko Milanovic that represents the average Gini coefficient for countries over time (link):

This graph makes the crucial point: inequalities within nations have increased dramatically across the globe since 1980, from an average Gini coefficient of about .45 to an average of .54 in 2000 (and apparently still rising). And this is the most important point: each of these countries is suffering the social disadvantages that go along with the fact of rising inequalities. So we could use the Milanovic graph to reach exactly the opposite conclusion from the one that Cowen reaches: in fact, global inequalities have worsened dramatically since 1980.

Thomas Piketty's name does not occur once in Cowen's short piece; and yet his economic arguments about capitalism and inequality in Capital in the Twenty-First Century are surely part of the the Cowen's impetus in writing this piece. Ironically, Piketty's findings corroborate one part of Cowen's point -- the global convergence of inequalities. Two French economists, François Bourguignon and Christian Morrisson, made a substantial effort to measure historical Gini coefficients for the world's population as a whole (link). Their work is incorporated into Piketty's own conclusions and is included on Piketty's website. Here is Piketty's summary graph of global inequalities since 1700 -- which makes the point of convergence between developed countries and developing countries more clearly than Cowen himself:

So what about China? What role does the world's largest economy (by population) play in the topic of global economic inequalities? China's per capita income has increased by roughly 10% annually during that period; as a population it is no longer a low-income economy. But most development economists who study China would agree that China's rapid growth since 1980 has sharply increased inequalities in that country (linklink). Urban and coastal populations have gained much more rapidly than the 45% or so of the population (500 million people) still living in backward rural areas. A recent estimate found that the Gini coefficient for China has increased from .30 to .45 since 1980 (link). So China's rapid economic growth has been a major component of the trend Cowan highlights: the rising level of incomes in previously poor countries. At the same time, this process of growth has been accompanied by rising levels of inequalities within China that are a source of serious concern for Chinese policy makers.

Here are charts documenting the rise of income inequalities in China from the 2005 China Human Development Report (link):

 
 
 

So rising global income inequality is not a minor issue to be brushed aside with a change of topic. Rather, it is a key issue for the economic and political futures of countries throughout the world, including Canada, Great Britain, the United States, Germany, Egypt, China, India, and Brazil. And if you don't think that economic inequalities have the potential for creating political unrest, you haven't paid attention to recent events in Egypt, Brazil, the UK, France, Sweden, and Tunisia.

Wednesday, July 16, 2014

'The Rise of the Non-Working Rich'

Robert Reich:

The Rise of the Non-Working Rich: In a new Pew poll, more than three quarters of self-described conservatives believe “poor people have it easy because they can get government benefits without doing anything.” In reality, most of America’s poor work hard, often in two or more jobs.
The real non-workers are the wealthy who inherit their fortunes. And their ranks are growing. In fact, we’re on the cusp of the largest inter-generational wealth transfer in history. ...
The “self-made” man or woman, the symbol of American meritocracy, is disappearing. Six of today’s ten wealthiest Americans are heirs to prominent fortunes. ...
This is the dynastic form of wealth French economist Thomas Piketty warns about. ... What to do? First, restore the estate tax in full.
Second, eliminate the “stepped-up-basis on death” rule. This obscure tax provision allows heirs to avoid paying capital gains taxes... Such untaxed gains account for more than half of the value of estates worth more than $100 million, according to the Center on Budget and Policy Priorities.
Third, institute a wealth tax. ...
We don’t have to sit by and watch our meritocracy be replaced by a permanent aristocracy, and our democracy be undermined by dynastic wealth. We can and must take action — before it’s too late.

Tuesday, July 15, 2014

Improving Social Insurance Can Narrow the 'Opportunity Gap'

I have a new column:

Improving Social Insurance Can Narrow the “Opportunity Gap”: The justification for social insurance programs that protect workers is usually based upon the fact that employment in capitalist economies is subject to substantial variation due to cyclical fluctuations and structural change. Economic systems such as socialism have much less variation in employment since everyone, pretty much, is guaranteed a job. But the growth rate of output in those systems is not as high as it is in capitalist economies, and that leads to a lower average standard of living. 
Why not enjoy the benefits of a capitalist system while minimizing its costs through the use of social insurance programs that insulate workers from harm when they lose their jobs for one of these reasons? ...
We don’t do enough to insulate workers from the fluctuations in employment inherent in capitalist economies. ...
Doing more to help workers affected by economic downturns and structural change is not the only way in which social insurance could be improved. There other risks, in particular the risk of unequal opportunity, that are baked into capitalist systems. ...

Wednesday, July 09, 2014

Adam Smith as Malthusian: 'The Surplus Population'

Brad DeLong quotes Adam Smith:

Adam Smith as Malthusian: “The Surplus Population”, by Brad DeLong: ...Adam Smith: Smith: Wealth of Nations, Book I, Chapter 8: “Is this improvement in the circumstances of the lower ranks of the people…

…to be regarded as an advantage or as an inconveniency to the society? The answer seems ... abundantly plain. Servants, abourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged.

Poverty… seems even to be avourable to generation. A half-starved Highland woman frequently bears more than twenty children…. Luxury in the fair sex, while it enflames perhaps the passion for enjoyment, seems always to weaken and frequently to destroy altogether, the powers of generation. But poverty… is extremely unfavourable to the rearing of children…. It is not uncommon… in the Highlands… for a mother who has borne twenty children not to have two alive…. In civilized society it is only among the inferior ranks of people that the scantiness of subsistence can set limits to the further multiplication of the human species… by destroying a great part of the children which their fruitful marriages produce. The liberal reward of labour, by enabling them to provide better for their children, and consequently to bring up a greater number, naturally tends to widen and extend those limits…. The liberal reward of labour, therefore, as it is the effect of increasing wealth, so it is the cause of increasing population. To complain of it, is to lament over the necessary effect and cause of the greatest public prosperity.

ItIt deserves to be remarked, perhaps, that it is in the progressive state, while the society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the labouring poor, of the great body of the people, seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state. The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationary is dull; the declining melancholy…

And then Brad remarks:

Two things are worth noting here:

The first is that even as early as 1776 economics had already acquired the utilitarian bias toward an equal distribution of income: feeding, clothing, and lodging the working class “tolerably well” contributed much more to the flourishing and happiness of society then would devoting the same resources to further increasing the luxury of the rich. We are in the world of Jeremy Bentham, where any claim that we cannot make interpersonal comparisons of utility between rich and poor is dismissed with a laugh.

The second is that Adam Smith is, in the longest run and in the last analysis, a Malthusian: economies are headed for a stationary–or, worse, a declining–state, and that stationary state is not a good one: “the condition of the… great body of the people… is hard in the stationary, and miserable in the declining state…” But there is no sense that we should not grab for the boom as long as we can, and as long as we are in the boom period, Adam Smith says, we should not complain about population growth

The liberal reward of labour… is the effect of increasing wealth… [and] the cause of increasing population. To complain… is to lament over the necessary effect and cause of the greatest public prosperity…

Tuesday, July 08, 2014

Is Wage Growth a Problem?

Josh Bivens:

Is Wage Growth the Problem or the Solution?, by Josh Bivens, WSJ Think Tank: Lots of talk has percolated recently about whether a sudden burst of rapid wage growth would force the Fed’s hand in pulling back monetary stimulus... Some who, like me, do not see any evidence of an imminent wage take-off have argued that the Fed should wait for some evidence of wage inflation before hitting the brakes.
These arguments essentially treat a pickup of wage growth as a problem to be guarded against. But the most conspicuous failure in the U.S. economy over the past generation, by far, has been too slow wage growth for the vast majority of American workers. ...
So one part of the “how much slack” debate that too often goes unaddressed is that there is not only a lack of evidence that wages are about to start growing rapidly but also that it wouldn’t be a big problem if they did. In fact, it would be a good thing.

Monday, July 07, 2014

'The Myth of America’s Golden Age'

Joe Stiglitz:

...the American dream—the notion that we are living in the land of opportunity—is a myth. The life chances of a young American today are more dependent on the income and education of his parents than in many other advanced countries, including “old Europe.”...
Today, inequality is growing dramatically..., and the past three decades or so have proved conclusively that one of the major culprits is trickle-down economics... But it has taken us far too long as a country to understand this danger. ...
Only with a vibrant middle class can the economy fully recover and grow faster. The more inequality, the slower the growth—a conclusion now endorsed even by the IMF. ...
None of this is the outcome of inexorable economic forces, either; it’s the result of policies and politics... If our politics leads to preferential taxation of those who earn income from capital; to an education system in which the children of the rich have access to the best schools, but the children of the poor go to mediocre ones; to exclusive access by the wealthy to talented tax lawyers and offshore banking centers to avoid paying a fair share of taxes—then it is not surprising that there will be a high level of inequality and a low level of opportunity. And that these conditions will grow even worse.
And now it’s also clear that ... the richer you are, the more you are able to influence the political process and the economic decisions that stem from it, and to rig it all in favor of the 1 percent. Is it any wonder the rich keep getting richer?

Tuesday, July 01, 2014

Are Calls for Income Redistribution Based on Envy or Justice?

New column:

Are Calls for Income Redistribution Based on Envy or Justice?: The redistribution of income and wealth has come to the forefront of discussions about economics and capitalist systems thanks to Thomas Piketty’s book Capital in the Twenty-First Century. Is rising inequality an inevitable feature of capitalist systems, or is it the result of the particular institutions that shape how capitalism expresses itself? What, if anything, should be done to reverse the trend toward rising inequality?
The answer depends upon whether the calls for redistribution are based upon envy as the political right often asserts, or the desire for the justice...

Monday, June 30, 2014

Education and Inequality

At macroblog, Julie L. Hotchkiss, a research economist and senior policy adviser at the Atlanta Fed, and Fernando Rios-Avila, a research scholar at the Levy Economics Institute of Bard College look at the relationship betwen education and inequality:

... There is little debate about whether income inequality has been rising in the United States for some time, and more dramatically recently. The degree to which education has exacerbated inequality or has the potential to reduce inequality, however, offers a more robust debate. We intend this post to add to the evidence that growing educational attainment has contributed to rising inequality. This assertion is not meant to imply that education has been the only source of the rise in inequality or that educational attainment is undesirable. The message is that growth in educational attainment is clearly associated with growing inequality, and understanding that association will be central to the understanding the overall growth in inequality in the United States.

More here.

'Moaning Moguls'

James Surowiecki explains why we have "Moaning Moguls":

Moaning Moguls, by James Surowiecki: The past few years have been very good to Stephen Schwarzman, the chairman and C.E.O. of the Blackstone Group, the giant private-equity firm. ... Schwarzman is now worth more than ten billion dollars. You wouldn’t think he’d have much to complain about. ... He recently grumbled that the U.S. middle class has taken to “blaming wealthy people” for its problems. Previously, he has said that it might be good to raise income taxes on the poor so they had “skin in the game,” and that proposals to repeal the carried-interest tax loophole—from which he personally benefits—were akin to the German invasion of Poland.
Schwarzman isn’t alone..., the basic sentiment is surprisingly common. ...[examples]... That’s not how it’s always been. ...
If today’s corporate kvetchers are more concerned with the state of their egos than with the state of the nation, it’s in part because their own fortunes aren’t tied to those of the nation the way they once were. In the postwar years, American companies depended largely on American consumers. Globalization has changed that... The well-being of the American middle class just doesn’t matter as much to companies’ bottom lines. And there’s another change. Early in the past century, there was a true socialist movement in the United States, and in the postwar years the Soviet Union seemed to offer the possibility of a meaningful alternative to capitalism. Small wonder that the tycoons of those days were so eager to channel populist agitation into reform. Today..., corporate chieftains have little to fear... Moguls complain about their feelings because that’s all anyone can really threaten.

