…is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity…. To the extent that opportunity itself is enhanced by access to economic resources, inequality of outcomes can exacerbate inequality of opportunity, thereby perpetuating a trend of increasing inequality…. Society faces difficult questions of how best to fairly and justly promote equal opportunity. My purpose today is not to provide answers to these contentious questions, but rather to provide a factual basis for further discussion…. I will review trends… then identify and discuss four sources of economic opportunity in America…. The first two are widely recognized as important sources of opportunity: resources available for children and affordable higher education. The second two may come as more of a surprise: business ownership and inheritances…. In focusing on these four building blocks, I do not mean to suggest that they account for all economic opportunity, but I do believe they are all significant sources of opportunity for individuals and their families to improve their economic circumstances…
Category: Equitablog
Morning Must-Read: Richard Mayhew: Harrassing the “Deserving” Poor
…a politically powerless and disenfranchised primary user base… to… the working poor [who] will never have as much power as the non-working rich, but they have some…. Post 1: ‘A friend from Minnesota asks if I have heard of the ‘old’ Medicaid rules on child support assignment being applied to ‘new’ Medicaid ACA-expanded beneficiaries….. Does this mean Medicaid’s more draconian aspects will finally see the light of day in public debate? Will the inclusion of working poor people create a constituency for a Medicaid program… [not] apparently premised on the idea that Medicaid beneficiaries are getting something for nothing and payback is our mission?’ Post 2: ‘As I have discussed elsewhere, we are conflicted about Medicaid so it is no surprise that the ACA is conflicted… does nothing to alter state discretion to seek state recoupment of Medicaid costs from Medicaid beneficiaries who received basic medical services… after the age of 55….’ These types of rules have been put in place as part of the favorite American game of determing who is and is not part of the deserving poor. Those rules applied to Medicaid when it was truly the poor person’s program and not a broad based payer of last resort. To some, anyone who qualifies for Medicaid, even with the income eligiblity expansion is a ‘loser’ who deserves random harrassment, but beyond those assholes and sociopaths, it is harder for the American voting public (which is quite different and generally more privileged than the general public on a variety of measures) to see the value of harrassing people who they either know or could have seen themselves to be.
Morning Must-Read: Mohamed A. El-Erian: The Inequality Trifecta
…at the recently concluded Annual Meetings of the International Monetary Fund and World Bank. Among the most striking was the disparity between participants’ interest in discussions of inequality and the ongoing lack of a formal action plan for governments to address it. This represents a profound failure of policy imagination…. In the developed world, the problem is rooted in unprecedented political polarization, which has impeded comprehensive responses and placed an excessive policy burden on central banks. Though monetary authorities enjoy more political autonomy than other policymaking bodies, they lack the needed tools to address effectively the challenges that their countries face. In normal times, fiscal policy would support monetary policy, including by playing a redistributive role. But these are not normal times…. As a result, most countries face a trio of inequalities – of income, wealth, and opportunity – which, left unchecked, reinforce one another, with far-reaching consequences. Indeed, beyond this trio’s moral, social, and political implications lies a serious economic concern: instead of creating incentives for hard work and innovation, inequality begins to undermine economic dynamism, investment, employment, and prosperity… affluent households spend a smaller share… high levels of inequality also impede the structural reforms needed to boost productivity… erodes social cohesion, political effectiveness, current GDP growth, and future economic potential. That is why it is so disappointing that, despite heightened awareness of inequality, the IMF/World Bank meetings – a gathering of thousands of policymakers, private-sector participants, and journalists, which included seminars on inequality in advanced countries and developing regions alike – failed to make a consequential impact on the policy agenda. Policymakers seem convinced that the time is not right for a meaningful initiative to address inequality of income, wealth, and opportunity. But waiting will only make the problem more difficult to resolve…
Morning Must-Read: Danilo Trisi: Safety Net Cut Poverty Nearly in Half Last Year
lift[ed] 39 million people — including more than 8 million children — out of poverty… Social Security, non-cash benefits such as rent subsidies and SNAP (formerly food stamps), and tax credits for working families like the Earned Income Tax Credit (EITC)…. Accounting for government assistance programs and taxes cuts the poverty rate for 2013 from 28.1 percent to 15.5 percent…. Safety net programs cut the poverty rate for children from 27.5 percent to 16.4 percent…
The Persistence of American Conservative Opposition to ObamaCare: Friday Focus for October 17, 2014
Jonathan Chait has an interesting piece on the thought on healthcare policy of the likely future senator from Iowa, Joni Ernst:
…have failed. And yet conservative opposition… has not diminished. If you want to know why this is, listen to… Joni Ernst….
