…in my view has collapsed. It has very little to contribute to the understanding over inequality over the last 20 years, and is not the basis for thinking about the future so much.
That said, these are caveats to what Larry says, not disproofs of it…
…Dad worked with his hands–he was an electrician–but he was anti-union and identified with the middle class rather than radical labor. Our family had middle-class values, read slick magazines rather than pulps, and voted Republican…. A lot of people raised the way I was think that Something Should Be Done about this or that world problem… Boko Haram’s kidnapping… the Lord’s Resistance Army… the Islamic State…. All of these organizations do horrific things by the standards of any civilized human being, myself included… [and] are demonstrably beyond the capacity of local governments to deal with…. If I hadn’t ridden a tank in SE Asia, I probably would have been on one or all of those bandwagons and on many others over the years. The thing is, I know what Doing Something means at the sharp end. I’ve helped to burn a village, I’ve watched a gutshot girl die (she’d been transporting rice for the NVA), and I was involved with a variety of other things that make me doubt the value to the ordinary people of Viet Nam and Cambodia of what we did there. Would it be different in Africa or the Middle East? Maybe, but I find wars have a logic of their own for the people in the mud and the dust and the insects. I think it would be good for folks who say, ‘We have to do something!’ to at least talk to some of us who’ve Done Something ourselves. Talk to us–or keep their mouths shut.
…even when households have preferences with high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. To make this point we construct a large scale Overlapping Generations Model with uninsurable labor productivity risk, show that it has a wealth distribution that matches the data well, and then use it to characterize fiscal policies that achieve a desired degree of redistribution in society. We find that marginal tax rates on the top 1% of the earnings distribution of close to 90% are optimal. We document that this result is robust to plausible variation in the labor supply elasticity and holds regardless of whether social welfare is measured at the steady state only or includes transitional generations.”
This is a weekly post we publish every Friday with links to articles we think anyone interested in equitable growth should read. We won’t be the first to share these articles, but we hope by taking a look back at the whole week we can put them in context.
Market power
Ryan Avent thinks concerns about the market power of Amazon.com Inc. are overblown. [free exchange]
Joshua Gans agrees that antitrust remedies are not the best way to deal with concerns about the company, but concerns should be voiced. [digitopoly]
Timothy Taylor looks at the possibility of anti-trust concerns writ global that cross borders. [conversable economist]
Paul Krugman wonders about the broader question of the disconnect between profits and investments and considers the role of monopoly power. [ny times]
Taxation at the top
“The question, then, is if confronted with a vastly higher tax rate, would Jamie Dimon still behave like LeBron James.” Ben Walsh on a new paper that argues the optimal top tax rate is 90 percent whether the payee is a sports superstar or one of the best-rewarded executives on Wall Street. [huff post]
Data deep dives
Where can someone in the United States earning the median income get the most bang for the buck? Dylan Matthews takes a look. [vox]
Next week, the Federal Open Markets Committee of the Federal Reserve is expected to announce the end of its third round of quantitative easing. QE3, as the policy is known, was the central bank’s third round of extraordinary bond purchasing focused on bringing down long-term interest rates to help boost economic growth. The anticipated end of the program has reignited debates about the effectiveness of the policy. And in light of Fed Chair Janet Yellen’s speech last week, many have focused on the effects of QE3 on inequality in particular.
In Dealbook at The New York Times, financial writer and former investment banker William D. Cohen argues that the Fed’s low interest rate policies have favored the rich over the poor in the tepid economic recovery following the Great Recession. Cohen notes that low interest rates have enabled the wealthy to enjoy the fruits of rising stock prices while crushing retirees and others who are living on fixed incomes or relying on their savings to make ends meet. In an interview last weekend, Eric Rosengren, the President of the Federal Reserve Bank of Boston (which hosted Yellen’s speech) acknowledged that quantitative easing did increase inequality by boosting stock prices. But he added that by boosting overall economic growth, QE3 on net decreases inequality. As he put it, “the one thing that really contributes to income inequality is to have no income at all.”
One way to think about this question is to consider an alternative scenario in which the Federal Reserve didn’t implement quantitative easing. As James Pethkoukis at the American Enterprise Institute points out, the U.S. economy might now resemble the current situation in most European Union economies, where a triple-dip recession looms in some countries. Even if the situation was slightly less grave, it would still in no way resemble the steady if slow U.S. economic growth over the past several years.
Pethokoukis says that there’s another scenario in which the Federal Reserve could have implemented policy that more directly increased the earnings of a broad swath of the population. He mentions a “helicopter drop” of money, where the Fed prints money to fund checks sent directly to American households from the U.S. Treasury. He says such a move might have decreased inequality relative to the chosen QE path, but would it have arrested the increase in income and wealth inequality? Given that the rise in economic inequality has been going for decades and continued over several periods of recessions and expansions, it seems unlikely.