Saturday, June 28, 2014

'Inequality Is Not Inevitable'

Joe Stiglitz:

Inequality Is Not Inevitable, by Joseph Stiglitz, Commentary, NY Times: An insidious trend has developed over this past third of a century. A country that experienced shared growth after World War II began to tear apart, so much so that when the Great Recession hit in late 2007, one could no longer ignore the fissures that had come to define the American economic landscape. How did this “shining city on a hill” become the advanced country with the greatest level of inequality?
One stream of the extraordinary discussion set in motion by Thomas Piketty’s timely, important book, “Capital in the Twenty-First Century,” has settled on the idea that violent extremes of wealth and income are inherent to capitalism. In this scheme, we should view the decades after World War II — a period of rapidly falling inequality — as an aberration.
This is actually a superficial reading of Mr. Piketty’s work, which provides an institutional context for understanding the deepening of inequality over time. Unfortunately, that part of his analysis received somewhat less attention than the more fatalistic-seeming aspects.
Over the past year and a half, The Great Divide, a series in The New York Times for which I have served as moderator, has also presented a wide range of examples that undermine the notion that there are any truly fundamental laws of capitalism. The dynamics of the imperial capitalism of the 19th century needn’t apply in the democracies of the 21st. We don’t need to have this much inequality in America. ....[continue]...

Monday, June 23, 2014

'Political Polarization and Income Inequality in the United States'

From the Liberty Street Economics blog at the NY Fed:

The Capitol Since the Nineteenth Century: Political Polarization and Income Inequality in the United States, by Rajashri Chakrabarti and Matt Mazewski, Liberty Street Economics: Even the most casual observer of American politics knows that today’s Republican and Democratic parties seem to disagree with one another on just about every issue under the sun. Some assume that this divide is merely an inevitable feature of a two-party system, while others reminisce about a golden era of bipartisan cooperation and hold out hope that a spirit of compromise might one day return to Washington. In this post, we present evidence that political polarization—or the trend toward more ideologically distinct and internally homogeneous parties—is not a recent development in the United States, although it has reached unprecedented levels in the last several years. We also show that polarization is strongly correlated with the extent of income inequality, but only weakly associated with the rate of economic growth. We offer several tentative explanations for these relationships, and discuss whether all forms of polarization are created equal. ...

Saturday, June 21, 2014

'The Perils Of Our Growing Inequality'

Friday, June 20, 2014

'Inequality in the Long Run'

Piketty and Saez (from the May issue of Science):

Inequality in the long run, by Thomas Piketty and Emmanuel Saez: The distribution of income and wealth is a widely discussed and contraoversial topic. Do the dynamics of private capital accumulation inevitably lead to the concentration of income and wealth in ever fewer hands, as Karl Marx believed in the 19th century? Or do the balancing forces of growth, competition, and technological progress lead in later stages of development to reduced inequality and greater harmony among the classes, as Simon Kuznets thought in the 20th century? What do we know about how income and wealth have evolved since the 18th century, and what lessons can we derive from that knowledge for the century now under way? For a long time, social science research on the distribution of income and wealth was based on a relatively limited set of firmly established facts together with a wide variety of purely theoretical speculations. In this Review, we take stock of recent progress that has been made in this area. We present a number of basic facts regarding the long-run evolution of income and wealth inequality in advanced countries. We then discuss possible interpretations and lessons for the future. ...

Monday, June 16, 2014

Income Inequality: Politics or Economics?

I haven't seen Dave Jacobs in many years. Nice to see that he's still doing good work:

Could politics trump economics as reason for growing income inequality?, EurekAlert: Most research examining growing income inequality in the United States has focused on economic causes, for seemingly obvious reasons.
But a new study suggests that a different cause – the politically induced decline in the strength of worker unions – may play a much more pivotal role than previously understood.
In fact, the role that union decline has played in growing income inequality may actually be larger than many of the favorite explanations offered by economists, such as the education gap in the United States.
Among their contributions to income equality: unions reduce pay differences within companies and use their influence to lobby on behalf of the working and middle classes, the researchers say. "The effect that unions used to have on protecting the incomes of middle class and working Americans has been underestimated," said David Jacobs, co-author of the study and professor of sociology at The Ohio State University.
Jacobs conducted the study with Lindsey Myers, a doctoral student in sociology at Ohio State. Their results appear online in the journal American Sociological Review and are scheduled to appear in the August print edition. ...
Although the decline in union memberships began in the early 1950s, this decline accelerated after the election of President Ronald Reagan, whose policies and appointments to the National Labor Relations Board severely weakened unions, Jacobs said. Since then, Republican presidents and one Democratic president (Bill Clinton) have followed policies that continued to weaken unions. ...
Of course, a lot happened during this period that may conceivably affect income inequality. But Jacobs and Myers controlled for more than 20 other factors... "We controlled for all of the major factors generally cited by researchers as contributing to inequality. Still, union decline and the presence of Republican presidents remained the most important explanations for income inequality," Jacobs said. "Even education wasn't nearly as important as union decline." ...
"After the Reagan turning point, unions no longer had the influence to help contain the acceleration in inequality," Jacobs said. ...

Sunday, June 15, 2014

'Why Does Inequality Grow? Can We Do Something About It?'

"The liberalization of labor-market institutions since 1980 has ... contributed substantially" to income inequality:

Why does inequality grow? Can we do something about it?, by Coen Teulings, Vox EU: Over the past couple of years, the OECD asked attention for the rapidly widening income dispersion in OECD countries (see e.g. OECD 2008, OECD 2014). The recent publication of Thomas Piketty’s Capital in the 21st Century, gave new impetus to this debate.

There were large shifts in the distribution of total income, both from labor to capital, and within the labor share – from low- to high-earning workers. This growing inequality has a large impact on many aspects of society, from diverging educational opportunities, to the distribution of health and overall well-being. Though there are marked differences between countries, the rise in inequality has been a general phenomenon. Hence, there is a quest for more inclusive strategies that allow larger parts of society to benefit from the growth of GDP.

Causes of income inequality

There has been much debate on the causes of this trend.

  • At the turn of the century, skill-biased technological progress was considered to be the main culprit.

The skill bias in the change in production technology reduced the demand for high school dropouts and raised that for college graduates. To the extent that the education system could not keep pace with the increased demand for graduates, the skill premium soared.

The rapid pace of technological progress makes that we move increasingly to a ‘the-winner-takes-it-all’ society, where early entrants in new industries capture an incredible amount of rents, with Microsoft, Google, and Facebook as the most extreme examples. This contributed to a steady shift in the distribution of income from labor to profits.

  • More recently, the attention shifted to the role of globalization.

Where the share of the BRIC countries in the world economy was too small to account for the large shifts in relative wages during the nineties, this share has grown so rapidly in the last two decades that its impact on the income distribution can no longer be ignored. However, this impact of globalization is more subtle than an outright increase in inequality. For the BRIC countries, globalization is equivalent to a large increase in GDP and, hence – a large improvement in the standards of living for the majority of their population.

For the developed countries, the effect of globalization on the income distribution is more subtle. The wage distribution becomes increasingly skewed to the right. Low and medium educated workers earn more and more similar wages, forming a large mass on the left side of the income distribution, while the share of the top 10% in total income skyrocketed, leading to a long and fat right left tail of the distribution.

Specifically:

  • The middle class loses (see Autor et al. 2013).

The middle class is employed exactly in the type of jobs that both face fierce global competition and are highly vulnerable to automation. Demand for workers with intermediate levels of education, therefore, falls and hence their wage surplus above workers with lower education. Despite the overall growth, US real wage of the median worker has fallen since 1990.

  • The upper class commands specialized human capital that is in high demand in a technology-driven world.
  • The lower class is mainly employed in personal services that are non-tradable and cannot be imported from the BRIC countries.

Moreover, jobs in these industries are less sensitive to technological innovation than jobs in manufacturing.

From a policy perspective, this diagnosis poses new challenges. The old story for emancipation relied on investment in human capital, for the lower strata of society, education was the best means for improving their position. The future of your children was safeguarded most effectively by better education – make sure that they spend all effort to obtain the highest possible degree. That story no longer applies for everybody. It still works for the upper tale of the distribution of educational attainment, since the return to obtaining a degree from good university has gone up. It no longer works for the lower tale of the distribution, since the return to the completion of high school, or adding some years of college, has gone down.

However, trade and technology are not the only explanations for the dramatic increase in inequality over the past couple of decades.

  • The liberalization of labor-market institutions since 1980 has also contributed substantially.

DiNardo, Fortin and Lemieux (1996) have shown that the fall in minimum wages and the demise of the union increased inequality in the United States during the 1980’s. Later work by Lee (1999) and Teulings (2003) suggests that a large part – if not all – of the rise in wage inequality in the lower half of the distribution is due to the fall in minimum wages during that period. This applies in particular for females, who earn lower wages anyway, and for whom the minimum wage therefore has a larger impact. Starting from the low levels of the minimum wage that prevail in the US currently, the job-losses of an increase in that minimum are limited. This fits the recent experience in the UK, where the introduction of a minimum wage had a substantial effect on wage inequality, but hardly any effect on the chances of low skilled workers to find a job. It might be different in France, where minimum wages are much higher to begin with. In that case, further increases in the minimum wage have large detrimental effects on the job opportunities for low-skilled workers.

  • Minimum wages – provided that they are not set too high – therefore have a large effect on wage inequality, and a relatively small effect on employment.

The obvious question is then what wage would be not too high. I use as a rule of thumb that at most 4% of the workers may actually earn the minimum wage. If more than 4% earns the minimum, job loss becomes substantial. However, there is no empirical evidence to support the rule of thumb other than the differences in outcomes between the US and France. Regrettably, the strategy of a limited increase in the minimum wage reaches this critical point of 4% earlier now that the wage differential between low and medium educated workers has gone down, and more workers earn wages not that far from the minimum wage.

Institutions and the labor market

Why are institutions so important on the labor market? Why would the free market not lead to the best possible outcome? We gradually start to understand why the institutions for wage setting matter so much. The standard auction model taught in economics 1.01 is a bad representation of how labor markets actually operate. The auction model assumes that all job seekers and all firms with vacancies meet at the same place and time. A hypothetical auctioneer calls a potential wage rate, records potential supply and demand at that wage, and then adjusts his call until he arrives at an equilibrium rate that sets supply equal to demand. Reality looks different. Individual job seekers and firms meet and bargain bilaterally on an acceptable wage. If they fail to reach agreement then both continue search for other options. The point is that there is no auctioneer to set the wage. The worker and the firm have to agree among themselves. Hence, it is critical which of the two parties has the best bargaining skills – the worker or the firm? There is no guarantee whatsoever that the free market yields a proper distribution of bargaining power from the point of view of social well-being.

When the theoretical apparatus for analyzing these models was first developed by Pissarides (1990) and Burdett and Mortensen (1988) – who received the Noble prize for this work – it looked as though, by a kind of divine miracle, the actual distribution of bargaining power was reasonably in line with the social optimum. Later on, Stevens (2004) showed that firms can save on their wage bill by using deferred compensation schemes. Workers get paid low wages initially, only to receive higher wages after staying at the same firm for a couple of years. If the worker quits before, the firm never has to pay these higher wages. Deferred payment binds a worker to the firm and, therefore, reduces the threat of outside competition. No practical man would be surprised by this result because this is what we see employers do every day. Most wage contracts contain extensive experience and tenure scales. However, what is surprising is that these schedules shift the balance of power in favor of the employer beyond what is desirable from societal point of view. Hiring a worker becomes too attractive. Firms start poaching workers from each other, leading to a waste of resources on recruitment activity, excess job mobility, and training cost to make workers familiar with their new job, from which they are likely to quit shortly afterwards by new incoming job offers anyway. This change in the balance of power might also have contributed to the shift of the distribution of total income from labor to capital.

Joint with Gautier and Van Vuuren (2010), I showed that even when firms don’t use Stevens’ seniority profiles, but instead offer a fixed flat wage contract, efficiency emerges only when there are strongly increasing returns to scale in job search, and when firms can commit to pay hiring premiums before even meeting a potential candidate. In all other cases, firms have too much bargaining power.