We’re looking at Obamacare right now. Once we start with those benefits in January, how are we going to get people off of those? It’s exponentially harder to remove people once they’ve already been on those programs…. We rely on government for absolutely everything. And in the years since I was a small girl up until now into my adulthood with children of my own, we have lost a reliance on not only our own families, but so much of what our churches and private organizations used to do. They used to have wonderful food pantries. They used to provide clothing for those that really needed it. But we have gotten away from that. Now we’re at a point where the government will just give away anything.
That’s the fundamental belief…. Health care should be a privilege rather than a right. If you can’t afford health insurance on your own, that is not the government’s problem…. All of us non-socialists would agree that there ought to be some things rich people get to enjoy that poor people are deprived of. Access to health care is a strange choice of things to deprive the losers of–not least because one of the things you do to ‘earn’ the ability to afford it is not just the normal market value of earning or inheriting a good income, but the usually random value of avoiding serious illness or accident…. But that is the belief that sets [American conservatives apart from [other] major conservative parties across the world, and it is the belief that explains why they have opposed national health insurance…
But if there is one thing that all students of health care finance agree on, it is that health-insurance markets do not work: they are riddled with adverse selection and moral hazard to an extraordinary degree, and maintaining an equilibrium in which the market actually works–a “pooling” rather than a “separating” equilibrium–is very difficult and requires skillful and delicate regulation. The fact that the market can’t deliver derails the chain of contribution-purchase-consumption that (some) conservatives identify with desert and fairness. And if a market equilibrium is, as it is in health care, not just inequitable and unutilitarian but also unjust according to libertarian lights, why plump for it?
This is the reason that many of us non-communists go for single-payer: equity an utilitarian greatest-good-of-the-greatest-number are good things, and single payer can get us to them even though the health-insurance market cannot deliver on what it is supposed to do. And this is the reason that others of us work very hard to try to find a way to fix the health-insurance market so that it will work, somehow–with Obamacare being the latest attempt to make it work, for a while at least. Bluntly: the exchange marketplaces will not work without the mandate, and the mandate cannot work without the subsidy pool.
Doesn’t Joni Ernst have any friends on her side of the aisle to educate her about health-insurance markets? And how do the technocrats on her side of that aisle expect to make good policy if they fail to make the effort to educate those who may well be voting up or down on their proposals in a year? Wasn’t it British Liberal Minister Robert Lowe who, after the passage of the Second Reform Bill in 1867, famously said “we must educate our masters”?
Now more than ever.
Things to Read on the Evening of October 16, 2014
Must- and Shall-Reads: (MOVE UP TO BELOW “PLUS” AND BEFORE “AND OVER HERE”)
- New Evidence on the Impact of Financial Crises in Advanced Countries
- Revisiting the Impacts of Teachers
- Introduction to Agent-Based Models with respect to the Future of Macroeconomics
- Economist’s View: Jean Tirole Wins Nobel Prize in Economic Sciences
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Markets Pricing in Kocherlakota-Like Interest Rates: “Minneapolis Fed President Narayana Kocherlakota may be the biggest dove on the Federal Reserve, but his interest-rate projections would make him just an ordinary trader on Wall Street. The current Fed funds futures contract is pricing in interest rates of 2% at the end of the third quarter of 2017. The lowest “dot” on the Fed’s dot plot of interest rates is for rates of 2% at the end of 2017. And the next lowest dot is at 2.63%. It’s not known for certain that the 2% dot for 2017 comes from Kocherlakota, but his speeches are consistent with such a view. For example, unlike his colleagues, he doesn’t think any rate hike would be appropriate next year. He doesn’t expect inflation as measured by the PCE price index to get back to 2% until 2018. And he doesn’t want any reduction in accommodation unless the outlook is for inflation to be at 2% in two years time…”
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More QE Might Be Appropriate If U.S. Economy Faltered: “If we really get a sustained, disinflationary forecast… I think moving back to additional asset purchases in a situation like that should be something we should seriously consider…. The concern is the next steps that [the ECB] may need. That worries me a little bit. Will their policy response be as timely and aggressive as needed?… The markets are pricing in a lot of other things that might happen and a lot of those are negative. The cross currents are really the story.”