Jared Bernstein argues that a central bank can reduce inequality, but only after a prolonged and consistent campaign to promote full employment. The effects of monetary policy on inequality need to be considered over a period longer than just one recession or expansion. The Federal Reserve is assigned a mandate by Congress to promote maximum employment in its policy setting. Perhaps the central bank should consider its commitment to that goal given unacceptably high unemployment today. For the Federal Reserve to reduce inequality, it’ll take a change in mindset.
Must- and Shall-Reads:
Copyright and Creativity: Evidence from Italian Operas: “This paper exploits variation in the adoption of copyright laws within Italy – as a result of Napoleon’s military campaign – to examine the effects of copyrights on creativity. To measure variation in the quantity and quality of creative output, we have collected detailed data on 2,598 operas that premiered across eight states within Italy between 1770 and 1900. These data indicate that the adoption of copyrights led to a significant increase in the number of new operas premiered per state and year. Moreover, we find that the number of high-quality operas also increased – measured both by their contemporary popularity and by the longevity of operas. By comparison, evidence for a significant effect of copyright extensions is substantially more limited. Data on composers’ places of birth indicate that the adoption of copyrights triggered a shift in patterns of composers’ migration, and helped attract a large number of new composers to states that offered copyrights…”
Low Down Payments Are Coming Back: “On Monday, Federal Housing Finance Agency Director Mel Watt announced that mortgage-finance companies Fannie Mae and Freddie Mac would start backing loans with down payments as low as 3%. And on Tuesday, three federal agencies approved a loosened set of mortgage-lending rules, removing a requirement for a 20% down payment for a class of high-quality loan known as a ‘qualified residential mortgage’…. In addition, veterans can apply for 100% financing on loans insured by the Veterans Administration, and the U.S. Department of Agriculture has several loan programs…. Borrowers with low down payments do default in higher numbers than similar borrowers with higher down payments, said Mark Zandi…. However, Mr. Zandi still believes that low-down-payment lending can be done in a responsible way, by making sure borrowers have solid credit, have low ratios of debt compared with their income and are taking on standard loans…”
< China’s Slowdown Is Secular, Not Cyclical: Is China bouncing back from a weak patch of growth, or is it headed for a prolonged slowdown lasting many years?… Both are probably true. Cyclical fluctuations are occurring around a clearly slowing long-term trend…. Until 2011, mainstream economic forecasters… believed that the trend growth rate in China would remain in the 9-10 per cent region for as far ahead as the eye could see. Now almost no one thinks that…. The Conference Board forecast this week that trend growth after 2020 would be only 4 per cent a year…”
Jeff Weintraub: China’s Man in Hong Kong Explains the Problem with Democracy–It’s a Threat to Capitalism: “The argument that democracy is dangerous because it means mob rule by the ignorant unwashed masses–or rule by unscrupulous and even tyrannical demagogues who can manipulate those masses–is a very old one…. [The] more specific version… that political democracy… threatens the basic requirements of a capitalist market economy, was made quite often throughout the 19th and into the early 20th century…. For better or worse, history seems to have demonstrated that such claims about the fundamental incompatibility… were exaggerated…. [The] inherent tensions… [are] a good thing…. Some pro-plutocratic and market-fundamentalist ideologues still share that 19th-century fear of the perils of democracy, and occasionally some billionaire will blurt this out in an unguarded interview. But in most western societies, people who hold these views can’t state them… openly and straightforwardly… [but] euphemistically… with various circumlocutions. In some other parts of the world, however, those anti-democratic arguments can still be made publicly with refreshing honesty.”
Chair Yellen Is Right: Income and Wealth Inequality Hurts Economic Mobility | Economic Policy Institute: “Janet Yellen gave a speech this week… no mincing of words as to what has happened: ‘It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.’ I appreciate both the straightforward description of the rise of both income and wealth inequality, and the explicit connection between these growing inequalities and the threat this poses to future generations’ upward mobility and opportunity…. Conservatives seem to only be concerned with facilitating opportunity or social mobility, and consider income inequality itself not a worthy focus…. Various reporters have noted the Obama administration backing away from making ’income inequality’ a key issue and shifting to a focus on opportunity or mobility. Is this tenable, deciding to focus on the upward mobility of today’s poor children without any focus on the incomes and wealth of their parents and the circumstances of their lives—where they live, in what housing, with what safety, and so on?”
Should Be Aware of:
The ECB as lender of last resort?: “As part of the move to a banking union, the largest banks in the Eurozone will soon be supervised by the ECB. This column argues that supervision and the lender of last resort function should be seen as a joint product. After the introduction of the euro, the national central banks continued to act as lenders of last resort because bank supervision remained at the national level. Now that supervision is moving to the ECB, so should the lender of last resort function for the larger, cross-border, banks.”
