Category Archive for: Income Distribution [Return to Main]

Saturday, October 11, 2014

Inequality and Progressive Taxes

Steve Waldman has a nice discussion of a recent debate:

Scale, progressivity, and socioeconomic cohesion, Interfluidity: Today seems to be the day to talk about whether those of us concerned with poverty and inequality should focus on progressive taxation. Edward D. Kleinbard in the New York Times and Cathie Jo Martin and Alexander Hertel-Fernandez at Vox argue that focusing on progressivity can be counterproductive. Jared Bernstein, Matt Bruenig, and Mike Konczal offer responses offer responses that examine what “progressivity” really means and offer support for taxing the rich more heavily than the poor. This is an intramural fight. All of these writers presume a shared goal of reducing inequality and increasing socioeconomic cohesion. Me too.
I don’t think we should be very categorical about the question of tax progressivity. We should recognize that, as a political matter, there may be tradeoffs between the scale of benefits and progressivity of the taxation that helps support them. We should be willing to trade some progressivity for a larger scale. Reducing inequality requires a large transfers footprint more than it requires steeply increasing tax rates. But, ceteris paribus, increasing tax rates do help. Also, high marginal tax rates may have indirect effects, especially on corporate behavior, that are socially valuable. We should be willing sometimes to trade tax progressivity for scale. But we should drive a hard bargain.
First, let’s define some terms...

Wednesday, October 08, 2014

'How are Economic Inequality and Growth Connected?'

Carter Price and Heather Boushey:

How are economic inequality and growth connected?, by Carter C. Price and Heather Boushey: ... In the past several decades, economic inequality in the United States and other wealthy nations has risen sharply, spurring renewed interest in the question of whether and how changes in income distributions affect economic wellbeing. Over the same time period, economic inequality has persisted and even grown in many poorer economies.

These trends have sparked economists to conduct empirical studies, analyzing data across states and countries, to see if there is a direct relationship between economic inequality, and economic growth and stability. Early empirical work on this question generally found inequality is harmful for economic growth. Improved data and techniques added to this body of research, but the newer literature was generally inconclusive, with some finding a negative relationship between economic growth and inequality while others finding the opposite.

The latest research, however, provides nuance that can explain many of the conflicting trends within the earlier body of research. There is growing evidence that inequality is bad for growth in the long run. Specifically, a number of studies show that higher inequality is associated with slower income gains among those not at the top of the income and wealth spectrum. ...

In this paper, we review the recent empirical economic literature that specifically examines the effect inequality has on economic growth, wellbeing, or stability. This newly available research looks across developing and advanced countries and within the United States. Most research shows that, in the long term, inequality is negatively related to economic growth and that countries with less disparity and a larger middle class boast stronger and more stable growth. Some studies do suggest that in the short run, inequality may spur growth before hindering it over the longer term, but overall there is growing evidence that, in the long run, more equitable societies are associated with higher rates of growth. ...

Important as well for the purposes of this paper is this—the latest economic research we reviewed only examines the outcome of whether there are results for regressions that demonstrate positive or negative relationships between inequality and economic growth and stability. This means the paper cannot provide clear guidance for policymakers on exactly how to address inequality or mitigate its effects on growth. In other words, the research examined in this paper generally does not identify the channels or mechanisms by which inequality affects growth. ...

This paper does not contain policy advice. Instead, it contains analysis that largely demonstrates there are direct, and possibly causal, relationships between economic inequality and growth—places that begin with a lower level of inequality subsequently tend to grow faster and have longer periods of growth than those with a higher level of inequality. In future research, we will focus on the channels...

Thursday, October 02, 2014

Why is our Infant Mortality so Bad?

Aaron Carroll:

So why is our infant mortality so bad?: ...Everyone knows that in international comparisons, the infant mortality rate in the US is terrible. Some people think it’s because we code things differently and try harder to save premature babies. Others think that’s not true, and that this points to other problems in the health care system.
As always, though, it’s probably a mixture of many things. A new NBER working paper gets at just that. “Why is Infant Mortality Higher in the US than in Europe?” ... What did they find?
Reporting differences ... explained up to 40% of the disadvantage in US infant mortality. But that would only get us closer. It would still leave us way worse. ... What accounted for the real disadvantage was postneonatal mortality, or mortality from one month to one year of age. That difference was almost entirely due to excess inequality in the US. ...
So there are two main takeaways from this paper. The first is that although reporting differences can account for some of our worse infant mortality statistics, most of the differences we see are not due to that explanation. The second is that most of the rest of the disadvantage is due to differences in postneonatal mortality, that likely require fixes to the healthcare system. Whether the ACA does so remains to be seen.

