Month: February 2015

Must- and Shall-Reads:

• Jonathan Cohn: For A Closing Act, Obama Has A Bold Plan To Transform Child Care
• Paul Krugman: Tough Fedding
• Justin Lahart: “The Federal Reserve can probably ignore the sharp decline in the bond market’s long-term inflation forecast. But not safely…. The problem lies more in what the TIPS market implies inflation will be in the five years that begin five years from now…”
• Rebecca Traister: Maternity Leave Policies in America Hurt Working Moms

 

1. James Pethokoukis: Did the Fed’s QE program boost the US economy?: “I would think understanding the past might provide some useful insights for policymakers. To that point, understanding the Great Recession and its aftermath is especially important. Take the role of the Federal Reserve during the Not-So-Great Recovery. Here is Senator Ted Cruz on his cosponsorship of the new Fed audit bill introduced by Rand Paul…”

2. Noah Millman: Class Resentment, Class Treason and Political Consciousness: “[Reihan] Salam proceeds to lay out a detailed brief against the mass upper class in policy terms: from their support for unproductive tax breaks… mortgage interest deduction… restrictive zoning… cartel-preserving licensure requirements… a backwards immigration system that lets in nannies but keeps out doctors…. You can contextualize… [this] policy criticism Salam is making within a general libertarian critique… or… a general left-wing critique… (we need a class-based politics that doesn’t get hijacked by cultural politics)… both frameworks for talking about how to reduce the political influence of a favored class…. But Salam doesn’t make either argument. Instead, he’s says we need to guilt the upper middle class into being a more civically-responsible gentry…. There is no virtuous class out there. Contra William F. Buckley, a collection of random names from the Boston phone book would do a terrible job running the country…. Here in New York. Our Mayor, Bill de Blasio… is trying to yoke… [a] pro-development stance to an affordable housing plan… acting against precisely the entrenched class interests that Salam thinks are so problematic…. But his cultural politics line up perfectly with the kinds of liberals Salam knows dominate the mass upper class. Which matters more? That, it seems to me, is the question.”

3. Elizabeth Stoker Bruenig: The Economist Magazine Is Wrong About Welfare’s Impact on Family: “If you want to see the right-wing denuded of its usual bluster about family values and welfare, visit this [Will Wilkinson Economist post… [that] argues that the problem isn’t a paucity of empathy for poor people who rely on welfare, but perhaps an excess of it; furthermore, the piece goes on to suggest that poor people who rely on disability benefits should, in order to get off of welfare, pack up and move away from family and friends in search of jobs…. The quandary the author refers to is the problem of preferring to rely on disability income and to stay among family and friends rather than moving to an entirely new place alone in order to relinquish benefits. There are multiple problems with this view…. There most certainly is an empathy gap when it comes to well-off individuals’ view of the poor…. The articleinadvertently admits a reality about poverty and welfare that few on the right are willing to: that poverty, rather than welfare, breaks up families…. Disability payment… allows people with disabilities to remain in places where their families live rather than chasing after work in far-flung places… resist[s] the massive social dislocation brought on by free-market capitalism…. The demands of capital and the obligations of family are often at cross-purposes…. [Will Wilkinson of] the Economist makes a good conservative case for a more expansive welfare regime: one that would really shore up family life.”

4. Scott Lemieux: The Supreme Court challenge against ObamaCare is rapidly falling apart: “The Adler-Cannon brief… cite[s] a letter sent by 11 Texas House Democrats, which they say constitutes evidence for the assertion that ‘[m]any House members… recognized [PPACA] conditioned subsidies on states creating Exchanges.’ Adler and Cannon’s characterization of the letter is blatantly dishonest…. The letter’s argument that under the Senate bill ‘millions of people will be left no better off than before Congress acted’… is preceded by a discussion of how some conservative states have cut or failed to expand benefits under Medicaid and CHIPRA…. The concern of the Texas Democrats… is that… conservative states[‘]… exchanges… would… make it impossible for some residents to obtain affordable insurance. Adler and Cannon stand the meaning of the letter on its head…”