Robin and Postel-Vinay (2002) have shown that firms can use even more aggressive strategies, by paying wage increases only when an outside firm threatens to poach its worker. A firm can then hire apprentices and other young workers for very low starting salaries, waiting for outside offers to these workers before paying any wage increase. Empirical evidence shows that this type of arrangements is used in practice indeed, in particular for low skilled workers. This type of wage contract shifts the balance of power even more in favor of employers, so even further beyond the social optimum than in Stevens’ analysis.

In this type of environment, small institutional details in wage setting can have a large impact on the outcome. Hence, the wave of liberalization of labor-market institutions in the eighties and nineties of last century might have a negative impact on society after all. It has made labor markets more flexible and thereby created many jobs, but beyond a certain point, the net effect of further liberalization might be negative from a societal point of view. Both the Financial Times and the Economist expressed sympathy for the idea of raising the minimum wage in the United States and introducing it in Germany. This support might be well taken. There is likely to be some kind of an optimum degree of liberalization of labor- market institutions. In some instances, the world might have moved beyond that point.

References

Autor, David, David Dorn and Gordon Hanson (0213), “Untangling Trade and Technology: Evidence from Local Labor Markets”, NBER working paper 18938.

Burdett, Kenneth and Dale Mortensen (1988), “Wage differentials, employer size, and unemployment”, International Economics Review, Vol. 39, No.2, May, pp. 257-273.

DiNardo, John, Nicole Fortin, and Thomas Lemieux (1996), “Labor market institutions and the distribution of wages, 1973-1992: A semiparametric approach”, Econometrica, Vol. 64, No.5, September, pp. 1001-1044.

Gautier, Pieter, Coen Teulings, and Aico van Vuuren (2010), “On-the-job search, mismatch, and efficiency”, The Review of Economic Studies, Vol. 77, Issue 1, pp.245-272.

Lee, David (1999), “Wage inequality in the United States during the 1980s: Rising dispersion or falling minimum wage?”, The Quarterly Journal of Economics, Vol. 114, No.3, August, pp. 977-1023.

OECD (2008), Growing Unequal?: Income Distribution and Poverty in OECD Countries, OECD Publishing, 21 October.

OECD (2014), Society at a glance, Directorate for Employment, Labour, and Social Affairs, OECD.

Piketty, Thomas (2014), Capital in the 21st century, Harvard University Press.

Pissarides, Christopher (1990), Equilibrium Unemployment Theory, MIT Press.

Postel-Vinay, Fabien and Jean-Marc Robin (2002), “Equilibrium wage dispersion with worker and employer heterogeneity”, Econometrica, Vol. 70, No.6, November, pp. 2295-2350.

Stevens, Margaret (2004), “Wage-tenure contracts in a frictional labour market: Firms’ strategies for recruitment and retention”, The Review of Economic Studies, Vol. 71, pp. 535-551

Teilings, Coen (2003), “The contribution of minimum wage to increasing wage inequality”, The Economic Journal, Vol. 113, Issue 490, October, pp.801-833.

Trends in CEO Compensation

Via the EPI:

... Trends in CEO compensation last year:

  • Average CEO compensation was $15.2 million in 2013, using a comprehensive measure of CEO pay that covers CEOs of the top 350 U.S. firms and includes the value of stock options exercised in a given year, up 2.8 percent since 2012 and 21.7 percent since 2010.

Longer-term trends in CEO compensation:

  • From 1978 to 2013, CEO compensation, inflation-adjusted, increased 937 percent, a rise more than double stock market growth and substantially greater than the painfully slow 10.2 percent growth in a typical worker’s compensation over the same period.
  • The CEO-to-worker compensation ratio was 20-to-1 in 1965 and 29.9-to-1 in 1978, grew to 122.6-to-1 in 1995, peaked at 383.4-to-1 in 2000, and was 295.9-to-1 in 2013, far higher than it was in the 1960s, 1970s, 1980s, or 1990s.
  • If Facebook, which we exclude from our data due to its outlier high compensation numbers, were included in the sample, average CEO pay was $24.8 million in 2013, and the CEO-to-worker compensation ratio was 510.7-to-1.

Thursday, June 12, 2014

'Synthesis Lost'

As someone who had a series called "Market Failures in Everything" when this blog first started over nine years ago, and as someone who believes market failures remain important even when the economy is operating at full capacity, I'm glad to see views evolving. (Market failures and business cycles form the basis for my calls for government intervention, though as I have written many times, I am coming around to the idea the intervention may also be needed to redistribute income as an offset for those who reap where they never sowed. That is, redistribution is needed to claw back income that flows unjustly according to my definition of equity to those at the top as a result of their economic and political power, e.g. monopoly power that distorts incme flows, and political power that allows rent-seeking behavior. Markets have had 40 years to solve the inequality problem, and it has only gotten worse -- being at full employment for many of those years has not reversed the growing inequality problem. A "hands off" policy when the economy is operating at full capacity, a capacity that can be limited by market failures, is not helpful in this regard.)

This is from Paul Krugman:

Synthesis Lost: Brad DeLong has some notes on the evident trouble we’ve been having maintaining the “neoclassical synthesis” — the doctrine, made famous by Paul Samuelson but actually there in Keynes too, that macroeconomic policy is needed for full employment but once you have that a relatively free-market policy works.

As it happens, I wrote a longish post about this back in 2010. ...

I’d add that I agree with Robert Waldmann: the policy judgement that you shouldn’t have too much detailed government intervention mainly reflects an appreciation for imperfect government, not faith in perfect markets.

And I still think that the Keynes/Samuelson view is reasonable, although market imperfections loom larger in my mind than they used to. But these are not reasonable times …

Tuesday, June 10, 2014

'The Rich Have Advantages That Money Cannot Buy'

Larry Summers says:

The rich have advantages that money cannot buy, by Lawrence Summers: ... There is every reason to believe that taxes can be reformed to eliminate loopholes for the wealthy and become more progressive, while also promoting a more efficient allocation of investment. In areas ranging from local zoning laws to intellectual property protection, from financial regulation to energy subsidies, public policy now bestows great fortunes on those whose primary skill is working the political system rather than producing great products and services. There is a compelling case for policy measures to reduce profits from such rent-seeking activities as a number of economists, notably Dean Baker and the late Mancur Olson, have emphasised.
At the same time, unless one regards envy as a virtue, the primary reason for concern about inequality is that lower- and middle-income workers have too little – not that the rich have too much.
So in judging policies relating to inequality, the criterion should be what their impact will be on the middle class and the poor. ...
It is vital to remember, however, that important aspects of inequality are unlikely to be transformed just by limited income redistribution. Consider two fundamental components of life – health and the ability to provide opportunity for children.

He goes on to explain the vast difference between the rich and the poor in the areas of health and education, and I have no problem at all with his call to reduce inequality in these areas.

The question I have is whether we should not be worried "that the rich have too much." As he notes earlier, "public policy now bestows great fortunes on those whose primary skill is working the political system rather than producing great products and services." Those "great fortunes" give the ultra-wealthy the influence they need to capture the political system, and as the fortunes grow larger and larger it becomes harder and harder to change the system to eliminate this rent-seeking behavior (so I don't think "there is every reason to believe" that the system can be reformed). When this happens, when income flows to the top because they have captured the system -- income that could (and in my view should) be going elsewhere -- I think it's worth asking if they have "too much."

Saturday, June 07, 2014

'What Does Piketty’s Capital Mean for Developing Countries?'

Gabriel Demombynes:

What Does Piketty’s Capital Mean for Developing Countries?, by Gabriel Demombynes: The economics book that has launched a thousand blog posts, Thomas Piketty’s Capital in the Twenty-First Country, tells a grand story of inequality past and present. One would expect that a book on global inequality would have much to say about development. However, the book has limited relevance for the developing world, and the empirical data he marshals for developing countries is weak. ...[continue]...

Thursday, June 05, 2014

'Growth Has Been Good for Decades. So Why Hasn’t Poverty Declined?'

Neil Irwin on a new study from the EPI:

Growth Has Been Good for Decades. So Why Hasn’t Poverty Declined?: The surest way to fight poverty is to achieve stronger economic growth. That, anyway, is a view embedded in the thinking of a lot of politicians and economists. ...
But over the last generation in the United States, that simply hasn’t happened. Growth has been pretty good, up 147 percent per capita. But rather than decline further, the poverty rate has bounced around in the 12 to 15 percent range — higher than it was even in the early 1970s. The mystery of why — and how to change that — is one of the most fundamental challenges in the nation’s fight against poverty.
The disconnect between growth and poverty reduction is a key finding of a sweeping new study of wages from the Economic Policy Institute. ... From 1959 to 1973, a more robust United States economy and fewer people living below the poverty line went hand-in-hand. That relationship broke apart in the mid-1970s. If the old relationship between growth and poverty had held up, the E.P.I. researchers find, the poverty rate in the United States would have fallen to zero by 1986 and stayed there ever since. ...
...low-income workers are putting in more hours on the job than they did a generation ago — and the financial rewards for doing so just haven’t increased. ...[T]he facts ... cast doubt on the notion that growth alone will solve America’s poverty problem. ... That’s the real lesson of the data: If you want to address poverty in the United States, it’s not enough to say that you need to create better incentives for lower-income people to work. You also have to devise strategies that make the benefits of a stronger economy show up in the wages of the people on the edge of poverty, who need it most desperately.

I think it's also important to understand why the distribution of income changed in the 1970s. It's not enough to say that the rewards have flowed to those at the top because of their increased contribution to society, as productivity has risen since the 1970s workers have contributed more, but their compensation has not increased commensurately. My own belief is that changes in economic power and the political power that comes with it have distorted income flows and changed the rules of the game in a way that favors those at the top. Thus, it's not that those at the top deserve what they have received because of their contributions, though perhpas it's partly that, it's also due to a change in the way income is distributed arising from changes in economic/political power.

Wednesday, June 04, 2014

'Basic Social Institutions and Democratic Equality'

Daniel Little:

Basic social institutions and democratic equality, Understanding Society: We would like to think that it is possible for a society to embody basic institutions that work to preserve and enhance the wellbeing of all members of society in a fair way. We want social institutions to be beneficent (producing good outcomes for everyone), and we want them to be fair (treating all individuals and groups with equal consideration; creating comparable opportunities for everyone).  There is a particularly fundamental component of liberal optimism that holds that the institutions of a market-based democracy accomplish both goals.  Economic liberals maintain that the economic institutions of the market create efficient allocations of resources across activities, permitting the highest level of average wellbeing. Free public education permits all persons to develop their talents. And the political institutions of electoral democracy permit all groups to express and defend their interests in the arena of government and law.

But social critics cast doubt on all parts of this story, based on the role played by social inequalities within both sets of institutions. The market embodies and reproduces a set of economic inequalities that result in grave inequalities of wellbeing for different groups. Economic and social inequalities influence the quality of education available to young people. And electoral democracy permits the grossly disproportionate influence of wealth holders relative to other groups in society.  So instead of reducing inequalities among citizens, these basic institutions seem to amplify them.

If we look at the fundamentals of social life in the United States we are forced to recognize a number of unpalatable realities: extensive and increasing inequalities of income, wealth, education, health, and quality of life; persistent racial inequalities; a growing indifference among the affluent and powerful to the poverty and deprivation of others; and a political system that is rapidly approaching the asymptote of oligarchy. It is difficult to be optimistic about our political future if we are particularly concerned about equality and opportunity for all; the politics of our time seem to be taking us further and further from these ideals.

So how should progressives think about a better future for our country and our world? What institutional arrangements might do a better job of ensuring greater economic justice and political legitimacy in the next fifty years in this country and other democracies of western Europe and North America?

Martin O’Neill and Thad Williamson’s recent collection, Property-Owning Democracy: Rawls and Beyond contains an excellent range of reflections on this set of problems, centered around the idea of a property-owning democracy that is articulated within John Rawls’s A Theory of Justice. A range of talented contributors provide essays on different aspects and implications of the theory of property-owning democracy. The contributions by O'Neill and Williamson are especially good, and the volume is a major contribution to political theory for the 21st century.