Tuesday, September 30, 2014

Highest Ranked, but It's Not Good News

Martin Wolf, in "Why inequality is such a drag on economies": 2012, says the Organisation for Economic Co-operation and Development, the US ranked highest among the high-income countries in the share of relatively low-paying jobs. ...

Monday, September 29, 2014

Paul Krugman: Our Invisible Rich

The difference between the rich and the poor is larger than most people realize:

Our Invisible Rich, by Paul Krugman, Commentary, NY Times: Half a century ago, a classic essay in The New Yorker titled “Our Invisible Poor” took on the then-prevalent myth that America was an affluent society with only a few “pockets of poverty.” For many, the facts about poverty came as a revelation...
I don’t think the poor are invisible today... Instead, these days it’s the rich who are invisible. ... In fact, most Americans have no idea just how unequal our society has become.
The latest piece of evidence to that effect is a survey asking people in various countries how much they thought top executives of major companies make relative to unskilled workers. In the United States the median respondent believed that chief executives make about 30 times as much as their employees, which was roughly true in the 1960s — but since then the gap has soared, so that today chief executives earn something like 300 times as much as ordinary workers.
So Americans have no idea how much the Masters of the Universe are paid, a finding very much in line with evidence that Americans vastly underestimate the concentration of wealth at the top. ...
So how can people be unaware of this development, or at least unaware of its scale? The main answer, I’d suggest, is that the truly rich are so removed from ordinary people’s lives that we never see what they have. We may notice, and feel aggrieved about, college kids driving luxury cars; but we don’t see private equity managers commuting by helicopter to their immense mansions in the Hamptons. The commanding heights of our economy are invisible because they’re lost in the clouds. ...
Does the invisibility of the very rich matter? Politically, it matters a lot. Pundits sometimes wonder why American voters don’t care more about inequality; part of the answer is that they don’t realize how extreme it is. ...
Most Americans say, if asked, that inequality is too high and something should be done about it — there is overwhelming support for higher minimum wages, and a majority favors higher taxes at the top. But at least so far confronting extreme inequality hasn’t been an election-winning issue. Maybe that would be true even if Americans knew the facts about our new Gilded Age. But we don’t know that. Today’s political balance rests on a foundation of ignorance, in which the public has no idea what our society is really like.

Friday, September 26, 2014

Paul Krugman: The Show-Off Society

When it comes to the wealthy, is this time different?:

The Show-Off Society, by Paul Krugman, Commentary, NY Times: Liberals talk about circumstances; conservatives talk about character.
This intellectual divide is most obvious when the subject is the persistence of poverty... Liberals focus on the stagnation of real wages and the disappearance of jobs offering middle-class incomes, as well as the constant insecurity that comes with not having reliable jobs or assets. For conservatives, however, it’s all about not trying hard enough. ...
Let us, however, be fair: some conservatives are willing to censure the rich, too. ... Peggy Noonan writes about our “decadent elites”... Charles Murray, whose book “Coming Apart” is mainly about the alleged decay of values among the white working class, also denounces the “unseemliness” of the very rich, with their lavish lifestyles and gigantic houses.
But has there really been an explosion of elite ostentation? ...
I’ve just reread a remarkable article titled “How top executives live,” originally published in Fortune in 1955 and ... it turns out that the lives of an earlier generation’s elite were, indeed, far more restrained, more seemly if you like ... And why had the elite moved away from the ostentation of the past? ... The large yacht, Fortune tells us, “has foundered in the sea of progressive taxation.”
But that sea has since receded. ... And there’s no mystery about what happened to the good-old days of elite restraint. ... Extreme income inequality and low taxes at the top are back. ...
Is there any chance that moral exhortations, appeals to set a better example, might induce the wealthy to stop showing off so much? No.
It’s not just that people who can afford to live large tend to do just that. As Thorstein Veblen told us long ago, in a highly unequal society the wealthy feel obliged to engage in “conspicuous consumption”... And modern social science confirms his insight. For example, researchers at the Federal Reserve have shown that people living in highly unequal neighborhoods are more likely to buy luxury cars... Pretty clearly, high inequality brings a perceived need to spend money in ways that signal status.
The point is that while chiding the rich for their vulgarity may not be as offensive as lecturing the poor on their moral failings, it’s just as futile. Human nature being what it is, it’s silly to expect humility from a highly privileged elite. So if you think our society needs more humility, you should support policies that would reduce the elite’s privileges.