Should Be Aware of:

• Jonathan Chait: Paul Ryan’s Most Shameless Lie Ever
• Julia Belluz: How an Amish missionary caused 2014’s massive measles outbreak
• David Marcus and Roman Schmidt: Optimism of intellect

 

1. Cawley: “Re: ‘2) The ARRA was too small. Here the data (as analyzed by all but John Taylor) show that Keynes was right. But the way people think is that the recovery was feeble, we tried that and it didn’t work…’ Which is EXACTLY what us stoopid Green Lanterns predicted would happen and why we’re still hung up on the fact that Obama settled so easily for so little. ARRA being so undersized–along with the 12-dimensional-ju-jitsu-chess-master-black-belt’s assurances that it would do the job–have made it even more difficult to deploy stimulus for the foreseeable future. (Not to mention the fact that if he had structured the ARRA the way Stiglitz wanted it with infrastructure $ and direct aid to the states & localities to cover their deficits, he would have had all the little Hoovers lobbying for it or having to explain to their constituents why it was so much better to lay off all their teachers, police and fireman than to take that dirty federal money.) But, hey, get over it. It was only millions of lives that were irrevocably damaged…. And then I hear some maroon from the O[bama] administration the other day talking about how the economy has come ‘roaring back’. Seriously. Roaring. Just ask all those people whose paychecks have been growing so fast they can barely fit them in their bank accounts…”

2. Paul Krugman: Macroeconomic Cronyism: “The stories Dornbusch and Edwards analyzed, the issues of Latin America today, involved governments that really were trying to help the poor and workers…. Populist regimes, even if they didn’t end up serving the interests of their constituency. But nobody would call the Putin regime populist; he’s rejecting economics as we know it to defend a kleptocracy…. Putin seems to have brought something new, or at least formerly rare, into the world of economic policy: macroeconomic cronyism, an effort to suspend the laws on economics on behalf, not of the broad populace, but a tiny group of well connected malefactors of great wealth. Innovation!”

3. Murad Ahmed: Lunch with the FT: Demis Hassabis: “DeepMind… has the aim of making ‘machines smart’…. Watch one of Hassabis’s entertaining presentations on YouTube. There, you can see him showing off the AI system… play[ing] retro arcade games such as Space Invaders. At first, the machine pilot is hopeless but, after just a few hours, it is firing missiles to its targets with uncanny accuracy…. His ambition is to create ‘general’ AI systems that use ‘unstructured’ information… to make independent decisions…. Before he leaves, I ask how long it will take to create general AI. When will Hassabis’s lines of computer code, his algorithms, start writing their own lines of code, their own algorithms?…”

4. Paul Rosenberg: Reagan’s Bizarre Defenders: Rick Perlstein, Phony Centrism, and the Attack on History: “‘Goldwater, Nixon, Reagan–Perlstein has moved from covering a minor saint, to a martyr, to God.’ — David Weigel. Weigel’s summary goes to the heart of why Rick Perlstein’s… ‘The Invisible Bridge’ has been received so differently from his first two histories…. A bogus plagiarism charge was even mounted to not only muddy the waters, but to actually try to prevent publication of his work…. Perlstein…. ‘My stupidest reviews come from centrists desperate to cling to myth of a sensible right’… linking to his response to a review by Jacob Weisberg…. And when UC Berkeley economist/econoblogger Brad DeLong tweeted back, ‘OK, I will grant you Jacob Weinberg. Who else?,’ Perlstein responded, ‘Sam Tanenhaus. Damon Linker [here] (he wasn’t all that bad). Robert Kaiser [here]’… Geoffrey Kabaservice and Michael Kimmage…. Perlstein’s got a point…. In his responses to Tanenhaus and Weisberg, Perlstein focused primarily on what they got wrong about his book descriptively–clearly demonstrable failures to accurately reflect the content they were commenting on…. [But] we [also] get repeated displays of ideologically loaded assumptions–it’s just that the ideology involved is a centrist one…”

The predictions made to Rand Paul, Ted Cruz, Paul Ryan and others back in 2009-2010 was that QE would lead to inflation and high nominal interest rates. Now they are complaining that it has led to low nominal interest rates, dollar “volatility”, a “destabiliz[ed]… financial system” and “distort[ed] investment”. You would think that by now they would be asking some hard questions of whatever economic “advisors” they have been listening to.

