Afternoon Must-Read: Emmanuel Saez and Thomas Piketty: Inequality in the Long Run

Emmanuel Saez and Thomas Piketty: Inequality in the long run: “During the 20th century, growth rates were exceptionally high…

…and rates of return were severely reduced by capital shocks (destructions) and the rise of taxation… quantitatively sufficiently important to explain why wealth concentration did not return to pre-WWI levels in the postwar period. Other factors might also have played a role… [but such] process[es] does not seem to have taken place in pre-WWI Europe…. To the extent that population growth (and possibly productivity growth) will slow down in the 21st century, and that after-tax rates of return to capital will rise… the 21st century… could… [see] wealth concentration….

The long-run dynamics of income inequality… is the most difficult part because income inequality combines forces arising from the inequality of capital… and forces related to the inequality of labor income…. Kuznets posited that income inequality first rises with economic development when new, higher-productivity sectors emerge… but then decreases as more and more workers join the high-paying sectors…. Our data show that this is not the reason that income inequality declined in developed countries during the first half of the 20th century…. Kuznets’ overly optimistic theory of a natural decline in income inequality in market economies largely owed its popularity to the Cold War context of the 1950s….

The most widely used economic model is based on the idea of a race between education and technology…. Such skill-biased technological progress is not sufficient to explain important variations between countries…. The race between education and technology fails to explain the unprecedented rise of very top labor incomes that has occurred in the United States over the past few decades…. Changes in tax policy, as well as social norms regarding pay equality, likely play a key role in shaping labor income inequality…. Inequality does not follow a deterministic process. In a sense, both Marx and Kuznets were wrong. There are powerful forces pushing alternately in the direction of rising or shrinking inequality. Which one dominates depends on… institutions and policies…