Wednesday, September 24, 2014

'Having It and Flaunting It'

Paul Krugman:

Having It and Flaunting It: David Brooks is getting some ribbing for suggesting that the wealthy should “follow a code of seemliness”, not living the lavish lifestyles they can afford. ...I want to talk a bit about the economics of flaunting your wealth...
The first thing to say is that expecting the rich not to flaunt their wealth is, of course, unrealistic..., for many of the rich flaunting is what it’s all about. ... So it’s largely about display — which Thorstein Veblen could, of course, have told you. ...
Wait, there’s more. If you feel that it’s bad for society to have people flaunting their relative wealth, you have in effect accepted the view that great wealth imposes negative externalities on the rest of the population — which is an argument for progressive taxation that goes beyond the maximization of revenue.
And one more thing: think about what this says about economic growth. We have an economy that has become considerably richer since 1980, but with a large share of the gains going to people with very high incomes — people for whom the marginal utility of a dollar’s worth of spending ... comes largely from status competition, which is a zero-sum game. So a lot of our economic growth has simply been wasted, doing nothing but accelerating the pace of the upper-income rat race. ...

From the past, my view of what wealth is for:

What is Rich?: ...When I was a little kid, being rich meant being able to buy the stuff I wanted without having to worry about how much it costs.

But as I got older -- and maybe this explains my choice of jobs -- being rich was much more about the ability to do what I wanted with my time. In this sense, you can have considerable wealth, but still not be rich. In fact, the quest for more and more stuff gets in the way (though it depends in part on what you want to do with your free time, if it's to play golf at an expensive club, sufficient wealth is a necessary condition).

Some of the richest people I know are quite poor in terms of having "stuff", but free of the rat race, and as far as I can tell, they are generally happy. I think a lot of people are actually looking for freedom as they accumulate wealth -- they imagine being able to do whatever they want -- but don't realize that working longer and longer hours until there is no time left for anything else is not the best the way to get the freedom they are looking for. ...

But for many it seems the accumulation of "stuff" and the envy of people who cannot afford it is more important than freedom from the never ending job of status competition.

Sunday, September 21, 2014

'Capitalism & the Low-Paid'

Chris Dillow:

Capitalism & the low-paid: Is capitalism compatible with decent living standards for the worst off*? This old Marxian question is outside the Overton window, but it's the one raised by Ed Miliband's promise to raise the minimum wage to £8 by 2020. ...
* Note for rightists: As Adam Smith said, the notion of what's decent rises as incomes rise. And the fact that capitalism has massively improved workers' living standards in the past does not guarantee it will do so in future. As Marx said, a mode of production which increases productive powers can eventually restrain them. And as Bertrand Russell pointed out, inductive reasoning can go badly wrong. ...

Saturday, September 20, 2014

Finance Sector Wages: Explaining Their High Level and Growth

Joanne Lindley and Steven McIntosh:

Finance sector wages: explaining their high level and growth, by Joanne Lindley and Steven, Vox EU: Individuals who work in the finance sector enjoy a significant wage advantage. This column considers three explanations: rent sharing, skill intensity, and task-biased technological change. The UK evidence suggests that rent sharing is the key. The rising premium could then be due to changes in regulation and the increasing complexity of financial products creating more asymmetric information. ...

Wednesday, September 17, 2014

'Empathy for the Poor'

Tim Taylor:

Empathy for the Poor: A Meditation: The U.S. Census Bureau has just published its annual report with estimates of the U.S. poverty rate, which was 14.5% in 2013, down a touch from 15.0% in 2012. It's easy to have sympathy for those with low incomes. But for many of us, myself included, true empathy with the one-seventh or so of Americans who are below the  poverty line is more difficult. It can be difficult to avoid falling into easy and ill-informed moralizing that if those with low incomes just managed their food budget a little better, or saved a little bit of money, worked a few more hours, or avoided taking out that high-interest loan, then their economic lives could be more stable and their longer-term prospects improved.

