Month: April 2014

There are many candidates for the worst review of Thomas Piketty’s Capital in the Twenty-First Century**. Consider Allan Meltzer. He opens:

Allan Meltzer: The United States of Envy: “In advance of the 2014 election…

…the Obama administration has drawn the political discussion away from its unpopular and flawed healthcare plan, usually called Obamacare, to bring public attention and support for increased income redistribution…. We can all expect this theme to be trumpeted loudly by the mainstream press as the mid-term election approaches: Some of us can have more, the argument goes, if we force others to have less. Support for the alleged social benefits of setting much higher marginal tax rates on the highest incomes has now been endorsed by the International Monetary Fund, based heavily on research by two French economists named Thomas Piketty and Emanuel Saez. The two worked together on the faculty at MIT, where the current research director of the IMF, Olivier Blanchard, was a professor. Like Piketty and Saez, he is also French. France has, for many years, implemented destructive policies of income redistribution….

I agree that in the past there was a notable positive association between economic growth and the spread between the shares of income going to the top 1, 5, or 10 percent of the earners and the share going to the remainder. The mistake is to conclude that narrowing the distribution contributes to growth. The far more plausible explanation is that economic growth in capitalist countries over the past two centuries contributed to a steep decline in the share of the top earners…

What can we say? That Meltzer has not read the book, because if he had read the book he would know that one of Piketty’s big points–r > g, remember–is that patrimonial capitalism weakens when economic growth is fast? That he is too disconnected from the world to remember that Emmanuel Saez was never on the MIT faculty? That he is too lazy to check his (faulty) memory against Emmanuel Saez’s cv? That there are many people in France who are as opposed to progressive taxation as Allan Meltzer? That France’s income-redistribution policies have not kept it from having as high median after-tax incomes with a lot more vacation time and better health care outcomes than the United States? Or that the lead with its invocation of the joint conspiracy of the mainstream media and the Obama Administration to distract attention from ObamaCare is unhinged wingnut regurgitation of mendacious talking points at its worst?

Must-Reads:

1. Jonathan Chait: Piketty, Oligarchy, and Conservative Evasion: “Every so often, a right-winger billionaire will go on an epic public rant against class warfare, populism, and the depredations of the Democratic soak-the-rich tax agenda. But such rants are noteworthy not only for their hilarious lack of self-awareness and uncomfortable tendency to invoke Adolph Hitler, but for their sheer discordance with the rest of the Republican message. The GOP obviously does not want its public face to be filthy rich men wallowing in self-pity…. The sudden popularity of Thomas Piketty’s Capital in the Twenty-First Century has again thrust conservatives into the pseudo-populist defensive stance…. David Brooks’s column today… a wilder essay/rant by Washington Free Beacon editor Matthew Continetti. Brooks (not for the first time) suggests that the liberal concern over inequality is driven by liberal elites, who are prestigious and wealthy, but less wealthy than the hedge-fund titans with whom they regularly interact, and against whose riches they bristle with resentment…. Continetti, meanwhile, brings up Piketty only to argue that the true oligarchs in America are the liberals…. What both have in common is a myopic focus on the sociological identity of Democratic elites…. In fact, American politics revolves around a policy dispute that carries massive repercussions for inequality…. Neither Brooks nor Continetti mentions any of these things. For all the demented paranoia of Tom Perkins, Ken Langone, Charles Koch, and the like, at least they are willing to acknowledge the basic class contours of the struggle in which they’re engaged…”

2. Adam Bonica and Jenny Shen: The rich are dominating campaigns. Here’s why that’s about to get worse

Continue reading “Things to Read at Nighttime on April 25, 2014” →

Larry Bartels does not like Nate Cohn’s piece in The Upshot on America’s (and Obama’s: but largely America’s) big problem–that southern (and prairie) whites seem to be separating themselves from the rest of us in their political (and other) attitudes to a remarkable degree.

I badly need a referee here to sort out the arguments. Is there one?

Continue reading “Southern (and Prarie) Whites as a Separate Ethnicity: I Want a Referee Here!: Early Monday Focus for April 28, 2014” →

Consider Henry Blodget, who appears to expect rapid and full mean-reversion to the very long run average ratio of prices to earnings, in spite of secularly low interest rates…

Henry Blodget: Stock Market And Investing Outlook: “Everyone’s getting cautiously bullish again…

…except me. I still think stocks are poised to have a decade or more of lousy returns…. Stocks are very expensive. Corporate profit margins are at record highs. The Fed is now tightening…. Unless ‘it’s different this time’ — the four most expensive words in the English language — stocks are priced to return only about 2.5% per year for the next decade, a far cry from the 10%-per-year long-term average…. I own lots of stocks, though, and I’m not selling them…. No other asset classes are attractively priced, either. Unfortunately, it looks as though we’re set up to have one of the worst decades in history in terms of the performance of financial assets….