Apparently not.

James Pethokoukis tries to bring some reality:

James Pethokoukis: Did the Fed’s QE program boost the US economy?: “I would think understanding the past…

…might provide some useful insights… understanding the Great Recession… is especially important. Take the role of the Federal Reserve during the Not-So-Great Recovery. Here is Senator Ted Cruz….

It’s time for a complete audit of the Federal Reserve…. The Fed has expanded its balance sheet fivefold, yet economic growth is still tepid… and median income and household wealth are depressed. Americans are living with near-zero interest rates on their savings… small businesses report credit is still hard to get. Quantitative easing has contributed to the dollar’s volatility… destabilizes the financial system… distorts investment. Other than elevating the stock market and key prices such as oil until lately, the Fed’s policies have not resulted in a long-term cure…. Enough is enough. The Federal Reserve needs to fully open its books so Congress and the American people can see what has been going on. This is a crucial first step….

Now one might get the impression from that statement that the Fed’s monetary easing efforts have been a bad, fruitless idea. I see things differently. Fed inactivity would have led to an ugly, Eurozonesque…. Martin Feldstein… calls quantitative easing a “success” that stimulated growth and job creation:

QE’s… aggressive program of bond-buying and its commitment to keep short-term interest rates low for a prolonged period drove the long-term rate down to about 1.5%. The sharp fall in long-term rates induced investors to buy equities, driving up share prices. Low mortgage interest rates also spurred a recovery in house prices… raised households’ net worth in 2013 by $10 trillion… led to a rise in consumer spending, prompting businesses to increase production and hiring, which meant more incomes and therefore even more consumer spending…. QE’s success in the US reflected the Fed’s ability to drive down long-term interest rates…

Folks supporting an active monetary policy the past few years should take a victory lap or sorts over the tight-money crowd…. And shifting to monetary policy rule, such as NGDP level targeting would seem to make the idea superfluous–unless your ultimate goal is to back the Fed into a tight monetary stance in lieu of return to the gold standard or some other commodity-based monetary standard.

Noah Millman: Class Resentment, Class Treason and Political Consciousness: “[Reihan] Salam proceeds to lay out a detailed brief…

against the mass upper class in policy terms: from their support for unproductive tax breaks… mortgage interest deduction… restrictive zoning… cartel-preserving licensure requirements… a backwards immigration system that lets in nannies but keeps out doctors…. You can contextualize… [this] policy criticism Salam is making within a general libertarian critique… or… a general left-wing critique… (we need a class-based politics that doesn’t get hijacked by cultural politics)… both frameworks for talking about how to reduce the political influence of a favored class….

But Salam doesn’t make either argument. Instead, he’s says we need to guilt the upper middle class into being a more civically-responsible gentry…. There is no virtuous class out there. Contra William F. Buckley, a collection of random names from the Boston phone book would do a terrible job running the country….

Here in New York. Our Mayor, Bill de Blasio… is trying to yoke… [a] pro-development stance to an affordable housing plan… acting against precisely the entrenched class interests that Salam thinks are so problematic…. But his cultural politics line up perfectly with the kinds of liberals Salam knows dominate the mass upper class. Which matters more? That, it seems to me, is the question.