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Notes on Cutler’s The Quality Cure: “I thought one of the best aspects of the book was the expression of optimism and realism throughout—evidence-based and without overbearing cheer leading. Too many health policy books take a grumpy ‘it’s all terrible’ tone. Too many also suggest solutions that are politically unrealistic. Cutler’s is decidedly different. He’s neither grumpy nor naive about what’s possible. I also liked that the book didn’t belabor any points. At 171 pages (of main text), given what it covers, it is laudably efficient. Few books are.”
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A Distant Mirror of Debt, Default, and Relief: “We take a first pass at quantifying the magnitudes of debt relief achieved through default and restructuring in two distinct samples: 1979-2010, focusing on credit events in emerging markets, and 1920-1939, documenting the official debt hangover in advanced economies that was created by World War I and its aftermath. We examine the economic performance of debtor countries during and after these overhang episodes, by tracing the evolution of real per capita GDP (levels and growth rates); sovereign credit ratings; debt servicing burdens relative to GDP, fiscal revenues, and exports; as well as the level of government debt (external and total). Across 45 crisis episodes for which data is available we find that debt relief averaged 21 percent of GDP for advanced economies (1932-1939) and 16 percent of GDP for emerging markets (1979-2010), respectively. The economic landscape after a final debt reduction is characterized by higher income levels and growth, lower debt servicing burdens and lower government debt. Also ratings recover markedly, albeit only in the modern period.”
Should Be Aware of:
- “Leon Panetta has served three presidents, and one thing has been constant each time — putting numero uno first”
- “Just a Website” (Update: McConnell proposes increasing KY taxes by $700M/year!) | ACASignups.net
- Private Companies Are Driving China’s Growth
- Of Gamers, Gates, and Disco Demolition: The Roots of Reactionary Rage
- Abortion Green Lanternism: “Atrios is making sense: ‘What was especially maddening about Saletan-esque arguments over the years, aside from their clear wrongness, was that he seemed to truly believe that if only pro-choice people would admit it was all so icky and horrible then anti-abortion people would just surrender and go home. It was the position that only a High Priest Of Punditry could take, that the discourse was more important than the policy.’ There were a lot of pathologies in the general pundit discourse about abortion in the preceding decade (which, thankfully, seem to be a little less common now.) But one of the strangest is the idea that there was some rhetorical strategy that could end the underlying conflict. And it’s particularly odd in the context of abortion, where public opinion has been remarkably stable since the issue became politically salient in the mid-60s, all the clever rhetorical strategies of both sides aside. Framing and messaging are overrated in general, and abortion is a particularly strong case in point even though it’s an issue where people seem to be particularly obsessed with it.”
At the Oregon Economic Forum: Introducing Doug Elliott: “Making Wall Street Work for Main Street: Thursday Focus for October 16, 2014
I am very happy to be here this morning to introduce the Oregon Economic Forum’s Keynote Speaker, Doug Elliott of the Brookings Institution, and to set the stage for his talk.
To do that, let me ask all of you to cast yourselves back to 2006, to the end of Alan Greenspan’s long tenure as Chair of the Federal Reserve, and to the days of what was then called the “Great Moderation”. During Greenspan’s term starting in 1987 the unemployment rate had never gone above 7.8% and it had gotten as low as 3.8%. The attainment of low unemployment under Greenspan did not signal any forthcoming inflationary spiral: The peak 12-mo PCE price index core inflation rate during Greenspan’s tenure was 4.7%. The peak inflation rate that followed that 3.8% unemployment rate was 2.4%. Inflation had not been above 2.5% since December 1993.
This superb macroeconomic performance had not been the result of “good luck” understood as an absence of macroeconomic disturbances and shocks. We had seen the 25% fall in the stock market in one day in October 1987, the S&L financial crisis of the early 2000s, the Mexican peso crisis on our southern border in 1995, the East Asian financial crisis of 1997, followed the next year by the bankruptcy of Russia and then by the collapse of the world’s then-largest hedge fund LTCM in the same year. 2001 had seen the collapse of the dot-com bubble, and the terror-attack on New York and the Pentagon on 9/11. Plus there had been large longer-term surges: the high-tech boom of the 1990s, the enormous Chinese export surplus surge of the late 1990s and 2000s, the Argentinian crash of 2002, the era of the global savings glut of the 2000s, the American construction and house-price boom, and the extraordinary rise in financial sophistication as the growth of derivative securities allowed risk to be finely sliced and diced and sold off to those who wished to hold that particular risk or make that particular bet. All of these held the prospect of producing significant macroeconomic disturbances to the underlying real economy of America. None of them did. Recessions were short. And small. And infrequent.