The chart below is from Yale professor Robert Shiller. It shows the cyclically adjusted price-earnings ratio of the S&P 500 for the last 130 years. As you can see, today’s P/E ratio of 25X is miles above the long-term average of 15X…

I don’t see this: I see that stocks are likely to return:

• 6%/year in real (inflation adjusted) terms,
• plus or minus whatever changes we see in valuation ratios.

That means that if we expect to see P/E10 fall over the next decade from 25X to 19X then we can expect to see returns of 3%/year real–that is, 5%/year nominal. That means that if we expect to see P/E10 fall all the way back to 15X over the next decade, then we can expect to see returns of 1%/year real–that is 3%/year nominal. But that is unlikely to happen. And if P/E10 remains at its current valuation ratios, we have 6%/year real returns–8%/year nominal.

Equities still look very attractive to me…

Must-Reads:

1. Ezra Klein: What’s the liberal equivalent of climate denial?: “Kahan… argu[es]… being right is irrelevant. ‘It’s not whether one gets the answer right or wrong but how one reasons that counts.’ A liberal who works backwards from conclusions but happens to believe in climate change is ‘to be congratulated for being lucky that a position they unreasoningly subscribe to happens to be true’, but nothing more. Here, Kahan makes a serious mistake. Political reasoning doesn’t take place inside our heads. It takes place inside our parties. No one can personally investigate the vast array of issues facing the country. In terms of getting the right answers, the most important decision people make is choosing whom to trust…. Majority parties bear the heavy responsibility of actually getting policy right…. That’s less true for minority parties. They have the luxury of being irresponsible…. But even minority parties have reason to calm the tribal impulses of their members. Winning elections requires winning the support of many voters who aren’t hardcore conservatives or liberals…”

2. Kevin Drum: Aetna CEO: Obamacare Pretty Much On Track: “CEO Mark Bertolini passed along a couple of interesting factlets: ‘Bertolini said about half of the company’s premium increases, whatever they turn out to be, will be attributable to “on the fly” regulatory changes made by the Obama administration. He cited as an example the administration’s policy of allowing old health plans that were supposed to expire in 2014 to be extended another three years if states and insurers wanted to…. Aetna has added 230,000 paying customers from ACA exchanges, and it projects to end the year with 450,000 paid customers. It said it can’t yet draw a “meaningful conclusion” about the population’s overall health status.’ The first is interesting because it suggests that Aetna’s premium increases won’t be based on fundamentals… aren’t rising because the customers Aetna signed up were older or sicker than they expected…. And the second is interesting because Aetna apparently expects to double its Obamacare customer base by the end of the year.”

3.

Continue reading “Things to Read on the Afternoon of April 24, 2014” →

Kevin Drum: Aetna CEO: Obamacare Pretty Much On Track: “CEO Mark Bertolini passed along a couple of interesting factlets:

Bertolini said about half of the company’s premium increases, whatever they turn out to be, will be attributable to “on the fly” regulatory changes made by the Obama administration. He cited as an example the administration’s policy of allowing old health plans that were supposed to expire in 2014 to be extended another three years if states and insurers wanted to…. Aetna has added 230,000 paying customers from ACA exchanges, and it projects to end the year with 450,000 paid customers. It said it can’t yet draw a “meaningful conclusion” about the population’s overall health status.

The first is interesting because it suggests that Aetna’s premium increases won’t be based on fundamentals… aren’t rising because the customers Aetna signed up were older or sicker than they expected…. And the second is interesting because Aetna apparently expects to double its Obamacare customer base by the end of the year.

*Paul Krugman: On Gattopardo Economics: “Thomas Palley… raises an interesting point…

…disappointed that Piketty’s book relies mainly on conventional, mainstream economics… labor and capital… paid their marginal product… True, when discussing the rise of “supermanagers” Piketty talks about imperfect competition and rents, but that’s not the core of his work…. Palley and others are disappointed…. The thing to bear in mind, however, is that you really don’t need to reject standard economics either to explain high inequality or to consider it a bad thing…. You can be perfectly conventional in your economics–or, my own attitude and what I think is Piketty’s, willing to use conventional models when they’re convenient and seem useful without treating them as irrefutable truth–while still taking inequality very seriously.