Elizabeth Stoker Bruenig: The Economist Magazine Is Wrong About Welfare’s Impact on Family: “If you want to see the right-wing denuded of its usual bluster…

…about family values and welfare, visit this [Will Wilkinson Economist post… [that] argues that the problem isn’t a paucity of empathy for poor people who rely on welfare, but perhaps an excess of it; furthermore, the piece goes on to suggest that poor people who rely on disability benefits should, in order to get off of welfare, pack up and move away from family and friends in search of jobs…. The quandary the author refers to is the problem of preferring to rely on disability income and to stay among family and friends rather than moving to an entirely new place alone in order to relinquish benefits. There are multiple problems with this view…. There most certainly is an empathy gap when it comes to well-off individuals’ view of the poor…. The articleinadvertently admits a reality about poverty and welfare that few on the right are willing to: that poverty, rather than welfare, breaks up families…. Disability payment… allows people with disabilities to remain in places where their families live rather than chasing after work in far-flung places… resist[s] the massive social dislocation brought on by free-market capitalism…. The demands of capital and the obligations of family are often at cross-purposes…. [Will Wilkinson of] the Economist makes a good conservative case for a more expansive welfare regime: one that would really shore up family life.

Scott Lemieux: The Supreme Court challenge against ObamaCare is rapidly falling apart: “The Adler-Cannon brief…

…cite[s] a letter sent by 11 Texas House Democrats, which they say constitutes evidence for the assertion that ‘[m]any House members… recognized [PPACA] conditioned subsidies on states creating Exchanges.’ Adler and Cannon’s characterization of the letter is blatantly dishonest…. The letter’s argument that under the Senate bill ‘millions of people will be left no better off than before Congress acted’… is preceded by a discussion of how some conservative states have cut or failed to expand benefits under Medicaid and CHIPRA…. The concern of the Texas Democrats… is that… conservative states[‘]… exchanges… would… make it impossible for some residents to obtain affordable insurance. Adler and Cannon stand the meaning of the letter on its head…”

Must- and Shall-Reads:

• Ben Thompson: Blogging’s Bright Future

 

1. Tony Yales (2013): John Taylor the Republican Contradicts John Taylor the Economist: “John Taylor… [says] we would be better off with tighter monetary policy, and greatly tighter fiscal policy. And the other smoking guns causing the crisis (lax regulation, global imbalances, irrational exuberance, politically motivated lending to subprime borrowers, etc) were a sideshow…. Taylor’s remarks sounded like a classic Republican critique of monetary and fiscal policy… objected to QE, fearful that it would stoke up inflation… objected to the stimulus package because it went against their preference for small government. But this Republican critique flies in the face of Taylor’s… work took on the causes of the business cycle, what monetary policy can do about it, and, by very close analogy, what fiscal policy can do too…”

2. Kevin J. Lansing and Benjamin Pyle: Persistent Overoptimism about Economic Growth: “Since 2007, Federal Open Market Committee participants have been persistently too optimistic about future U.S. economic growth. Real GDP growth forecasts have typically started high, but then are revised down over time as the incoming data continue to disappoint. Possible explanations for this pattern include missed warning signals about the buildup of imbalances before the crisis, overestimation of the efficacy of monetary policy following a balance-sheet recession, and the natural tendency of forecasters to extrapolate from recent data.”

3. Paul Krugman: Who’s Unreasonable Now?: “Yanis Varoufakis is saying that he and his colleagues don’t care what happens to the headline value of the debt…. What they want instead is… reducing the amount of resources transferred to creditors from 4.5 to 1-1.5 percent of GDP… flexibility to achieve these surpluses with a mix that includes more revenue and less spending austerity. This is a dastardly ploy by those left-wing radicals. You see, it’s completely reasonable…”

Should Be Aware of:

• Jonathan Chait: “‘Merits of [Jeet Heer’s](http://www.newrepublic.com/article/120884/new-republics-legacy-race) story aside, it is hard to evaluate the decision to publish it outside of Chris Hughes’s desire to justify his mismanagement and ineptitude,’ Jonathan Chait, one of the contributing editors who left, said in an interview…” <– Jonathan Chait makes his play to become the Mickey Kaus of the twenty-first century…
• Tom Levenson: David Brooks Auditions For Graham Greene

 

1. Josh Marshall: Defining Issue of 2016?): “Hillary Clinton @HillaryClinton: The science is clear: The earth is round, the sky is blue, and #vaccineswork. Let’s protect all our kids. #GrandmothersKnowBest”