On David Brooks on Edmund Burke: “Burke is… often held up as the source of conservatism, [but] I get the feeling he’s not often read… quotations inevitably have a whiff of cliché about them—little platoons and so on—emitting that stale blast of familiarity you sense when you listen to someone go on about a text he may or may not have read during one week in college…”
Helicopter Money: “The original Friedman thought experiment involved the central bank distributing money by helicopter… by the central bank printing money, rather than the government issuing debt…. Helicopter money is… QE coupled with a tax cut. Another way of thinking about it: instead of using money to buy assets (QE alone), the central bank gives it away to people…. It could be that advocates of helicopter money really want higher inflation targets, but do not want to be explicit about this, just as they may not want to call helicopter money a fiscal stimulus. The problem with this is that central bankers do understand the macroeconomics…. As Willem Buiter says, ‘there always exists a combined monetary and fiscal policy action that boosts private demand’.”
Plutocrats Against Democracy: “The very success of the conservative agenda only intensifies this fear. Many on the right–and I’m not just talking about people listening to Rush Limbaugh; I’m talking about members of the political elite–live, at least part of the time, in an alternative universe in which America has spent the past few decades marching rapidly down the road to serfdom. Never mind the new Gilded Age that tax cuts and financial deregulation have created; they’re reading books with titles like [Nick Eberstadt’s] A Nation of Takers: America’s Entitlement Epidemic, asserting that the big problem we have is runaway redistribution. This is a fantasy…. If you worry that low-income voters will run wild, that they’ll greedily grab everything and tax job creators into oblivion, history says that you’re wrong. All advanced nations have had substantial welfare states since the 1940s–welfare states that, inevitably, have stronger support among their poorer citizens. But you don’t, in fact, see countries descending into tax-and-spend death spirals–and no, that’s not what ails Europe…. The obvious answer is Mr. Leung’s: Don’t let the bottom half, or maybe even the bottom 90 percent, vote. And now you understand why there’s so much furor on the right over the alleged but actually almost nonexistent problem of voter fraud, and so much support for voter ID laws that make it hard for the poor and even the working class to cast ballots. American politicians don’t dare say outright that only the wealthy should have political rights–at least not yet. But if you follow the currents of thought now prevalent on the political right to their logical conclusion, that’s where you end up. The truth is that a lot of what’s going on in American politics is, at root, a fight between democracy and plutocracy. And it’s by no means clear which side will win.”
The real villain of the Clinton impeachment: “The Republicans who set up a crooked Republican lawman to go after Clinton. Ken Starr crooked? A Freedom of Information Act search reveals that, yes, during the probe into Clinton’s relationship with an intern, he used agents who bullied and ‘mistreated’ the key witness, Monica Lewinsky, threatening her and her family if she didn’t provide them with grounds to remove the Democratic president. ‘The report also lays out the encounter in detail, suggesting that it quickly spun out of control as a shocked and hysterical Lewinsky asked to consult a lawyer or a parent–even as prosecutors grew increasingly determined to persuade her to agree on the spot to cooperate against the president…’ Keep this in mind: the actions taken were the result of Republican demands. The actions were political and illegal. The report on the matter was kept under wraps for years and only now has emerged as a result of a FOIA demand…”
…no mincing of words as to what has happened: ‘It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.’ I appreciate both the straightforward description of the rise of both income and wealth inequality, and the explicit connection between these growing inequalities and the threat this poses to future generations’ upward mobility and opportunity…. Conservatives seem to only be concerned with facilitating opportunity or social mobility, and consider income inequality itself not a worthy focus…. Various reporters have noted the Obama administration backing away from making ’income inequality’ a key issue and shifting to a focus on opportunity or mobility. Is this tenable, deciding to focus on the upward mobility of today’s poor children without any focus on the incomes and wealth of their parents and the circumstances of their lives—where they live, in what housing, with what safety, and so on?
…as a result of Napoleon’s military campaign – to examine the effects of copyrights on creativity. To measure variation in the quantity and quality of creative output, we have collected detailed data on 2,598 operas that premiered across eight states within Italy between 1770 and 1900. These data indicate that the adoption of copyrights led to a significant increase in the number of new operas premiered per state and year. Moreover, we find that the number of high-quality operas also increased – measured both by their contemporary popularity and by the longevity of operas. By comparison, evidence for a significant effect of copyright extensions is substantially more limited. Data on composers’ places of birth indicate that the adoption of copyrights triggered a shift in patterns of composers’ migration, and helped attract a large number of new composers to states that offered copyrights…
…or is it headed for a prolonged slowdown lasting many years?… Both are probably true. Cyclical fluctuations are occurring around a clearly slowing long-term trend…. Until 2011, mainstream economic forecasters… believed that the trend growth rate in China would remain in the 9-10 per cent region for as far ahead as the eye could see. Now almost no one thinks that…. The Conference Board forecast this week that trend growth after 2020 would be only 4 per cent a year…
muchany purchase on rising inequality since the mid-1990s, any labor-force strategy that spends money and gets people to complete college is still a very high-return human capital investment, no?