I think Thomas Palley has a stronger point than Krugman does. As I wrote, well, last night:

Brad DeLong: The Daily Piketty: Thursday Focus: April 24, 2014: “I had not fully realized just how heavy a lift Piketty has in trying to persuade the American neoclassical growth-economics community within economics departments. Their–our–default view of the world is–very strongly–that it is characterized by a Cobb-Douglas aggregate production function, in which the rate of profit moves inversely with the L ratio and in which as a result the capital income share of total income is constant.

You may say: “But if you have a model in which you assume the capital income share is constant, you then have no chance of ever explaining fluctuations in income distribution. How can you use a model in which fluctuations in income distribution do not happen to criticize anyone trying to explain why they do?” And this is a more than fair cop. But that the habit of thought is not rational doesn’t keep American neoclassical growth-economists in economics departments from doing it: their–our–first reaction to Piketty is: “That can’t be right, because in our model the capital-income share of total income is invariant to shifts in the wealth-income ratio.” And they–we–typically do not take the second step in the argument and say: “wait a minute: in our model nothing causes shifts in income distribution, so we need a different model”.

And, as I have also said before, I think Suresh Naidu gets this point right:

Suresh Naidu: The Slack Wire: Notes from Capital in the 21st Century Panel: “I think there is a ‘domesticated’ version of the argument…

that economists and people that love economists will take away. Then there is a less domesticated one, one that is more challenging to economics as it is currently done. I’m curious which one Thomas believes more. I worry that the impact of the book will be blunted because it becomes a “Bastard Piketty-ism” and allows macroeconomics to continue in its modelling conventions, which are particularly ill-suited to questions of inequality.

The domesticated version is a story about technology and the world market making capital and labor more and more substitutable over time, and this is why r does not fall very much as wealth accumulates. It is fundamentally a story about market forces, technology and trade making the demand for capital extremely elastic. We continue to understand r as the marginal contribution of capital to the production of the economy. I think this is story that is told to academic economists, and it is plausible, at least on the surface. 

There is another story about this, one that goes back to Keynes. And the idea here is that the rate of return on capital is set much more by institutions, norms and expectations than by supply and demand of the capital market. Keynes writes that “But the most stable, and the least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in future, the minimum rate of interest acceptable to the generality of wealth-owners.” Keynes footnotes it with the 19th century saying that “John Bull can stand many things, but he cannot stand 2 percent.”

The book doesn’t quite take a stand on whether it is brute market forces and a production function with a high elasticity of substitution or instead relatively rigid organization of firms and financial institutions that lies behind the stability of r.  

I think the production approach is less plausible, partly because housing plays such a large role in the data, partly because average wages would have increased along with K/Y, partly because the required elasticity of substitution is too big for net quantities, and partly because of the differences between book and market capital. The (really great) sections from the book on corporate governance actually suggest something quite different, that there is a gap between cash-flow rights and control rights, and this is why Germany has lower market relative to book values. This political dimension of capital, the difference between the valuation written down in the balance sheet and the real power to dispose of the asset, is something that the institutional view of capital can capture better than the marginal product view. This is, I think, also a fruitful interpretation of what was at stake behind the old capital controversies.

The policy stakes from this are also potentially large, because if it is just a very high substitutability, a variety of labor market reforms are taken off the table, as firms just replace workers with machines if you try to raise the wage.

Second, what is gained by producing long-run data? Why do economic historians do what we do? And why is it important that the series go before 1960? Part of the answer is that we discipline the modelling with useful analogies to a past. History gives us a library of options for understanding the present….

The Gilded Age U.S. North was riven with labor conflict and the South was an apartheid state. U.S. military forces were deployed on U.S. territory more times in the late 19th century than any other period, solely for breaking up strikes and repressing labor conflict. And this points us towards one of the costs of inequality, which is a large amount of social conflict. But note that… you could have a peaceful high inequality society by spending a lot on security guards and gated enclaves (or hired economists to tell people it is all efficient and for the best), but that is still costly, in that social resources are getting unnecessarily spent to repress, persuade, and manage social conflict. We see the same thing in unequal societies like India, South Africa or the gulf countries.

There is a place where the analogy breaks down, however. We live in a world where much more of everyday life occurs on markets…. From health care to schooling to philanthropy to politicians, we have put up everything for sale. Inequality in this world is potentially much more menacing than inequality in a less commodified world, simply because money buys so much more. This nasty complementarity of market society and income inequality maybe means that the social power of rich people is higher today than in the 1920s, and one response to increasing inequality of market income is to take more things off the market and allocate them by other means.

Finally, let me suggest that if we’re aiming for politically hopeless ideas, open migration is as least as good as the global wealth tax in the short run, and perhaps complementary…