Here is one of Rawls's early statements of the idea of a property-owning democracy in A Theory of Justice:

In property-owning democracy, ... the aim is to realize in the basic institutions the idea of society as a fair system of cooperation between citizens regarded as free and equal.  To do this, those institutions must, from the outset, put in the hands of citizens generally, and not only of a few, sufficient productive means for them to be fully cooperating members of society on a footing of equality. (140)

One thing that is striking about the discussions that recur throughout the essays in this volume is the important relationship they seem to have to Thomas Piketty’s arguments about rising inequalities in Capital in the Twenty-First Century. Piketty presents rising inequality as almost unavoidable; whereas the advocates for a property-owning democracy offer a vision of the future in which inequalities of assets are narrowed. The dissonance disappears, however, when we consider the possibility that the institutional arrangements of POD are in fact a powerful antidote to the economic imperatives identified by Piketty. And in fact the editors anticipate this possibility in their paraphrase of Rawls's reasons for preferring POD over welfare state capitalism:

Because capital is concentrated in private hands under welfare state capitalism, it will be difficult if not impossible to provide to call "the fair value of the political liberties"; that is to say, capitalist interests and the rich will have vastly more influence over the political process than other citizens, a condition which violates the requirement of equal political liberties. Second, Rawls suggests at points that welfare state capitalism produces a politics that tends to undermine the possibility of tax transfers sufficiently large to correct for the inequalities generated by market processes.(3)

These comments suggest that Rawls had an astute understanding of the ways that wealth and power and influence are connected; so he believed that a more equal prior distribution of assets is crucial for a just society.

The primary aim of this public activity is not to maximize economic growth (or to maximize utility) but rather to ensure that capital is widely distributed and that no group is allowed to dominate economic life; but Rawls also assumes that the economy needs to be successful in terms of conventional measures (i.e., by providing full employment, and lifting the living standards of the least well off over time). (4)

The editors make a point that is very incisive with respect to rising economic inequalities.

The concentration of capital and the emergence of finance as a driving sector of capitalism has generated not only instability and crisis; it also has led to extraordinary political power for private financial interests, with banking interest taking control in shaping not only policies immediately affecting that sector but economic (and thereby social) policy in general. (6)

In other words, attention to the idea of a property-owning democracy is in fact a very substantive rebuttal to the processes identified in Piketty's analysis of the tendencies of capital in the modern economy. As the editors put the point, the idea of a property-owning democracy provides a rich basis for the political programs of progressive movements in contemporary politics (5).

Two questions arise with respect to any political philosophy: is the end-state that it describes a genuinely desirable outcome; and is there a feasible path by which we can get from here to there? One might argue that POD is an appealing end-state; and yet it is an outcome that is virtually impossible to achieve within modern political and economic institutions. (Here is an earlier discussion of this idea; link.) These contributors give at least a moderate level of reason to believe that a progressive foundation for democratic action is available that may provide an effective counterweight to the conservative rhetoric that has dominated the scene for decades.

Monday, June 02, 2014

Paul Krugman: On Inequality Denial

Inequality denial persists despite clear evidence to the contrary:

On Inequality Denial, by Paul Krugman, Commentary, NY Times: A while back I published an article titled “The Rich, the Right, and the Facts,” in which I described politically motivated efforts to deny the obvious — the sharp rise in U.S. inequality, especially at the very top of the income scale. ...
Nor will it surprise you to learn that nothing much has changed. ... What may surprise you is the year in which I published that article: 1992.
Which brings me to the latest intellectual scuffle, set off by an article by Chris Giles ... attacking the credibility of Thomas Piketty’s best-selling “Capital in the Twenty-First Century.” Mr. Giles claimed that Mr. Piketty’s work made “a series of errors that skew his findings,” and that there is in fact no clear evidence of rising concentration of wealth. And like just about everyone who has followed such controversies over the years, I thought, “Here we go again.”
Sure enough, the subsequent discussion has not gone well for Mr. Giles. ... In short, this latest attempt to debunk the notion that we’ve become a vastly more unequal society has itself been debunked. And you should have expected that. There are ... many independent indicators pointing to sharply rising inequality ...
Yet inequality denial persists, for pretty much the same reasons that climate change denial persists: there are powerful groups with a strong interest in rejecting the facts, or at least creating a fog of doubt. Indeed, you can be sure that the claim “The Piketty numbers are all wrong” will be endlessly repeated even though that claim quickly collapsed under scrutiny. ...
So here’s what you need to know: Yes, the concentration of both income and wealth ... has increased greatly over the past few decades. No, the people receiving that income and owning that wealth aren’t an ever-shifting group..., both rags to riches and riches to rags stories are rare... No, taxes and benefits don’t greatly change the picture — in fact, since the 1970s big tax cuts at the top have caused after-tax inequality to rise faster than inequality before taxes.
This picture makes some people uncomfortable, because it plays into populist demands for higher taxes on the rich. But good ideas don’t need to be sold on false pretenses. If the argument against populism rests on bogus claims about inequality, you should consider the possibility that the populists are right.

Sunday, June 01, 2014

A Review of Debraj Ray's Review of Piketty

Branko Milanovic:

Where I disagree and agree with Debraj Ray’s critique of Piketty’s Capital in the 21s Century, by Branko Milanovic: Two people whose opinion I hold in very high esteem have told me, “Read Debraj Ray’s critique of Piketty; It is the best written yet.” I have read it before, but only in parts, and have focused on a few rather unimportant points in the first part of Debraj’s piece. So I decided now to read it carefully, and in full. It is a short piece, some 9 pages long. It is very well and clearly written. There are many things with which I agree.  But there are also many with which I do not. Let me start, because it is more fun, with the latter. ...

Friday, May 30, 2014

Piketty, Krugman, and Wren-Lewis Respond to the FT

Piketty's full response from Vox EU (see also Paul Krugman: Thomas Doubting Refuted and Simon Wren-Lewis: What the Financial Times got (very) wrong):