When I find myself sucked into a discussion of how the poor live their lives, I think of the comments of George Orwell in his underappreciated 1937 book, The Road to Wigan Pier, which details the lives of the poor and working poor in northern industrial areas of Britain like Lancashire and Yorkshire during the Depression. Orwell, of course, was writing from a leftist and socialist perspective, deeply sympathetic to the poor. Bur Orwell is also painfully honest about his reactions and views. At one point Orwell laments that the poor make such rotten choices about food--but then he also points out how unsatisfactory it feels to patronizingly tell those with low incomes how to spend what little they have. Here's Orwell...

Monday, September 15, 2014

'Polanyi's Paradox and the Shape of Employment Growth'

"A key observation of the paper is that journalists and expert commentators overstate the extent of machine substitution for human labor and ignore the strong complementarities":

Polanyi's Paradox and the Shape of Employment Growth, by David Autor, NBER Working Paper No. 20485, September 2014 [open link]: In 1966, the philosopher Michael Polanyi observed, “We can know more than we can tell... The skill of a driver cannot be replaced by a thorough schooling in the theory of the motorcar; the knowledge I have of my own body differs altogether from the knowledge of its physiology.” Polanyi’s observation largely predates the computer era, but the paradox he identified—that our tacit knowledge of how the world works often exceeds our explicit understanding—foretells much of the history of computerization over the past five decades. This paper offers a conceptual and empirical overview of this evolution. I begin by sketching the historical thinking about machine displacement of human labor, and then consider the contemporary incarnation of this displacement—labor market polarization, meaning the simultaneous growth of high-education, high-wage and low-education, low-wages jobs—a manifestation of Polanyi’s paradox. I discuss both the explanatory power of the polarization phenomenon and some key puzzles that confront it. I then reflect on how recent advances in artificial intelligence and robotics should shape our thinking about the likely trajectory of occupational change and employment growth. A key observation of the paper is that journalists and expert commentators overstate the extent of machine substitution for human labor and ignore the strong complementarities. The challenges to substituting machines for workers in tasks requiring adaptability, common sense, and creativity remain immense. Contemporary computer science seeks to overcome Polanyi’s paradox by building machines that learn from human examples, thus inferring the rules that we tacitly apply but do not explicitly understand.

Wednesday, September 10, 2014

'More Education = More Income'

Eduardo Porter:

A Simple Equation: More Education = More Income, by Eduardo Porter, NY Times: ...the gap between the wages of a family of two college graduates and a family of high school graduates..., between 1979 and 2012...,grew by some $30,000, after inflation. This ... amounts to a powerful counterargument to anybody who doubts the importance of education in the battle against the nation’s entrenched inequality.
But in the American education system, inequality is winning, gumming up the mobility that broad-based prosperity requires. ... Only one in 20 Americans aged 25 to 34 whose parents didn’t finish high school has a college degree. The average across 20 rich countries in the O.E.C.D. analysis is almost one in four. ...
Given the payoff, the fact that many of those who would benefit most are not investing in a college education suggests an epic failure. And the growing cadre of countries that outperform the United States suggests failure is hardly inevitable. ...
Mr. Schleicher told me that, while places like Japan, Singapore and Canada have learned how to educate socially disadvantaged children, in the United States social background plays an outsize role in the educational outcomes. ... “But a lot depends on policy. There is a lot we can do.”
Decimating public education is not to anyone’s advantage...

Thursday, September 04, 2014

FRB Explanatory Video: Changes in Family Finances

Sunday, August 24, 2014

The Acemoglu-Robinson Critique of Piketty

Branko Milanovic:

My take on the Acemoglu-Robinson critique of Piketty: A couple of days ago Daron Acemoglu and James Robinson published a critique of Piketty’s Capital in the 21st century. It is published here.  Because of the renown of the authors, perhaps more than because of its intrinsic quality, it is a review worth reading. I read it today and my brief reaction to the three main critiques by Acemoglu and Robinson is as follows. ...

[Travel day, squeezing this one in before hurrying to my next flight.]