The question as to whether one actually believes the models one teaches, and tries to apply the principal conclusions that follow from them, or regards them as ritualistic incantations to be dropped as soon as they contradict one’s ideological instincts or the preferences of one’s political masters… this is more and more coming to seem to me to be a key issue:

Tony Yates (2013): John Taylor the Republican Contradicts John Taylor the Economist: “John Taylor… [says] we would be better off…

…with tighter monetary policy, and greatly tighter fiscal policy. And the other smoking guns causing the crisis (lax regulation, global imbalances, irrational exuberance, politically motivated lending to subprime borrowers, etc) were a sideshow…. Taylor’s remarks sounded like a classic Republican critique of monetary and fiscal policy… objected to QE, fearful that it would stoke up inflation… objected to the stimulus package because it went against their preference for small government. But this Republican critique flies in the face of Taylor’s… work took on the causes of the business cycle, what monetary policy can do about it, and, by very close analogy, what fiscal policy can do too…

Kevin J. Lansing and Benjamin Pyle: Persistent Overoptimism about Economic Growth: “Since 2007, Federal Open Market Committee participants…

…have been persistently too optimistic about future U.S. economic growth. Real GDP growth forecasts have typically started high, but then are revised down over time as the incoming data continue to disappoint. Possible explanations for this pattern include missed warning signals about the buildup of imbalances before the crisis, overestimation of the efficacy of monetary policy following a balance-sheet recession, and the natural tendency of forecasters to extrapolate from recent data.

Event – Income and Wealth Inequality in the United States: Evidence, Causes and Solutions | Rice University’s Baker Institute:

The policy debate on the sources, causes and potential solutions to rising income and wealth inequality has intensified in the past few years. Recently, French economist Thomas Piketty’s popular book ‘Capital in the Twenty-First Century’ garnered much attention and ignited further debate about these issues. Piketty argues that wealth will inevitably become more concentrated under capitalism because the returns to wealth are larger than economic growth rates. The solution he proposes is a coordinated global tax on wealth. The Baker Institute’s Tax and Expenditure Policy Program will host two renowned economists to discuss the underlying causes and consequences of inequality, evaluate the empirical evidence of rising inequality, and examine potential solutions for dealing with these problems in the United States.

• WELCOME AND INTRODUCTION: John W. Diamond, Ph.D., Edward A. and Hermena Hancock Kelly Fellow in Public Finance, Baker Institute
• PANELISTS
  • R. Glenn Hubbard, Ph.D.: Dean and Russell L. Carson Professor of Finance and Economics, Columbia Business School
  • J. Bradford DeLong, Ph.D.: Professor of Economics, University of California, Berkeley
• MODERATOR: George R. Zodrow, Ph.D., Allyn R. and Gladys M. Cline Chair of Economics; and Baker Institute Rice Faculty Scholar.

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As prepared for delivery:

The Rise in Income and Wealth Inequality: Evidence, Causes, and Solutions

J. Bradford DeLong :: U.C. Berkeley, NBER, WCEG, INET :: February 3, 2015 :: http://tinyurl.com/dl20150202a

I am very happy to be here, especially as Texas is a state I get to relatively rarely. I have unusually few relatives in it, you see. When the DeLongs got to Wichita they decided to turn north rather than south and wound up in DeKalb County, Illinois. And those who did end up here decamped to North Carolina, leaving me with none until last year when my cousin Annie and her husband moved to Dallas. The last time my wife and I spent any extended time in Texas was on our honeymoon, when we were washed out of our campsite in a swamp near the Louisiana border by a midnight mid-June thunderstorm, so we bypassed Galveston and Houston and then spent a week and a half going Austin-San Antonio-Permian Basin-El Paso.

We are here today because of a problem in the American economy, a problem that emerged back at the end of the 1970s. Since 1980 our rate of productivity growth in the American economy has been little more than half what it was before. Americans used to expect living standards in the country to double every generation. Not since 1980. in fact, standards of living at the median–with half the workers above and half the workers below–pretty much stopped growing around 1980 and are still stuck.