Response to FT, by Thomas Piketty, Vox EU: This is a response to the criticisms - which I interpret as requests for additional information – that were published in the Financial Times on May 23 2014 (see FT article here).1 These criticisms only refer to the series reported in chapter 10 of my book Capital in the 21st century, and not to the other figures and tables presented in the other chapters, so in what follows I will only refer to these series.
This response should be read jointly with the technical appendix to my book, and particularly with the appendix to chapter 10 (available here). The page numbers given below refer to the HUP edition of my book that was published in March 2014.
Let me start by saying that the reason why I put all excel files on line, including all the detailed excel formulas about data constructions and adjustments, is precisely because I want to promote an open and transparent debate about these important and sensitive measurement issues.
Let me also say that I certainly agree that available data sources on wealth inequality are much less systematic than what we have for income inequality. In fact, one of the main reasons why I am in favor of wealth taxation, international cooperation and automatic exchange of bank information is that this would be a way to develop more financial transparency and more reliable sources of information on wealth dynamics (even if the tax was charged at very low rates, which everybody could agree with).
For the time being, we have to do with what we have, that is, a very diverse and heterogeneous set of data sources on wealth: historical inheritance declarations and estate tax statistics, scarce property and wealth tax data; household surveys with self-reported data on wealth (with typically a lot of under-reporting at the top); Forbes-type wealth rankings (which certainly give a more realistic picture of very top wealth groups than wealth surveys, but which also raise significant methodological problems, to say the least). As I make clear in the book, in the on-line appendix, and in the many technical papers on which this book relies, I have no doubt that my historical data series can be improved and will be improved in the future (this is why I put everything on line). In fact, the “World Top Incomes Database” (WTID) is set to become a “World Wealth and Income Database” in the coming years, and together with my colleagues we will put on-line updated estimates covering more countries. But I would be very surprised if any of the substantive conclusions about the long run evolution of wealth distributions was much affected by these improvements.
I welcome all criticisms and I am very happy that this book contributes to stimulate a global debate about these important issues. My problem with the FT criticisms is twofold. First, I did not find the FT criticism particularly constructive. The FT suggests that I made mistakes and errors in my computations, which is simply wrong, as I show below. The corrections proposed by the FT to my series (and with which I disagree) are for the most part relatively minor, and do not affect the long run evolutions and my overall analysis, contrarily to what the FT suggests. Next, the FT corrections that are somewhat more important are based upon methodological choices that are quite debatable (to say the least). In particular, the FT simply chooses to ignore the Saez-Zucman 2014 study, which indicates a higher rise in top wealth shares in the United States during recent decades than what I report in my book (if anything, my book underestimates the rise in wealth inequality). Regarding Britain, the FT seems to put a lot of trust in self-reported wealth survey data that notoriously underestimates wealth inequality.
I will start by giving an overview of the series on wealth inequality that I present in chapter 10 of my book. I will then respond to the specific points raised by the FT.
Overview of the series on wealth inequality reported in chapter 10
The long run series on wealth inequality provided in chapter 10 of my book deal with only four countries: France, Britain, Sweden, and the United States.
Figure 10.1. Wealth inequality in France, 1810-2010 (p.340)
Figure 10.2. Wealth inequality in versus France 1810-2010 (p.341)
Figure 10.3. Wealth inequality in Britain, 1810-2010 (p.344)
Figure 10.4. Wealth inequality in Sweden, 1810-2010 (p.345)
Figure 10.5. Wealth inequality in the United States, 1810-2010 (p.348)
Figure 10.6. Wealth inequality in Europe versus the US, 1810-2010 (p.349)
The series used to construct figures 10.1-10.6, replicated in the book on p.340-348 are available in table S10.1, as well as in the corresponding excel file.
These wealth inequality series deal with much fewer countries and are substantially more exploratory than the empirical material provided in other parts of the book: income and population growth in chapters 1-2; wealth-income ratios in chapters 3-6; income inequality series in chapters 7-9. This follows from the fact that available data sources on wealth inequality are much less systematic than data sources on growth, wealth-income ratios and income inequality. In particular, we do have yearly income declarations statistics for dozens of countries, but we do not have yearly wealth declarations statistics for most countries. So we have to do with the diverse set of sources that I described above.
I believe that the data we have on wealth inequality is sufficient to reach a number of conclusions. Namely, wealth inequality was extremely high and rising in European countries during the 19th century and up until World War 1 (with a top 10% wealth share around 90% of total wealth in 1910), then declined until the 1960s-1970s (down to about 50-60% for the top 10% wealth share); and finally increased moderately since the 1980s-1990s. In the United States, wealth inequality was less extreme than in Europe until World War 1, but it was less strongly affected by the 20th century shocks, and in recent decades it rose more strongly than in Europe. Both in Europe and in the United States, wealth inequality is less extreme than what it was in Europe on the eve on World War 1.
I believe that the data that we have is sufficient to reach these conclusions, but that it is insufficient to go much beyond that. In particular, our ability to measure the most recent trends in wealth inequality is limited, partly due to the huge rise in cross border financial assets and offshore wealth. According to Forbes-type wealth rankings, the very top of the world wealth distribution has been rising about three times faster than average wealth at the global level over the 1987-2013 period (see chapter 12 of my book, in particular Table 12.1. The growth rate of top global wealth, 1987-2013). This seems to be clear evidence than wealth inequality is rising, partly because the rate of return to very large portfolios is higher than the growth rate. This interpretation is consistent with what I find with the returns to large university endowments (see Table 12.2. The return on the capital endowments of US universities, 1980-2010). But we do not really know whether this holds only at the very very top or for bigger groups (say, above 10 millions $ and not only above 1 billion $). Let me make very clear that I do not believe that r>g is the only force that determines the dynamics of wealth inequality. There are many other important forces that could in principle drive wealth inequality in other directions. The main message coming from my book is not that there should always be a deterministic trend toward ever rising inequality (I do not believe in this); the main message is that we need more democratic transparency about wealth dynamics, so that we are able to adjust our institutions and policies to whatever we observe.
I now consider each of the four countries one by one and respond to the specific points raised by the FT. I start with Sweden (the first country for which the FT expresses concerns), and then move to France, the United States, and finally to Britain (arguably the country with the biggest data problems) and to the European average.
Sweden (see figure 10.4 here)
The FT does not point out any significant disagreement regarding Sweden. Their corrected figure looks virtually identical to mine (see their figure on Sweden here).
The FT argues however that my choice of years from raw data sources is not entirely clear. For instance, they point out that raw data for year "1908" for year "1910", year "1935" for year "1930", and so on. These issues are already explained in the book and in the technical appendix, but they probably need to be clarified. Generally speaking, when I present series on wealth-income ratios and wealth inequality (and also for some figures on income inequality), I usually choose to present decennial averages rather than yearly series. This is because wealth series often display a lot of short-run volatility (in particular due to sharp movements in asset prices). So in order to focus the attention on long-run evolutions, it is better to abstract from these short-run movements and show decennial averages. See for instance the wealth-income series presented in chapter 5: contrast figure 5.1 and figure 5.5. When full yearly series are available, the way decennial averages are computed in the book is the following: "1900" usually refers to the average "1900-1909", and so on. This is further explained in the technical paper "Capital is back..." (Piketty-Zucman QJE 2014) available here.
In the case of the wealth inequality series reported in chapter 10, the raw series are usually not available on annual basis, so I compute decennial averages on the basis of the closest years available. This is clearly explained in the chapter 10 excel file (see sheet "TS10.1"). For instance, "1870" is computed as the average for years "1873-1877", "1910" as the average "1907-1908", and so on. These choices can be discussed and improved, but they are reasonably transparent (they are explicitly mentioned in the excel table, which apparently the FT did not notice), and as one can check they have negligible impact on long run evolutions.
The FT also suggests that I made a transcription error by using the estimate for 1908 for the top 1% wealth share (namely, 53.8% of total wealth) for year 1920 (instead of the correct raw estimate for that year, namely 51.5% of total wealth). In fact, this adjustment was intended to correct for the fact that there is a break in a data sources in 1908: pre-1908 series use estate tax data, while post-1908 use wealth tax data, resulting into somewhat lower top wealth (as exemplified by year 1908, for which both data sources co-exist; see Waldenstrom 2009, Table 3.A1, p.120-121). This is standard practice, but I agree that this adjustment should have been made more explicit in the technical appendix and excel file.2 In any case, whatever adjustment one chooses to make to deal with this break in series is again going to have a negligible impact on long-run patterns.
France (see figure 10.1 and figure 10.2)
The FT does not point out any significant disagreement regarding France. Their corrected figure looks virtually identical to mine (see their figure on France here).
The FT argues however that no explanation is given for some of the data construction. Namely, the FT claims the following: “The original source reports data relative to the distribution of wealth among the dead. In order to obtain the distribution of wealth across the living, Prof Piketty augments the share of the top 10 per cent of the dead by 1 per cent and the wealth share of the top 1 per cent by 5 per cent. An adjustment of this sort is standard practice in this type of calculations to correct for the fact that those who die are not representative of the living population. Prof. Piketty does not explain why the adjustment is usually constant. But in one year, 1910, it is not constant and the adjustment scale rises to 2 per cent and 8 per cent respectively. There is no explanation.”
This is a surprising statement, because all necessary explanations are actually given in the technical research paper on which these series are based (see Piketty-Postel-Vinay-Rosenthal AER 2006) and in the chapter 10 excel file (see sheet "TS10.1DetailsFR"). Namely, the PPVR AER 2006 paper includes detailed, year-by-year estimates of how differential mortality affects wealth inequality among the living, and finds that the ratio between top wealth shares among the living and top wealth shares among decedents rises at the end of the 19th century and in the early 20th century. Intuitively, this is because differential mortality effects seem to become stronger around that time (namely, life expectancy rises quite fast among top wealth holders, but much less so for the rest of the population). One can see this explicitly in table A4 of the working paper version of the PPVR AER 2006 article; this is explicitly reproduced in chapter 10 excel file (see sheet "TS10.1DetailsFR", table A4 (2), ratios for top 1% shares). More recent research has also confirmed the changing pattern of differential mortality around that time. See in particular the appendix tables to Piketty-Postel-Vinay-Rosenthal EEH 2014. Differential mortality is a complex issue, and we do not have perfect answers; but we do our best to address this issue in the most transparent way. In particular, we put on line on this web site the large micro files that we have collected in French inheritance archives, so that everybody can reproduce our computations and use this data for their own research. We are currently collecting additional micro files in Parisian and provincial archives, and we will put new data files and updated estimates in the future.
What it find somewhat puzzling in this controversy is the following: (i) the FT journalists evidently did not read carefully the technical research papers and excel files that I have put on-line; (ii) whatever adjustment one makes to correct for differential mortality (and I certainly agree that there are uncertainties left regarding this complex and important issue), it should be clear to everyone that this really has a relatively small impact on the long-run trends in wealth inequality. This looks a little bit like criticism for the sake of criticism.
United States (see figure 10.5)
The FT does point out more substantial disagreements regarding the United States. Their corrected figure actually looks very close to mine regarding the long run evolution, but not for the recent decades, where the FT considers that I overestimate somewhat the rise in wealth inequality (see their figure on United States here). The FT also expresses concerns about some of the adjustments that are made for earlier periods, although they have little impact on the overall patterns.
As I explain in the book (chapter 10, p.347) and in the technical appendix to chapter 10 (available here), there are very large uncertainties regarding US historical sources on wealth inequality, and I certainly agree that the series that are provided in the book can be improved. I try to combine in the most consistent manner the information coming from estate tax statistics (which unfortunately only cover the top few percents of the distribution, and not the entire population like in France) and the information coming from household wealth surveys (fortunately the SCF is known to be of higher quality than most other wealth surveys). In particular, the estimate for year 1970 tries to combine the estimates available for top 10% and top 1% wealth shares for years 1960 and 1980 and the evolution of very top wealth shares between 1960, 1970 and 1980. This has little impact on the overall long-run pattern, but I agree that this is relatively uncertain, and that this could have been explained more clearly.
I should stress however that the more recent and more reliable estimates that were recently produced by Emmanuel Saez (Berkeley) and Gabriel Zucman (LSE) confirm the pattern that I find. See Saez-Zucman 2014. For the recent decades, they actually find a larger rise of top 10% wealth shares and especially top 1% and top 0.1% wealth shares than what I report in my book. So, if anything, my book tends to underestimate the recent rise in US wealth inequality (contrarily to what the FT suggests).
This important work was done after my book was written, so unfortunately I could not use it for my book. Saez and Zucman use much more systematic data than I used in my book, especially for the recent period. Also their series are constructed using a completely different data source and methodology (namely, the capitalization method using capital income flows and income statements by asset class). Now that this work is available, the Saez-Zucman series (which unfortunately the FT article seems to ignore) should be used as reference series for wealth inequality in the United States. In a recent survey chapter that will be published in the Handbook of Income Distribution (HID), we choose to use the Saez-Zucman series (rather than the series reported in my book) in order to describe the long-run evolution of US wealth inequality. See Piketty-Zucman 2014 (see in particular supplementary figure S3.5, p.91 for a comparison between the two series; as one can see, they look very similar).3
Britain (see figure 10.3)
The FT does point out substantial disagreements regarding the recent evolution in Britain. Their corrected figure actually looks very close to mine regarding the long run evolution, but not for the recent decades, where the FT considers that there was no rise at all in wealth inequality, and possibly a decline, whereas I report a rise (see their figure on Britain here). The biggest disagreement comes from the latest data point (c.2010): the FT considers that the right estimate for the top 10% wealth share is around 44% of total wealth (this comes from a recent household survey based upon self-reported data, namely the “wealth and assets survey”, which I believe underestimates top wealth groups significantly; see below); whereas I report an estimate with a top 10% wealth share around 71% (this comes from more reliable estate tax statistics). This is a very large difference indeed.
Let me make clear that although I think my estimate is more reliable and rests on better methodological choices, I also believe that this large gap reflects major uncertainties and limitations in our collective ability to measure recent evolution of wealth inequality in developed countries, particularly in Britain. As I explain above, I believe this is a major challenge for our statistical and democratic institutions.
The estimates that I report for wealth inequality in Britain rely primarily on the very careful estimates that were established by Atkinson-Harrison 1978 and Atkinson et al 1989 using estate tax statistics from the 1920s to the 1980s. I updated these series for the 1990-2010 period using official HMRC data that are also based upon estate tax records. I find a rising inequality trend, although a more modest one than for the United States. I think this is the most reasonable estimate one can obtain given available data, but this certainly should be improved in the future.
What is troubling about the FT methodological choices is that they use the estimates based upon estate tax statistics for the older decades (until the 1980s), and then they shift to the survey based estimates for the more recent period. This is problematic because we know that in every country wealth surveys tend to underestimate top wealth shares as compared to estimates based upon administrative fiscal data. Therefore such a methodological choice is bound to bias the results in the direction of declining inequality. For instance, as I note in the technical appendix to chapter 10 (available here), the recent wealth surveys undertaken by INSEE in 2004-2010 in France indicate a top decile share just above 50% of the total wealth, whereas fiscal data (inheritance and wealth tax) suggest a top decile share above 60% of the total wealth. The gap seems particularly large for the case of Britain, which could reflect the fact that the “wealth and assets survey” seems particularly bad at measuring the top part of the wealth distribution of the UK. Indeed, according to the latest report by the Office of national statistics (ONS), the response rate for this survey was only 64% in 2010-2012; this is an improvement as compared to the response rate of 55% that was observed during the 2006-2008 wave of the same survey (see ONS 2014, Table 7.1); but it is pretty clear that with such a low response rate, it is hard to claim that one can adequately measure wealth inequality, particularly at the top of the distribution. Also note that a 44% wealth share for the top 10% (and a 12.5% wealth share for the top 1%, according to the FT) would mean that Britain is currently one the most egalitarian countries in history in terms of wealth distribution; in particular this would mean that Britain is a lot more equal that Sweden, and in fact a lot more equal than what Sweden as ever been (including in the 1980s). This does not look particularly plausible.
Of course the estate records based estimates also raise significant methodological concerns, and I do not claim that the resulting estimates are perfectly reliable. In particular, they might also underestimate top wealth levels (because top wealth holders sometime escape the estate tax through sophisticated trust funds or offshore assets). But they definitely seem more plausible than the estimates based upon self-reported survey data.
Note also that in recent years more and more scholars and statisticians have started to recognize the limitations of household wealth surveys and to upgrade the top segments of survey based wealth distributions using other sources. For instance, a recent study undertaken at the research department of the ECB attempts to upgrade in a systematic manner the top tail of the wealth surveys undertaken in Eurozone countries by using the Pareto coefficients that one can estimate using Forbes rankings and other lists of very high wealth individuals in each country. The results indicate that this can lead to very large increases (more than 10 percentage points) in top wealth shares (see Vermeulen 2014). In the United States, although the SCF wealth survey is generally regarded as a very high quality wealth survey, there has been some important work trying to upgrade the top tail by using Forbes ranking and estate tax data (see Johnson-Shreiber 2006 and Raub-Johnson-Newcomb 2010). This is definitely something that should be done for the British “wealth and assets survey”.
Regarding the 19th century estimates, the FT expresses concerns with the way I compute the top wealth shares for Britain in 1810 and 1870. Namely, I borrow the top 1% wealth shares estimates from Lindert (54.9% and 61.1%, respectively), and I assume that the next 9% shares shifted from 28% to 26%. Lindert does report a lower estimate for the next 9% share (about 16%). However this would indicate a relatively unusual pattern of Pareto coefficients within the top 10% of the distribution (as compared both to the French 19th century inheritance data, which is a lot more comprehensive than the British probate data, and to the British estate tax statistics for 1911-1913). Given that the probate records used by Lindert seem to provide a better coverage of the top 1% than of the next 9%, I use Pareto interpolation techniques to estimate the next 9% share. This is an issue that should have been explained more clearly and that would definitely deserve further research. This has a limited impact for the long run patterns analyzed here (the pre-World War 1 rise in wealth inequality would be even larger without this adjustment).
European average (see figure 10.6)
Finally, the FT also expresses the following concern: the European average series, which I computed by making a simple arithmetic series between France, Britain and Sweden, should have been computed using population weighted averages. I do agree that population (or GDP) weighted averages are generally superior to simple arithmetic averages. However I should stress that it really does not make much of a difference here, because all three European countries that I use follow fairly similar long run patterns. Namely, all three countries display high and rising top wealth shares during the 19th century and up until World War 1 (with about 90% of total wealth for the top 10% around 1910); then a sharp decline until the 1960s-1970s (with top 10% wealth shares down to 50-60%); and finally a modest rise since the 1980s-1990s. So whether one weights the three countries with equal weights or according to population or GDP does not make a big difference. But in case Britain did follow a markedly different pattern than the other countries in recent decades (with a decline in wealth inequality rather than a rise), then putting more weight on Britain than on Sweden becomes a significant issue. So we are back to the previous question: what happened to wealth inequality in Britain in recent decades? The FT seems to believe it has become more equal; however the way they use self-reported wealth survey data is not convincing. This is nevertheless an interesting debate for the future, and we should all agree that we know too little about it.
Footnotes:
1 See also the other two articles published by the FT on May 23 2014: here and there. See also my short reponse published here in the FT. Unfortunately I was given limited time to submit this response, so I could not address specific points; here is a longer response.
2 Also note that the raw series display a decline in top 1% wealth share between 1908 and 1920, but a sharp rise in the share of the next 9% (resulting into a significant increase in the top 10% share). This does not look entirely plausible and might also be due to a break in raw data sources (unless this is due to sharp short-run variations in the relative price of assets held by these different wealth groups).
3 Note that this HID chapter also includes novel series about the evolution of the share of inheritance in total wealth accumulation. These new series use a different methodology and complement those reported in chapter 11 of my book.