Wednesday, August 20, 2014

Understanding Social Mobility

Friday, August 15, 2014

'The Supply-Side Case for Government Redistribution'

Alan Blinder on the inequality Laffer curve (that some of us were writing about in early 2011):

The Supply-Side Case for Government Redistribution, by Alan S. Blinder, Commentary, WSJ: ...Why is high and rising inequality a problem? ... In thinking about the effects of inequality on growth, we should look more at the supply side than the demand side. That's ironic. The clarion call of "supply-side economics" since the 1970s has been to cut taxes on the rich on the hope (not supported by much evidence) that benefits would "trickle down"... But nowadays the best supply-side policies may be those aimed at reducing income inequality. Consider:
Children who grow up poor get inferior K-12 education, and most likely don't go to college. They don't develop their talents as fully as middle- and upper-class kids do. Children who grow up undernourished do not reach their full physical or mental potential... Children who don't have enough access to health care grow up to be less healthy and productive adults. These ... ill-effects of poverty ... aren't limited to poor countries...
The strongest arguments against rampant inequality may nonetheless be political, not economic. ...Americans aren't really created equal. ... Sadly, with our political system so dominated by money, "equal political rights" is a cruel deception. ...
So even if you don't buy the ethical argument for redistribution, and even if you thought 1979 levels of income inequality were just fine, there are good reasons to reconsider the case in 2014. Inequality has risen so much in the past 35 years that it may now be retarding economic growth on the supply side while leaving us with the finest government money can buy.

Thursday, August 14, 2014

'A Clear Connection Between the Rise in Incomes at the Very Top and Lower Real Wages for Everyone Else'

Simon Wren-Lewis:

...In the US the share of the 1% has increased from about 8% at the end of the 70s to nearly 20% today. If that has had no impact on aggregate GDP but is just a pure redistribution, this means that the average incomes of the 99% are 15% lower as a result. The equivalent 1% numbers for the UK are 6% and 13% (although as the graph shows, that 13% looks like a temporary downward blip from something above 15%), implying a 7.5% decline in the average income of the remaining 99%.
So there is a clear connection between the rise in incomes at the very top and lower real wages for everyone else. Arguments that try and suggest that any particular CEO’s pay increase does no one any harm may be appealing to a common pool type of logic, and are just as fallacious as arguments that some tax break does not leave anyone else worse off. It is an indication of the scale of the rise in incomes of the 1% over the last few decades that this has had a significant effect on the incomes of the remaining 99%.   

'Education Alone Is Not the Answer to Income Inequality'

Robert Kuttner:

Education Alone Is Not the Answer to Income Inequality and Slow Recovery: Our economy is now five years into an economic recovery, yet the wages of most Americans are flat. ... The top one percent has made off with nearly all of the economy’s gains since 2000.  
Is there nothing that can be done to improve this picture?
To hear a lot of economists tell the story, the remedy is mostly education. It’s true that better-educated people command higher earnings. But...
If everyone in America got a PhD, the job market would not be transformed. Mainly, we’d have a lot of frustrated, over-educated people.
The current period of widening inequality, after all, is one during which more and more Americans have been going to college. Conversely, the era of broadly distributed prosperity in the three decades after World War II was a time when many in the blue-collar middle class hadn’t graduated from high school.
I’m not disparaging education—it’s good for both the economy and the society to have a well-educated population. But the sources of equality and prosperity mainly lie elsewhere. ...

Friday, August 08, 2014

Paul Krugman: Inequality Is a Drag

Reducing inequality "can make the nation as a whole richer":