Now you can and probably should paint a more optimistic picture of how the American economy has done since 1980 then the standard rapidly growing wealth at the very top and stagnation everywhere else. Women are much better off economically with the decline in discrimination–if, that is, work burdens both outside and inside the household are fairly shared.

African Americans are better off economically with the decline and discrimination–although the overwhelming proportion of the African-American population has been caught up in the negative parts of broader trends. Our standard indices of what prices really are are biased upwards by about an extra half a percentage point per year which means that our standard indices of real incomes are biased downward by about the same amount. And the value each of us receives from what the buy is greater than its price–if it were not, we would not buy it. For information-type virtual goods the ratio of true user value to market price is bigger, and as more of our economy shifts the information goods this factor pays an extra dividend. Plus how people live is different from what they receive an income because of progressive taxes and the safety net.

Nevertheless:

2/5 of the measured productivity growth we reasonably expected back in the late 1970s that we would have seen by now in the American economy is simply not there.

Effectively all of the growth and measured living standards at the median of the population that we reasonably expected we would have seen by now is simply not there.

And that is a big problem–at least, that is a big problem if you believe in American exceptionalism an American progress.

Why has productivity growth done so much worse than previous generations? That is not a topic for tonight: and if he were to start there, we could never get anywhere else.

Why has the median done so much worse than the average since the late 1970s? Arithmetically, it is not because the bottom has caught up via some leveling process but because the top has leaped ahead. America’s best educated, best positioned, and most fortunate tenth looks no better educated or entrepreneurial relatively speaking now then its predecessor did in 1980. Yet it receives half of all income now while it only received one-third of all income then. That is what is given us a lower 85% little better than stagnant since 1980 in their real incomes, and 85th percentile to 95th percentile upper-middle-class with incomes growing roughly with economy wide productivity, and with an upper-class of households–a fortunate twentieth–with their incomes outstripping everyone else’s. The incomes of the top 1% slots in the distribution are the only ones to have grown faster since 1980 then before–economy why productivity +3% growth and income as per year for the top 1%.

And by the time you get up to the top 0.01%–The richest earning 260 households in Houston, in the rarefied air that only 1300 households now in Houston will ever breathe at any point in their lives–well, the incomes of those 260 start at $7 million a year and average $50 million a year. Back in the late 1970s would have started at, in today’s prices, $900K and averaged $6M. Fur people in that slice, The past generation has been a wonderful era of the American dream coming true.

What has happened has not been a tilting of the income distribution as globalization or the race between education and technology shifts the skill and education premium. What has happened, instead, has been a great hollowing out.

Below the 80%-ile–below roughly $90,000/year in household income–the slots in the distribution have had a hard time holding their own in real terms. Above that we have an upper middle class–from the 80% to the 95%-ile, with household income in the $90-$160,000/year level-—where the slots are more or less holding its own in relative terms and with income levels rising at the rate of growth of productivity.

And above that we have:

• At the 99%-ile, income from 1978-2013 up from $200 to $375,000/year.
• At the 99.9%-ile, up from $500,000 to $1,400,000/year.
• At the 99.99%-ile, up from $900,000 to $7,000,000/year

Why has this happened?

Why the enormous surge in wealth at the top and relative disappointment and stagnation everywhere below the upper-middle-class? 15 years ago when we talked about rising inequality we talked about the decision in the 1970s to stop increasing relative spending on public higher education. We talked about how thereafter technology kept creating more high-skill jobs and removing low-skill jobs and so college graduates and the well-trained found themselves in a sellers’ market and others in a buyers’.

Add onto that globalization, plus something title weird going on at the very top, and we thought we had a handle on it. We did not. The lion’s share of the gains are not being distributed in proportion to education or skill, but simply to those at the top.

There are a bunch of hypotheses. Larry Summers likes to muse on how George Eastman and Steve Jobs were both master technologist entrepreneurs, but one’s inventions supported middle-class prosperity in Rochester for decades, while the other’s created a few Silicon Valley millionaires. Some point to the decline of the union movement: it used to be overpaying your executives handed the UAW a powerful organizing tool, hence George Romney lived in a “normal” house, albeit in Grosse Point.