Tuesday, May 27, 2014

'The Share of Borrowers with High Student Loan Balances is Rising'

We need to provide more support for education if we want it to be a vehicle for enhanced opportunity rather than a means of promoting existing inequities:

The Share of Borrowers with High Student Loan Balances is Rising, On the Economy, St. Louis Fed: It’s not just the total number of student loan borrowers that is going up. The average balance per borrower is going up as well. And, in particular, the fraction of borrowers with more than $10,000 in student debt is rising.

In a recent Economic Synopses essay, Alexander Monge-Naranjo, research officer and economist with the Federal Reserve Bank of St. Louis, examined the recent growth in student loan debt in the U.S. over the period 2005-2012. As of March 2012, student loan debt stood at $870 billion and had surpassed total credit card debt ($693 billion) and total auto loan debt ($730 billion).

In addition, Monge-Naranjo found that the distribution of student loans by debt levels had shifted, with the share of borrowers with loan balances in excess of $10,000 increasing. Increases were greater at higher levels of debt:

  • Only 3 percent of borrowers in 2005 owed more than $100,000. By 2012, that fraction reached 6.2 percent.
  • The share of borrowers who owed between $150,000 and $175,000 rose from 1.7 percent to 3.7 percent.
  • The share who owed between $175,000 and $200,000 went up from 0.6 percent to 1.5 percent.
  • The share of those owing more than $200,000 went up from 0.2 percent to 0.6 percent.

While Monge-Naranjo noted that “high levels of student loan debt pose no problems as long as the investment in education has high returns and the loans are repaid,” he also indicated that some borrowers may suffer adverse effects in the future, such as difficulty obtaining other forms of credit.

Thursday, May 15, 2014

'Why Inequality Lowers Social Mobility'

This was in the daily links, but thought it deserved additional highlighting. It's from Miles Corak:

Joseph Fishkin’s book, “Bottlenecks,” explains why inequality lowers social mobility, by Miles Corak: [The Brookings Institution has been having an online discussion of Bottlenecks: A New Theory of Equal Opportunity, a book by Joseph Fishkin. This post is a re-blog of my contribution, "Money: a Bottleneck with Bite."]
... So far, it has been politically convenient to focus on upward mobility of children from the bottom of the income distribution, measured in some absolute sense, because it puts broader issues of the influence of inequality to one side.
The mobility-only approach puts the onus of the problem on the poor—their incomes, their work ethic, their schooling, their fertility choices, their parenting strategies—and abstracts from the broader context within which they must engage, define themselves, and raise their children. The rich are not part of this story.
But Professor Fishkin is right: “anyone concerned with equal opportunity ought also to be concerned with limiting inequality of income and wealth.” ...
The factors impacting on child development certainly include non-financial ones, including what social scientists clinically label the “unobserved parental characteristics”, which are correlated with income.
But inequality alters the rules of the game. It narrows the goals we pursue as individuals, shapes values, and more importantly it turns our pursuit of the good life into an arms race over positional goods, and changes both incentives and opportunities. That is what makes money a bottleneck that bites.
Bottlenecks outlines a theory of opportunity that gives us good reason to worry about outcomes, because to some important degree unequal outcomes lead to unequal opportunities. ...
Money is a significant bottleneck. Facing that fact can only be healthy, if somewhat more challenging, for the way we think about public policy. ...

Wednesday, May 14, 2014

'The Inequality Puzzle'

Summers on Piketty:

The Inequality Puzzle: Once in a great while, a heavy academic tome dominates for a time the policy debate and, despite bristling with footnotes, shows up on the best-seller list. Thomas Piketty’s Capital in the Twenty-First Century is such a volume. As with Paul Kennedy’s The Rise and Fall of the Great Powers, which came out at the end of the Reagan Administration and hit a nerve by arguing the case against imperial overreach through an extensive examination of European history, Piketty’s treatment of inequality is perfectly matched to its moment.
Like Kennedy a generation ago, Piketty has emerged as a rock star of the policy-intellectual world. His book was for a time Amazon’s bestseller. Every pundit has expressed a view on his argument, almost always wildly favorable if the pundit is progressive and harshly critical if the pundit is conservative. Piketty’s tome seems to be drawn on a dozen times for every time it is read.
This should not be surprising. At a moment when our politics seem to be defined by a surly middle class and the President has made inequality his central economic issue, how could a book documenting the pervasive and increasing concentration of wealth and income among the top 1, .1, and .01 percent of households not attract great attention? Especially when it exudes erudition from each of its nearly 700 pages, drips with literary references, and goes on to propose easily understood laws of capitalism that suggest that the trend toward greater concentration is inherent in the market system and will persist absent the adoption of radical new tax policies. ...[continue]...

Update: Piketty responds to criticism.

Monday, May 12, 2014

'How to Shrink Inequality'

Robert Reich:

How to Shrink Inequality: Some inequality of income and wealth is inevitable, if not necessary. If an economy is to function well, people need incentives to work hard and innovate. The pertinent question is ... at what point do these inequalities become so great as to pose a serious threat to our economy, our ideal of equal opportunity and our democracy. We are near or have already reached that tipping point. ...But a return to the Gilded Age is not inevitable. ... There is no single solution for reversing widening inequality. ... Here are ten initiatives that could reverse the trends..:

1) Make work pay. ... [Min wage, EITC, etc.]
2) Unionize low-wage workers. ...
3) Invest in education. ...
4) Invest in infrastructure. ...
5) Pay for these investments with higher taxes on the wealthy. ...
6) Make the payroll tax progressive. ...
7) Raise the estate tax and eliminate the “stepped-up basis” for determining capital gains at death. ...
8) Constrain Wall Street. ...
9) Give all Americans a share in future economic gains. ... [Diversified index of stocks and bonds given to all at birth]
10) Get big money out of politics. ...

[The essay, which is much, much longer, also talks about how inequality has happened, how it threatens the foundations of our society, and why it has happened.]

Friday, May 09, 2014

Paul Krugman: Now That’s Rich

"Myths about who the rich really are and how they make their money":

Now That’s Rich, by Paul Krugman, Commentary, NY Times: Institutional Investor’s latest “rich list”..., its survey of the 25 highest-paid hedge fund managers, is out..., let’s think about ... about how their good fortune refutes several popular myths about income inequality...
First, modern inequality isn’t about graduates. It’s about oligarchs. Apologists for soaring inequality almost always ... talk about the rising incomes of college graduates, or maybe the top 5 percent. The goal of this misdirection is to soften the picture, to make it seem as if we’re talking about ordinary white-collar professionals who get ahead through education and hard work.
But many Americans are well-educated and work hard. ... Yet they don’t get the big bucks. ...
Second, ignore the rhetoric about “job creators”... Conservatives want you to believe that the big rewards in modern America go to innovators and entrepreneurs, people who build businesses and push technology forward. But that’s not what those hedge fund managers do for a living; they’re in the business of financial speculation...
Once upon a time, you might have been able to argue ... that all this wheeling and dealing was productive.... But, at this point, the evidence suggests that hedge funds are a bad deal for everyone except their managers... More broadly, we’re still living in the shadow of a crisis brought on by a runaway financial industry. ...
Finally, a close look at the rich list supports the thesis made famous by Thomas Piketty... — namely, that we’re on our way toward a society dominated by wealth, much of it inherited, rather than work. ...
But why does all of this matter? Basically, it’s about taxes.
America has a long tradition of imposing high taxes on big incomes and large fortunes, designed to limit the concentration of economic power as well as raising revenue. These days, however, suggestions that we revive that tradition face angry claims that taxing the rich is destructive and immoral — destructive because it discourages job creators from doing their thing, immoral because people have a right to keep what they earn.
But such claims rest crucially on myths about who the rich really are and how they make their money. Next time you hear someone declaiming about how cruel it is to persecute the rich, think about the hedge fund guys, and ask yourself if it would really be a terrible thing if they paid more in taxes.

Thursday, May 08, 2014

Higher Ed Cuts, Tuition Hikes Worsen Low-Income Students’ Struggles

As a follow-up to the previous post on black-white differences in economic mobility:

Higher Ed Cuts, Tuition Hikes Worsen Low-Income Students’ Struggles: State cuts to higher education have led colleges and universities to make deep cuts to educational or other services, hike tuition sharply, or both, as we explain in our recently released paper.  These tuition increases are hitting low-income students particularly hard, lessening their choices of schools, adding to their debt burdens — and likely deterring some from enrolling in school altogether. ...