Inequality Is a Drag, by Paul Krugman, Commentary, NY Times: For more than three decades, almost everyone who matters in American politics has agreed that higher taxes on the rich and increased aid to the poor have hurt economic growth. ...
But there’s now growing evidence for a new view — namely, that the whole premise of this debate is wrong,... coming from places like the International Monetary Fund, that high inequality is a drag on growth, and that redistribution can be good for the economy. ...
But how is that possible? Doesn’t taxing the rich and helping the poor reduce the incentive to make money? Well, yes, but ... extreme inequality deprives many people of the opportunity to fulfill their potential.
Think about it. Do talented children in low-income American families have the same chance ... to get the right education, to pursue the right career path ... as those born higher up the ladder? Of course not. ... Extreme inequality means a waste of human resources.
And government programs that reduce inequality can make the nation as a whole richer, by reducing that waste.
Consider, for example,... food stamps, perennially targeted by conservatives who claim that they reduce the incentive to work. The historical evidence does indeed suggest that ... food stamps ... somewhat reduces work effort, especially by single mothers. But it also suggests that Americans who had access to food stamps when they were children grew up to be healthier and more productive..., which means that they made a bigger economic contribution. The purpose of the food stamp program was to reduce misery, but it’s a good guess that the program was also good for American economic growth.
The same thing, I’d argue, will end up being true of Obamacare. Subsidized insurance will induce some people to reduce the number of hours they work, but it will also mean higher productivity from Americans who are finally getting the health care they need, not to mention making better use of their skills because they can change jobs without the fear of losing coverage. Over all, health reform will probably make us richer as well as more secure.
Will the new view of inequality change our political debate? It should. Being nice to the wealthy and cruel to the poor is not, it turns out, the key to economic growth. On the contrary, making our economy fairer would also make it richer. Goodbye, trickle-down; hello, trickle-up.

Tuesday, August 05, 2014

'The Missing Women in the Inequality Discussion'

This is from Caroline Freund and Sarah Oliver:

The Missing Women in the Inequality Discussion, by Caroline Freund and Sarah Oliver: Growing inequality of income and wealth has become a major global concern. In many countries inequality has been driven by weak earnings growth not only among the poor but also among groups across much of the income distribution, while earnings of the top 1 percent continue to rise dramatically.
A clear but often overlooked feature of this discussion is that the fantastic gains at the top of the distribution are almost entirely accruing to men. One reason it is overlooked is that income and wealth inequality are measured at the household level. But one person in the household typically earns and controls the money, and that person is almost always a man. The concentration of income and wealth in the hands of men should reinforce the call to undertake greater redistributive policies. ...
The growing concentration of wealth in the hands of a few is itself disturbing. That these few are almost all men makes it even more so.

'How Increasing Income Inequality Is Dampening U.S. Economic Growth'

The email letting me know about this said "Notorious commie group Standard & Poor’s says inequality hurting economic growth":

How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide: The topic of income inequality and its effects has been the subject of countless analysis stretching back generations and crossing geopolitical boundaries. Despite the tendency to speak about this issue in moral terms, the central questions are economic ones: Would the U.S. economy be better off with a narrower income gap? And, if an unequal distribution of income hinders growth, which solutions could do more harm than good, and which could make the economic pie bigger for all?
Given the decades--indeed, centuries--of debate on this subject, it comes as no surprise that the answers are complex. A degree of inequality is to be expected in any market economy. It can keep the economy functioning effectively, incentivizing investment and expansion--but too much inequality can undermine growth. ...
Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world's biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population. ...

Tuesday, July 29, 2014

'Why Not Maximum Wages?'

Simon Wren-Lewis:

If minimum wages, why not maximum wages?: I was in a gathering of academics the other day, and we were discussing minimum wages. The debate moved on to increasing inequality, and the difficulty of doing anything about it. I said why not have a maximum wage? To say that the idea was greeted with incredulity would be an understatement. So you want to bring back price controls was once response. How could you possibly decide on what a maximum wage should be was another.
So why the asymmetry? Why is the idea of setting a maximum wage considered outlandish among economists?
The problem is clear enough. All the evidence, in the US and UK, points to the income of the top 1% rising much faster than the average. ...
So why not consider a maximum wage? One possibility is to cap top pay as some multiple of the lowest paid, as a recent Swiss referendum proposed. That referendum was quite draconian, suggesting a multiple of 12, yet it received a large measure of popular support (35% in favour, 65% against). The Swiss did vote to ban ‘golden hellos and goodbyes’. One neat idea is to link the maximum wage to the minimum wage, which would give CEOs an incentive to argue for higher minimum wages! Note that these proposals would have no disincentive effect on the self-employed entrepreneur. 
If economists have examined these various possibilities, I have missed it. One possible reason why many economists seem to baulk at this idea is that it reminds them too much of the ‘bad old days’ of incomes policies and attempts by governments to fix ‘fair wages’. But this is an overreaction, as a maximum wage would just be the counterpart to the minimum wage. I would be interested in any other thoughts about why the idea of a maximum wage seems not to be part of economists’ Overton window.

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:

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.


  • 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.


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.
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.