I tend to focus on the rise of finance–from 3% to 8% of total incomes, a very steeply-peaked sector indeed, and yet does the increase in the share of income it receives reflect anything more than modern high finance is much better at convincing individual middle-class investors and trustees of pension funds to take risks that they shouldn’t?

I tend to focus on the extra 5% of total income we spend on health care that other countries with health-care systems that outperform ours do not–and how much of that money flows to those who have gotten legislatures to bar nurse-practitioners from offering to treat their patients and who have figured out that the way to really make money in health is to collect insurance premiums and then figure out a way not to pay for the treatment of sick people, for sick people are expensive. I tend to focus on how with falling marginal tax rates and much higher pay levels for financiers who top executives regard as their peers, it is much much harder for directors and bosses who are part of the same social networks as bosses and immediate reports to hold the line, especially in the interest of shareholders given our well-known and longstanding flaws in corporate governance.

And then there are the hypotheses that suggest that rising inequality is relatively benign. There is the focus on winner-take-all information-goods industries. Fifty years ago it would have really raised the quality of life of three women to have been able to spend their afternoons hanging out laundry and gossiping with Oprah Winfrey over the back fence. In today’s world she manages to talk to not three people over the fence but to millions via the TV, and to turn her skill into a job, and to make $3 billion. That’s a big plus.

Back at the end of the 1970s it was promised that we would get better corporate governance and more time and energy devoted to invention and production management and less to tax avoidance if we lowered tax rates. We lowered them. But the productivity-growth benefits that were expected–well, I cannot see them in the data, and the only people who can are those with much more faith than St. Thomas ever had. And the argument that entrepreurship can only be spurred by the hope of a few very big prizes–well, Glenn Hubbard’s successor Greg Mankiw in the George W. Bush administration points to Steven Spielberg, Steven Jobs, and J.K. Rowling–all of whom would have been extremely happy to work like the dogs they worked like for 1/100 of the compensation.

Thinking about policies to remedy the situation is very difficult if we do not have a secure diagnosis of the causes of the problem, and we do not have a secure diagnosis of the causes of the problem. But I can say that making our income tax and our safety-net transfer system less progressive is not a rational policy reaction to the market economy’s having become a more unequal place.

And then there is the possibility that it is the old America, the America from 1933-1979, that was the anomaly. America before 1880 is the free-land America of the frontier, but as the frontier closed and the Gilded Age began income and wealth inequality rapidly became like it was today. Perhaps it is not what is going on now that is unusual, but what went on in the shadow of the Great Depression and the New Deal.

That is certainly what Thomas Piketty thinks. He points out that, historically:

1. Wealth is nearly always highly concentrated.
2. The era of wars, revolutions, progressive taxes, depressions, and social democracy that began in the 1910s quickly saw economy-wide wealth-to-annual-income ratios in the North Atlantic fall from about 7 to about 3.
3. And now it simply looks like we are going back to the old pre-World War I Belle-Époque Gilded-Age pattern.

Now this might be a benefit for the rest of us. After all, if the rich are rich because their ability to compound wealth is undisturbed, then they have to invest their wealth in something. And if they invest their wealth in useful buildings and productive machines, well then the rest of us who want to rent those buildings and work in businesses equipped with those machines find that we are in a buyers’ market: our wages go up, interest rates and dividend yields go down, and we have what John Maynard Keynes called the euthanization of the rentier, as the super-rich have immense wealth but because of low rates of profit derive only modest incomes from it.

It’s possible. But, as Thomas Piketty points out, when we look in history for the negative relationship between wealth-to-annual-income ratios and rates of return, we do not find it. Societies in which the rich are richer in relative terms appear to be societies in which the political-economic system is tuned to protect the profits of the rich as well.