Black–White Differences in Intergenerational Economic Mobility

Bhashkar Mazumder of the Federal Reserve Bank of Chicago

Black–white differences in intergenerational economic mobility in the United States: The large and persistent gap in economic status between blacks and whites in the United States has been a topic of considerable interest among social scientists and policymakers for many decades. The historical legacy of slavery and segregation raises the question of how long black Americans are likely to remain a disadvantaged minority. Despite the enormous literature on black–white inequality and its historical trends, few studies have directly measured black–white differences in rates of intergenerational mobility, that is, the ability of families to improve their position in the income distribution from one generation to the next. Estimates of rates of intergenerational mobility by race can provide insight on whether racial differences in the United States are likely to be eliminated and, if so, how long it might take. Furthermore, they might also help inform policymakers as to whether there are lingering racial differences in equality of opportunity and, if so, what the underlying sources for these differences are.
More generally, the relatively low rate of intergenerational mobility in the United States compared with other industrialized countries has been a growing concern to policymakers across the political spectrum.1 Understanding the sources of racial differences in intergenerational mobility might also shed light on the mechanisms behind the relatively high degree of intergenerational persistence of inequality in the United States. ...
A key finding is that in recent decades, blacks have experienced substantially less upward intergenerational mobility and substantially more downward intergenerational mobility than whites. These results are shown to be highly robust to a variety of measurement issues, such as the concept of income used, the age of the sample members, and the length of the time average used. The results are found in two different data sets that cover different birth cohorts and differ in their gender composition. Moreover, these results utilize relatively large samples of black families, so that racial differences can be shown to be statistically significant. An important implication of the results that has not been shown explicitly before is that if these patterns of mobility were to persist into the future, the implications for racial differences in the “steady-state” distribution of income would be alarming. Instead of eventually “regressing to the mean,” as some traditional measures of intergenerational mobility (when applied to the whole population) would suggest, these results imply that black Americans would make no further relative progress. Of course, it is a strong hypothetical to assume that current rates of mobility will hold in future generations. Indeed, over the past 150 years, there have been clear periods in which the racial gap in economic status has narrowed and it is certainly possible that black–white gaps could converge.4
This study also tries to shed light on which factors are associated with the racial gaps in upward and downward mobility. To be clear, while the analysis is descriptive and not causal, it nonetheless provides some highly suggestive “first-order” clues for the underlying mechanisms leading to black–white differences in intergenerational mobility. It appears that cognitive skills during adolescence, as measured by scores on the Armed Forces Qualification Test (AFQT), are strongly associated with these gaps. ... I do not interpret these scores as measuring innate endowments but rather as reflecting the accumulated differences in family background and other influences that are manifested in test scores.6 If these results are given a causal interpretation, they suggest that actions that reduce the racial gap in test scores could also reduce the racial gap in intergenerational mobility.7
A commonly proposed explanation for racial gaps in achievement has been the relatively high rates of black children growing up with single mothers. I find evidence that for blacks, the lack of two parents in the household throughout childhood does indeed hamper upward mobility. However, patterns in downward mobility are unaffected by family structure for either blacks or whites. Importantly, the negative effects of single motherhood on blacks are only identified in the SIPP, where the entire marital history during the child’s life is available. This highlights the importance of access to data on family structure over long periods rather than a single snapshot at one point in time. I also find that black–white gaps in both upward and downward mobility are significantly smaller for those who have completed 16 years of schooling.8 ...
Finally, I should also note that the focus of this article is on relative mobility across generations and that the measures are relevant for answering questions concerning the progress of blacks relative to whites. It may also be interesting to consider measures of absolute mobility, but that is not the focus of this article. ...[read more]...

Tuesday, May 06, 2014

Why Economists Are Finally Taking Inequality Seriously

New column:

Why Economists Are Finally Taking Inequality Seriously, by Mark Thoma: In economics, the examination of questions surrounding the distribution of income have been ignored or pushed into the background in the academic literature. However, rising inequality over the last several decades coupled with recent work by Thomas Piketty – which has had a surprisingly large and positive reception by the public – have propelled these questions to the forefront of economic analysis. ...

Thursday, May 01, 2014

'Another Perspective on U.S. Economic Mobility'

Busy day ... quick one from Tim Noah:

Another Perspective on U.S. Economic Mobility , by Timothy Noah, Washington Wire: My fellow Think Tank-er Benjamin Domenech, in formulating a conservative response to Thomas Piketty, wrote that “Several recent studies have shown that U.S. economic mobility is very good.”
But these studies aren’t terribly useful. They define “mobility” as what happens to an individual over many years..., a predictable earnings lifecycle. Most everybody enters the workforce making nothing or next to nothing; acquires experience and makes more; tops out at some point; then retires and makes less. ...
A much more useful measure of mobility is intergenerational... How “heritable” is relative income? In the U.S., it’s about 40 percent.... That isn’t very good by international standards. It’s been in that range since ... the 1970s. I write about all this at greater length here.

Wednesday, April 30, 2014

'Begging the Inequality Question'

Chris Dillow:

Begging the inequality question, by Chris Dillow: ... many of us dislike inequality not because we envy the mega-rich but because it is (sometimes) a symptom of malfunctioning markets... The fact that so many bosses get paid millions even for failure suggests that they are not paid their marginal product. Instead, some mix of agency failure, efficient wage considerations (bosses must be paid not to steal corporate assets) and arms races force pay above marginal product.
Sure, you can write models in which inequality emerges as if it were the product of free choices in a free market economy. You can also model a man's empty house as if he had called in the removal men - but if he has in fact been burgled, your models miss something.
I fear that some free market advocates - not all by any means, but some - are mistaking the map for the terrain. They forget that the textbook perfect competition model is not a description of reality but rather of a utopia against which to assess actually-existing markets. And sometimes - not always but in some important respects - they fall well short. ...

Tuesday, April 29, 2014

Inequality and Mobility in America

If you want a tutorial on how the political right responds to inequality and mobility concerns, this video is for you (Chrystia and Jared do their best to respond, and Jared has a nice summary of all of the potential causes of inequality in his opening remarks):

Income inequality has diminished in many parts of the world--Chile, Turkey, Mexico and Hungary being a few examples. But in America, the gap has widened. Ironically, the same forces may be responsible for both: globalization and technology, which have eased poverty in the developing world but led to the loss of unskilled but well-paying middle-class jobs in the United States and other developed nations. For the first time in nearly a century, the top 10 percent of American earners take home more than half the nation's income. New research suggests that it's harder than ever for the poor to move up into the middle and upper classes, an issue that has potential consequences for our economy, government, institutions and people. What can--or should--be done to narrow this disparity? Is education the key? With many Americans falling behind, these questions are stirring concern among policymakers and the business community as well. This panel will examine the magnitude of this complex challenge and strategies for reversing the trend.

  • Speakers: Jared Bernstein, Economic Policy Fellow, Milken Institute; Senior Fellow, Center on Budget and Policy Priorities; Former Chief Economist to Vice President Joe Biden
  • Edward Conard, Author, "Unintended Consequences"; Former Senior Managing Director, Bain Capital
  • Robert Doar, Fellow in Poverty Studies, American Enterprise Institute; Former Commissioner, Human Resources Administration, City of New York
  • Chrystia Freeland, Member of Parliament, Canada; Author, "Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else"
  • Moderator: Alan Schwartz, Executive Chairman, Guggenheim Partners

Friday, April 25, 2014

Paul Krugman: The Piketty Panic

Money talks, but sometimes not very coherently:

The Piketty Panic, by Paul Krugman, Commentary, NY Times: “Capital in the Twenty-First Century,” the new book by ... Thomas Piketty, is ... serious, discourse-changing scholarship... And conservatives are terrified. ...
The really striking thing about the debate so far is that the right seems unable to mount any kind of substantive counterattack... Instead, the response has been all about name-calling — ...that Mr. Piketty is a Marxist...
For the past couple of decades, the conservative response to attempts to make soaring incomes at the top into a political issue has involved two lines of defense: first, denial that the rich are actually doing as well and the rest as badly as they are, but when denial fails, claims that those soaring incomes at the top are a justified reward for services rendered. Don’t call them the 1 percent, or the wealthy; call them “job creators.”
But how do you make that defense if the rich derive much of their income not from the work they do but from the assets they own? And what if great wealth comes increasingly not from enterprise but from inheritance?
What Mr. Piketty shows is that these are not idle questions. Western societies before World War I were indeed dominated by an oligarchy of inherited wealth — and his book makes a compelling case that we’re well on our way back toward that state.
So what’s a conservative, fearing that this diagnosis might be used to justify higher taxes on the wealthy, to do? He could try to refute Mr. Piketty in a substantive way, but, so far, I’ve seen no sign of that happening. Instead, as I said, it has been all about name-calling..., to ... denounce Mr. Piketty as a Marxist..., which only makes sense if the mere mention of unequal wealth makes you a Marxist. ...
And The Wall Street Journal’s review, predictably, goes the whole distance, somehow segueing from Mr. Piketty’s call for progressive taxation as a way to limit the concentration of wealth ... to the evils of Stalinism. ...
Now, the fact that apologists for America’s oligarchs are evidently at a loss for coherent arguments doesn’t mean that they are on the run politically. Money still talks — indeed, thanks in part to the Roberts court, it talks louder than ever. Still, ideas matter too, shaping both how we talk about society and, eventually, what we do. And the Piketty panic shows that the right has run out of ideas.

Thursday, April 24, 2014

Consumption Inequality is Also Growing

Hearing a lot of talk about how Democrats never talk about consumption inequality, and that this is "the holy grail for inequality skeptics". It is talked about, and it's a "myth that growing consumption inequality is a myth." A very quick search of this blog turns up:

The Myth that Growing Consumption Inequality is a Myth 2012
Inequality of Income and Consumption 2012
Inequality Has Increased in Income and Consumption 2012
But They Have TVs and Cell Phones! - 2012
Has Consumption Inequality Mirrored Income Inequality? 2011
Is Consumption the Grail for Inequality Skeptics? 2009

Income Inequality, Spending Inequality, Wealth Inequality 2008

Consumption and Income Inequality 2008

Video: Piketty, Krugman, Stiglitz, and Durlauf on 'Capital in the Twenty-First Century'

"The French economist Thomas Piketty discussed his new book, Capital in the Twenty-First Century at the Graduate Center. In this landmark work, Piketty argues that the main driver of inequality—the tendency of returns on capital to exceed the rate of economic growth—threatens to generate extreme inequalities that stir discontent and undermine democratic values. He calls for political action and policy intervention. Joseph Stiglitz, Paul Krugman, and Steven Durlauf participated in a panel moderated by Branko Milanovic."

Wednesday, April 23, 2014

'Inequality in Well-Being'

From the House of Debt:

Inequality in Well-Being, by Atif Mian and Amir Sufi: As we mentioned in our post yesterday, economists care much more about inequality in well-being rather than inequality in income or wealth. Data on well-being are more difficult to gather, but we discussed some evidence that inequality in consumption also increased from 1980 to 2010. Consumption directly affects the utility of an individual in most economic models. Income does not.
Here is some more evidence, with a particular focus on the last few years ...
Another strategy in measuring well-being is to look beyond spending and toward measures of health. Life expectancy data are available, and they seem to tell a similar story...: the rise in life expectancy from 1980 to 2010 for people already 65 is driven almost entirely by the rich.
There has been a lot of attention on income and wealth inequality, and for good reason. But inequality in outcomes such as consumption and health are far more important. We’ve gathered some evidence here, but more is needed. The evidence so far suggests that inequality in well-being has tracked inequality in wealth and income closely. ...

'Thomas Piketty Is Right'

Solow on Piketty:

Thomas Piketty Is Right: Everything you need to know about 'Capital in the Twenty-First Century', by Robert Solow: Income inequality in the United States and elsewhere has been worsening since the 1970s. The most striking aspect has been the widening gap between the rich and the rest. This ominous anti-democratic trend has finally found its way into public consciousness and political rhetoric. A rational and effective policy for dealing with it—if there is to be one—will have to rest on an understanding of the causes of increasing inequality. The discussion so far has turned up a number of causal factors: the erosion of the real minimum wage; the decay of labor unions and collective bargaining; globalization and intensified competition from low-wage workers in poor countries; technological changes and shifts in demand that eliminate mid-level jobs and leave the labor market polarized between the highly educated and skilled at the top and the mass of poorly educated and unskilled at the bottom.
Each of these candidate causes seems to capture a bit of the truth. But even taken together they do not seem to provide a thoroughly satisfactory picture. They have at least two deficiencies. First, they do not speak to the really dramatic issue: the tendency for the very top incomes—the “1 percent”—to pull away from the rest of society. Second, they seem a little adventitious, accidental; whereas a forty-year trend common to the advanced economies of the United States, Europe, and Japan would be more likely to rest on some deeper forces within modern industrial capitalism. Now along comes Thomas Piketty, a forty-two-year-old French economist, to fill those gaps and then some. I had a friend, a distinguished algebraist, whose preferred adjective of praise was “serious.” “Z is a serious mathematician,” he would say, or “Now that is a serious painting.” Well, this is a serious book. ...

