Brad DeLong: Worthy reads on equitable growth, January 25–31, 2019

Worthy reads from Equitable Growth:

  1. Equitable Growth’s Heather Boushey is engaging with Jonathan Ostry, Prakash Loungani, Andrew Berg, and Jason Furman at the Peterson Institute today, January 31. Go there and check out their discussion of the book Confronting Inequality: How Societies Can Choose Inclusive Growth.
  2. Greg Leiserson has an excellent piece over at MarketWatch for everybody who wants to rapidly get up to speed on what a net worth wealth tax might be and how it could work. Read his “How a wealth tax would work in the United States,” in which he writes: “Policymakers looking for a highly progressive tax instrument that raises substantial revenue would find a net worth tax appealing. Such a tax would impose burden primarily on the wealthiest families—reducing wealth inequality—and could raise substantial revenues. As noted above, the United States taxes wealth in several forms already. Thus, the policy debate is less about whether to tax wealth and more about the best ways to tax wealth and how much it should be taxed. A net worth tax could be a useful complement to—or substitute for—other means of taxing wealth, as well as a tool for increasing overall taxation of wealth.”
  3. I have been waiting for this, from Piketty-Saez-Zucman, to show up for a while, and here it is now in Equitable growth’s working paper series. This is the simplified and streamlined version on their take on how we should do national income statistics for the 21st century—how we can and should take advantage of our data to go beyond averages and seriously track issues of distribution. Read Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, “Simplified Distributional National Accounts,” in which they write: “This paper develops a simplified methodology that starts from the fiscal income top income share series and makes very basic assumptions on how each income component from national income that is not included in fiscal income is distributed. … It can be used to create distributional national income statistics in countries where fiscal income inequality statistics are available but where there is limited information to impute other income … This simplified methodology can also be used to assess the plausibility of the Piketty, Saez, and Zucman (2018) assumptions. In particular, we will show that the simplified methodology can be used to show that the alternative assumptions proposed by Auten and Splinter (2018) imply a drastic equalization of income components not in fiscal income which does not seem realistic.”

Worthy reads not from Equitable Growth:

  1. While the Federal Reserve may not believe that the slowing U.S. economy will relieve inflationary pressures, financial markets believe that the economy will slow so much as to perhaps produce a recession. This strongly suggests that the Federal Reserve is right now getting the balance of risks wrong. Read Tim Duy, “Fed Holding Steady For Now,” in which he writes: “I think the Fed will on net conclude that there exists reason to believe that the economy will slow in 2019 relative to 2018, but the degree of slowing remains uncertain and not clearly sufficient to relieve inflationary pressures. As such, I doubt that the Fed will drop its internal bias toward further tightening … That bias is clearly evident externally in the Fed’s Summary of Economic Projections. It is also evident in this sentence from the December Federal Open Market Committee statement: ‘The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.’”
  2. Big oligopolistic companies conduct research and development to produce technologies that benefit them—which typically means technologies in which capital substitutes for labor and allows them to shed jobs from their value chain. Enhancing societal well-being, however, requires the development of technologies that do not substitute for but, rather, complement human capabilities. It is becoming increasingly clear to me that the private sector cannot get this balance right. Read Tim O’Reilly, “Gradually, Then Suddenly,” in which he argues: “Neural interfaces: One of my biggest ‘Wow!’ moments of 2018 took place in the offices of neural interface company CTRL-labs. The company’s demo involves someone playing the old Asteroids computer game without touching a keyboard, using machine learning to interpret the nerve signals … But that’s just the first stage. Essentially, users of this technology ‘grow’ another virtual hand, which they can move independently of their physical hands … Humanity is already going cyborg … Don’t fall into the trap of thinking that AI will replace humans when it can be used even more powerfully to augment them.”
  3. There do not appear to be many examples of governments that both increase inequality and raise the standard of living of the bottom 10 percent of income earners. Instead, it appears to be one or the other. Read Dan Davies, “Up and Down, Left and Right,” in which he writes: “Inequality in the U.K. against the income of the poorest 10 percent, as a time series … It hits you right between the eyes. It’s all up-and-down or left-and-right. The sort of thing that generates the difficult cases for liberal political philosophy—increases in inequality which nevertheless benefited the worst-off, which would have showed up as a southwest-to-northeast upward slope—never happened.”
  4. Yet more evidence that inflation builds very slowly: There appears to be no such thing as a red line that prudent economies dare not cross. Read Sylvain Leduc, Chitra Marti, and Daniel J. Wilson, “Does Ultra-Low Unemployment Spur Rapid Wage Growth?,” in which they write: “The unemployment rate ended 2018 at just under 4 percent, substantially lower than most estimates of the natural rate. Could such an ostensibly tight labor market lead to a sharp pickup in wage growth from its recent moderate pace, such that the relationship between wage growth and unemployment is not always linear? Investigations using state-level data show no economically significant nonlinearity between wage growth and unemployment that would predict an abrupt jump in wage growth.”
  5. On this question, these days I tend to go the full Modern Monetary Theory—the bond market will tell us when it is time to worry about the deficit and the debt, and that time is not now. Read Jason Furman and Larry Summers, “Why Washington Should Worry Less About the Deficit,” in which they write: “As policymakers set budgets in the coming years, a lot will depend on what interest rates do. Financial markets do not expect the increases in interest rates that budget forecasters have priced in. If the markets prove right, that will strengthen the case against deficit reduction. If, on the other hand, interest rates start to rise well above what even the budget forecasters expect, then, as in the early 1990s, more active efforts to cut the deficit could make sense.”
  6. The highest-quality economic theory on how to correctly do the analysis of societal well-being—and, in the process, nest utilitarianism in a broader sensible framework—is evident in this paper from 2016 by Emmanuel Saez and Stefanie Stantcheva, “Generalized Social Marginal Welfare Weights for Optimal Tax Theory,” in which they write: “Evaluat[ing] tax reforms by aggregating money-metric losses and gains of different individuals using ‘generalized social marginal welfare weights.’ Optimum tax formulas take the same form as standard welfarist tax formulas … Weights directly capture society’s concerns for fairness without being necessarily tied to individual utilities. Suitable weights can help reconcile discrepancies between the welfarist approach and actual tax practice, as well as unify in an operational way the most prominent alternatives to utilitarianism … There is no social-welfare objective primitive … Instead, our primitives are generalized social marginal-welfare weights which represent the value that society puts on providing an additional dollar of consumption to any given individual. These weights directly reflect society’s concerns for fairness … We define a tax system as locally optimal if no small reform is desirable.”

January 31, 2019


Brad DeLong


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