So perhaps our grandchildren’s destiny will be to live in a world once again like that of Jane Austen or Honoré de Balzac–one in which marrying well after choosing the right parents are the roads to success as the world measures it…

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The Rise in Income and Wealth Inequality: Evidence, Causes, and Solutions

• J. Bradford DeLong :: U.C. Berkeley, NBER, WCEG, INET :: February 3, 2015
• http://tinyurl.com/dl20150202a

The Problem

• Americans used to expect living standards to double every generation…
• That stopped at the end of the 1970s—productivity growth halved…
• And stagnant real hourly median compensation tells us standards of living at the median stopped growing much, if at all…

Things Wrong with This Graph

• Misses decline in discrimination against women…
• Misses decline in discrimination against African-Americans…
• Denominator in real compensation still mostly a price index rather than a cost-of-living index (bias of 0.5%/year?)…
• Misses consumer surplus…
  • A lot more consumer surplus from “information goods” than from physical commodities…
• Misses progressive taxes
  • Misses safety net

Nevertheless…

• 2/5 of the total productivity growth we reasonably expected back in the late 1970s to see by now is not there…
• Effectively all of the growth in measured living standards at the median we expected to see is not there…

Why Has the Median Done so Much Worse than the Average?

• Arithmetically, top 10% up from 34% to 50%…
  • Reduction in 90% share by 1/4—from 2/3 to 1/2—accounts for the median…
  • Lower 85% little better than stagnant…
  • 85-95% growing with productivity…
  • 95-99% at productivity +0.8%/year…
• Top 1% at productivity + 3.0%/year—better than pre-1980…
• These are incomes of slots, not of people

And Look at the Top 0.01%

• From 1% to 5%…
• From 100 to 500 times average…
• 13,000 households at any point in time…
  • 260 households in Houston…
  • 1300 households now in Houston will make it there at some point in their lives…
  • Average income $50 million/year…
    • Back in the late 1970s their then-counterparts averaged $6 million/year…

What Has Happened?

• A “hollowing out”:
  • Below 80%—below $90K in household income—roughly holding its own in real terms…
  • An upper middle class—80%-95%, household income, $90K-$160K/year—holding its own in relative terms…
  • At the 99%-ile, income from 78-13 up from $200-375K/year…
  • At the 99.9%-ile, up from $500K-1.4M…
  • At the 99.99%-ile, up from $900K-$7M…

Why Has This Happened?

• Used to think:
  • Race between education and technology…
  • Plus “globalization”…
  • With something weird but less important going on at the top and the very top…
• That’s much harder a belief to hold on to now,
  • The lion’s share of the gains aren’t going to the educated, but to the top…

Hypotheses…

• Negative:
  • Something to do with the character of “technology”?
    • Kodak vs. Facebook
  • Decline of “union threat”:
    *It used to be that overpaying your boss gave your unions an excellent organizing tool…
    • George Romney lived in a “normal” house in Grosse Point…
  • Rise of finance: from 3% to 8% of total income…
  • Rise of health-care excess: another 5% of total income…
  • NIMBYism/congestion…
  • “Because they can”—lowered marginal tax rates, could afford to…
• Positive:
  • The rise of winner-take-all information-goods industries:
    • Oprah Winfrey, estimated net worth $3B, as America’s best friend…
  • Beneficial spur for innovation:
    • Greg Mankiw’s faux pas: “Steve Jobs as he develops the iPod, J.K. Rowling as she writes…Harry Potter… or Steven Spielberg as he directs…”
  • It didn’t work: we haven’t gotten faster productivity growth or better corporate control as a benefit of the 1980s reduction in marginal tax rates…
• Worrisome:
  • Great Depression and after as an unusual and anomalous era—it’s not what is going on now that is unusual, it is 1933-1979…

Thomas Piketty’s Take

• Wealth nearly always concentrated…
• Wealth-to-income falls from 7x to 3x annual income…
• Now it is simply going back…
• Will this be a bonanza for the rest of us? Keynes’s euthanasization of the rentier?…
  • No: wealth is very good at protecting itself and its returns…
• Your grandchildren will live, once again, in a world in which marrying well and choosing the right parents are the roads to success as the world measures it…

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