Thursday, April 17, 2014

'Antitrust in the New Gilded Age'

Robert Reich:

Antitrust in the New Gilded Age, by Robert Reich: We’re in a new gilded age of wealth and power similar to the first gilded age when the nation’s antitrust laws were enacted. Those laws should prevent or bust up concentrations of economic power that not only harm consumers but also undermine our democracy — such as the pending Comcast acquisition of Time-Warner. ...
In many respects America is back to the same giant concentrations of wealth and economic power that endangered democracy a century ago. The floodgates of big money have been opened...
Remember, this is occurring in America’s new gilded age — similar to the first one in which a young Teddy Roosevelt castigated the “malefactors of great wealth, who were “equally careless of the working men, whom they oppress, and of the State, whose existence they imperil.”
It’s that same equal carelessness toward average Americans and toward our democracy that ought to be of primary concern to us now. Big money that engulfs government makes government incapable of protecting the rest of us against the further depredations of big money.
After becoming President in 1901, Roosevelt used the Sherman Act against forty-five giant companies, including the giant Northern Securities Company that threatened to dominate transportation in the Northwest. William Howard Taft continued to use it, busting up the Standard Oil Trust in 1911. 
In this new gilded age, we should remind ourselves of a central guiding purpose of America’s original antitrust law, and use it no less boldly. 

Sunday, April 13, 2014

'The Social and Moral Philosophy of the Minimum Wage'

More Delong -- Brad makes this point about value neutrality every once in awhile, it's one I sometimes forget in these discussions, so it's a nice reminder:

The Social and Moral Philosophy of the Minimum Wage: Matthew Yglesias is surprised that most economists favor raising the minimum wage: ...
...at the University of Chicago's Booth School of Business found they supported a minimum-wage increase. They weren't sure, however, whether increases would create unemployment. Most said that, on balance, the benefits exceeded the costs...
But why should he be surprised? ...

One possibility is that Matthew has spent too much time listening to bad right-wing economists who are even worse philosophers--people who say things like: "We are economists, We talk only about efficiency, and so we talk about what maximizes real income per capita. If you want to introduce some other consideration and maximize something other than real income per capita, well then you are introducing interpersonal value comparisons into the problem and you should consult the philosopher or theologian. But we should agree at the start that it is maximizing real income per capita that is the efficient outcome."
The problem with this, of course, is that maximizing real income per capita does take a stand, and a very fictional your stand, on interpersonal value comparisons. To maximize real income per capita is to assert that each dollar at the margin--no matter how rich is the person that goes to--has the same effect on marginal utility, has the same effect on the greatest good of the greatest number. If we were, instead of maximizing real income per capita, to go about maximizing the geometric mean of real income we would be taking another stand: that utility was logarithmic in real income, so that each doubling of real income had the same effect on the greatest good of the greatest number no matter who that doubling went to or how rich they already were.
Both maximizing real income per capita and maximizing the geometric mean of real income are wrong, are not what we really want to do. ...
But if one wants a neutral place to start, it is surely less obnoxious to start from maximizing the geometric mean of real income than from maximizing real income per capita. And once one starts from there you need a very large disemployment effect--one that we simply see strong evidence against at the current level of the minimum wage--for an increase in the minimum wage to flunk any sensible benefit-cost calculation.

Notes and Finger Exercises on Thomas Piketty's "Capital in the Twenty-First Century"

Brad DeLong attempts to answer a question many people have been asking. Can the Summers claim of secular stagnation due to the real interest rate being too low be reconciled with Piketty's argument that the real interest rate is too high, high enough to generate rising inequality (larger than the growth rate of the economy)?:

Notes and Finger Exercises on Thomas Piketty's "Capital in the Twenty-First Century": When I look at Thomas Piketty's big book, I see one thing that he failed to do that I think he really should have done. A large part of the book is about the contrast between "r", the rate of return on wealth, and "g" the growth rate of the economy. However, there are four different r's. And in his book he failed to distinguish between them.

The four different r's are:

  1. The real interest rate at which metropolitan governments can borrow: call this r1.
  2. The real interest rate that is the actual average return on wealth in the society and economy: call this r2.
  3. The real interest rate that is the average risky net rate of accumulation--what capital receives, minus the risk of confiscation or destruction or taxation, plus appreciation in valuation multiples, minus what is spent in order to keep the world in the appropriate social position: call this r3.
  4. A measure of the extent to which capital and wealth serve as an effective claim on income independent of how much capital there is--a standardized measure of what the society and economy's return on wealth would be at some standardized ratio of wealth to annual income: say, 4: call this ρ.

These four r's are very different animals.

The first r, r1, is what Larry Summers is talking about when he talks about secular stagnation. When that r1 falls to a level equal to minus the rate of inflation, the economy is in big trouble. At that point, wealthholders would rather become coupon-clipping rentiers holding government bonds then invest in industry of any sort. Full employment can then be attained only via:

  1. A bubble that produces unrealistic and unsustainable expectations of the profits from investing in industry.
  2. The government borrowing money and buying stuff on a large scale.
  3. A higher rate of trend inflation that relaxes the zero lower bound constraint on safe government debt interest rates. .

Larry Summers is worried that this is the dilemma we face: that we are in a world in which r1 is too low...

Thomas Piketty, by contrast, says that he is worried about the world in which r2 is too high.

But it is not r2 but rather r3 that he should be talking about. And r3--the average rate of accumulation--is r2 to which there are a good number of sociopolitical factors plus and minus.

Are Piketty and Summers Reconcilable?

We have a world in which some eminent economists (Larry Summers) say r1 is too low, and other eminent economists (Thomas Piketty) say r2 is too high. Can this compute?

Yes.

The difference between r1 and r2 is the risk premium. In a well-functioning market economy with well-functioning financial markets, there are powerful reasons to believe that this risk premium should be small: less than 1%-point per year. The fact the risk premium appears to me to be 7%-points per year today is a powerful evidence of the profound dysfunctionality of our financial markets, and of their failure to do their proper catallactic job. But that is a separate and largely independent discussion: that is a dysfunction of our modern market economy which is different from either the dysfunction feared by Summers or the dysfunction feared by Piketty. For the moment, simply note that it is perfectly possible for all three of these major dysfunctions to occur together.

What Does This Neoclassical Economist Say? Build a Mathematical Model

When a conventional American post-World War II neoclassical economist--somebody, that is, like me--tries to make analytical sense of Piketty's big book, he says:

Ring-ding-ding-ding-dingeringeding!

No, that's not it... He says something like:

Piketty talks a lot about eras, and about times when r--his r, r2--r2 > g, and wealth concentration and the wealth-to-annual income ratio is rising, and times when r2 < g, and wealth concentration and the wealth-to-annual-income ratio is falling. But how much? And in what periods, exactly? Let's see if we can do some finger exercise to figure it out. ...

Saturday, April 12, 2014

'Better Insurance Against Inequality'

Robert Shiller:

Better Insurance Against Inequality: Paying taxes is rarely pleasant, but as April 15 approaches it’s worth remembering that our tax system is a progressive one and serves a little-noticed but crucial purpose: It mitigates some of the worst consequences of income inequality. ...
But it’s also clear that ... what we have isn’t nearly enough. It’s time — past time, actually — to tweak the system so that it can respond effectively if income inequality becomes more extreme. ...
In testimony before the Senate Finance Committee last month, [Leonard] Burman proposed a version of inequality indexing that might be politically acceptable... His idea was to integrate inequality indexing with inflation indexing: Instead of just linking tax brackets to inflation..., he proposed that ... if inequality worsened, higher tax brackets would bear a bit more of the burden, and people at the bottom would bear less.
A relatively minor change like this should be politically acceptable. It is a reframing of inflation indexing, which is already a sacrosanct principle, and would be revenue-neutral. ... Such a plan would be a nice first step toward making our tax system manage the risk of future increases in inequality.

I'm a bit more doubtful than he is about the political acceptability of this proposal so long as the GOP is in a position to block any movement in this direction.

Friday, April 11, 2014

'What Do Average Americans Think About Inequality?'

Sociologist Claude Fischer:

What do average Americans think about inequality?: ... In her 2013 book, The Undeserving Rich: American Beliefs about Inequality, Opportunity, and Redistribution, sociologist Leslie McCall methodically tries to figure out Americans’ thinking about inequality. ... Here is what McCall found (updated a bit with new surveys):
  • First, surveys show that Americans are aware that inequality has grown...
  • Second, Americans do not like high income inequality. ...
  • Third, most Americans find widening inequality objectionable because it seems to undercut opportunities for economic advancement. ...
  • Fourth, a growing percentage of Americans want something done about inequality. ...
  • Fifth, what Americans have not increasingly endorsed is having the government redistribute income. ...
  • Sixth, what Americans do want the government to do – and there is increasing support for this – is to increase opportunity, notably by funding more education. ...
...I am struck that, in her data and analysis, Americans generally do not object to economic inequality on grounds that perhaps other westerners might: not that it is morally, religiously offensive – Pope Francis speaks of “moral destitution”; nor on the grounds that everyone has a human right to a decent standard of living;  nor because inequality might have damaging psychological consequences or social consequences; nor even because inequality slows economic growth. Generally, Americans object to inequality, it seems, because they think that it undermines the chances that  individual ambition and hard work will succeed.

Wednesday, April 09, 2014

'Rich people rule!'

In case you missed this in today's links, Larry Bartels:

Rich people rule!, by Larry Bartels, Commentary, Washington Post: Everyone thinks they know that money is important in American politics. But how important? .. For decades, most political scientists have sidestepped that question... But now, political scientists are belatedly turning more systematic attention to the political impact of wealth, and their findings should reshape how we think about American democracy.
forthcoming article ... by ... Martin Gilens and ... Benjamin Page marks a notable step in that process. ... They conclude that “economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while mass-based interest groups and average citizens have little or no independent influence.”
Average citizens have “little or no independent influence” on the policy-making process? This must be an overstatement of Gilens’s and Page’s findings, no?
Alas, no. In their primary statistical analysis, the collective preferences of ordinary citizens had only a negligible estimated effect on policy outcomes, while the collective preferences of “economic elites” ... were 15 times as important. ...

Monday, April 07, 2014

Paul Krugman: Oligarchs and Money

Class interests stand in the way of raising the inflation target:

Oligarchs and Money, by Paul Krugman, Commentary, NY Times: Econonerds eagerly await each new edition of the International Monetary Fund’s World Economic Outlook. ... This latest report ... in effect makes a compelling case for raising inflation targets above 2 percent, the current norm in advanced countries. ...
First, let’s talk about the case for higher inflation. ... It’s good for debtors — and therefore good for the economy as a whole when an overhang of debt is holding back growth and job creation. It encourages people to spend rather than sit on cash — again, a good thing in a depressed economy. And it can serve as a kind of economic lubricant, making it easier to adjust wages and prices...
But ... would it be enough to get back to 2 percent, the official inflation target...? Almost certainly not.
You see, monetary experts ... thought that 2 percent was high enough to ... make liquidity traps ... very rare. But America has now been in a liquidity trap for more than five years. Clearly, the experts were wrong.
Furthermore,... there’s strong evidence that changes in the global economy are increasing the tendency of investors to hoard cash..., thereby increasing the risk of liquidity traps unless the inflation target is raised. But the report never dares to say this outright.
So why is the obvious unsayable? One answer is that serious people like to prove their seriousness by calling for tough choices and sacrifice (by other people, of course). They hate being told about answers that don’t involve more suffering.
And behind this attitude, one suspects, lies class bias. Doing what America did after World War II — using low interest rates and inflation to erode the debt burden — is often referred to as “financial repression,” which sounds bad. But who wouldn’t prefer modest inflation and a bit of asset erosion to mass unemployment? Well, you know who: the 0.1 percent... Modestly higher inflation, say 4 percent, would be good for the vast majority of people, but it would be bad for the superelite. And guess who gets to define conventional wisdom.
Now, I don’t think that class interest is all-powerful. Good arguments and good policies sometimes prevail even if they hurt the 0.1 percent — otherwise we would never have gotten health reform. But we do need to make clear what’s going on, and realize that in monetary policy as in so much else, what’s good for oligarchs isn’t good for America.