The conclusion that the economics profession–at least the macroeconomic mainstream of it–drew from this–call it 1984-2007–“Great Moderation” generation was that monetary policy had finally figured out how to do its proper job. A Federal Reserve that had painfully reestablished market trust in it as the guardian of price stability had set solid anchors foe inflationary expectations: no more creeping or trotting inflationary spirals. A Federal Reserve that no longer had to worry about making its bones with respect to its credibility as a price-stability guardian was thus free to throw its weight around and not fine tune but at least grossly adjust the economy to try to keep employment at high even if not full levels and growth and investment strong.
In such an environment allowing experimentation in the financial sector appeared to be wise. The large persistent gaps in average rates of return across asset classes appeared to economists to suggest an outsized price of risk. Financial innovation and experimentation that promised to generate forms of risk more investors would be more willing to bear more cheaply seemed to promise an improvement in economic efficiency. The risks of allowing and in fact encouraging cowboy finance appeared to be small: the princes of Wall Street had every incentive in their own portfolios and options to manage risk correctly, and in the experience of the Federal Reserve since the mid-1980s strongly indicated that whatever shocks were generated by financial disturbances the Federal Reserve could build firewalls to keep them from materially and significantly damaging the real economy of demand, employment, production, and incomes. And the peripheral financial crises–Argentinian, Russian, East Asian, Mexican? Not, the consensus of North Atlantic economists was, likely or perhaps even possible in the deep and sophisticated financial markets of the North Atlantic.
Thus when Raghu Rajan, then Chicago Business School professor and now head of the Reserve Bank of India, stood up at the Federal Reserve’s Jackson Hole Wyoming conference in 2005 and said not just that there were large risks of financial crisis but that we had no grasp of what the risks were, the response was a general hooting. My friend and patron Larry Summers told him that the “slightly Luddite premise of [his] paper” was “largely misguided”. The very sharp Armenio Fraga said that “risk is going where it belongs… we may be better off than before… [and] less of an impact of all these financial accidents on the real economy”. The only defender he had was Alan Blinder, who wanted to: “defend Raghu a little bit against the unremitting attack he is getting here for not being a sufficiently good Chicago economist…”
And so when we went into 2008 we–certainly I–thought that the situation was serious but not desperate, that the likely outcome would be a small recession like 2001, and that certainly by 2011 we would be back to normal if we took the situation sufficiently seriously–which I was highly confident that we would.
Big mistake.
It turned out that the Federal Reserve did not have a power to build firewalls to protect the real economy of demand, employment, production, and incomes from the consequences of financial distress–and, in its origins, not all that much financial distress either. We built at most one million houses above trend during the housing bubble, and–without the snowballing and feedback vicious circles–there were only a couple of hundred thousand dollars of mortgage debt on each that was not going to be repaid and had to be allocated as losses. Triple that for losses on existing homeowners who became overextended, and we still have only $600 billion of losses due to bad investments. Yet those $600 billion of fundamental losses which should have been there barely noticeable in the world economy of $80 trillion of financial assets triggered a more than $20 trillion collapse in financial values, and landed us here.
Now Doug Elliott is here to tell us why, exactly, I and so many others were so mistaken in our estimates of the situation back in 2007, and what is to be done next.
Is the era of high Chinese economic growth coming to an end?
The ups and downs in the stock market yesterday were triggered in part by concerns about the fortunes of global economic growth. The collection of economies that use the euro as their currency, the Eurozone, looks like its sliding toward a triple-dip recession. Newly released data from the United States indicating perhaps weaker economic growth ahead also fueled concerns. And yes, stock analysts and economists also are trying to discern the often opaque short-term data flowing out of China are contributing to market jitters.
But these short-term trends, while concerning, take on an altogether different complexion if a new working paper on China’s future economic growth is correct.
The National Bureau
of Economic Research earlier this week released a new paper by Lant Pritchett and Larry Summers, both of Harvard University. In short, the authors argue that China’s economy is very susceptible to a quick and sudden decrease in its growth rate. China has been growing so quickly for so long that forecasts would have us believe that the economic future of the world lies in Asia. Pritchett and Summers call this belief “Asiaphoria.” They argue that previous periods of Asiaphoria—during the rapid growth of Japan in the 1980s and then Southeast Asian countries such as Thailand in the 1990s—failed to live up to expectations.
The authors point out that the best way to evaluate the growth prospects of an economy isn’t to look at its past but rather at economies in similar situations. Pritchett and Summers act on this insight by focusing on a key finding from economic growth research: reversion to the mean. In other words, high-flying growth will eventually fall back to the overall average. Just like a middling basketball shooter can go on a hot streak for a while before his shooting percentage falls back to earth over the long run, Chinese growth is likely to decrease, and sharply.
Pritchett and Summers argue that China is more likely to have an even more swift decline in economic growth than other similar countries in the past. The reason: China’s corrupt and authoritarian political system. This system means there is very little rule of law in China. And the authors even go so far as to say that there are “plausible scenarios which may disrupt the current political settlement” (translation: political instability) that could sharply reduce growth rates.
There are other reasons to be concerned about Chinese growth, though on a longer time frame. A recent article in The Economist flagged concerning research about the growth in Chinese productivity. The rate of growth in total factor productivity, or how efficiently an economy uses labor and capital, seems to be declining. One potential reason for the decline is the financial sector, dominated by state-owned banks, which isn’t delivering funds to highly productive firms. Total factor growth is the basis for long-run economic growth, so this trend is worrying for China’s economic future.
Of course, these fears may all be overblown. Pritchett and Summers are clear that the growth decline they identify in recent research on dynamics of economic growth isn’t destiny. The decline in Chinese total factor productivity growth isn’t a well-established fact yet. And predictions, especially those about the future, are notoriously difficult. But the possibility of a sudden and sharp decrease in Chinese growth or an even slowing economic malaise is high enough that we all need to think about how the economy might handle such an event.
What Would Be Convincing Evidence That 2%/Year Is too Low for the Inflation Target?: Hoisted from the Archives/Wednesday Focus
God! We were (and are) so smart!
and (1992): Macroeconomic Policy and Long-Run Growth:
On almost any theory of why inflation is costly, reducing inflation from 10%/year to 5%/year is likely to be much more beneficial than reducing it from 5%/year to 0%/year. So austerity encounters diminishing returns. And there are potentially important benefits of a policy of low positive inflation. It makes room for real interest rates to be negative at times, and for relative wages to adjust without the need for nominal wage declines….
These arguments gain further weight when one considers the recent context of monetary policy in the United States. A large easing of monetary policy, as measured by interest rates, moderated but did not fully counteract the forces generating the recession that began in 1990. The relaxation of monetary policy seen over the past three years in the United States would have been arithmetically impossible had inflation and nominal interest rates both been 3%-points lower in 1989. Thus a more vigorous policy of reducing inflation to 0%/year in the mid-1980s might have led to a recent recession much more severe than we have in fact seen…
If the past 24 hours… the past six months… the past six years… are not convincing evidence that a 2%/year inflation target is too low, what would be convincing evidence to that effect?
Plus Bonus Hoisted from the Archives:
A 2%/Year Inflation Target Is too Low: First, the live question is not whether the Federal Reserve should raise its target inflation rate above 2% per year.
The live question is whether the Federal Reserve should raise its target inflation rate to 2% per year.
On Wednesday afternoon, Federal Reserve Chair Bernanke stated that he was unwilling to undertake more stimulative policies because “it is not clear we can get substantial improvements in payrolls without some additional inflation risks.” But the PCE deflator ex-food and energy has not seen a 2% per year growth rate since late 2008: over the past four quarters it has only grown at 0.9%. At a 3.5% real GDP growth rate, unemployment is still likely to be at 8.4% at the end of 2011 and 8.0% at the end of 2012–neither of them levels of unemployment that would put any upward pressure at all on wage inflation. It thus looks like 1% is the new 2%: on current Federal Reserve policy, we are looking forward to a likely 1% core inflation rate for at least another year, and more likely three. A Federal Reserve that was now targeting a 2% per year inflation rate would be aggressively upping the ante on its stimulative policies right now. That is not what the Federal Reserve is doing. Would that we had a 2% per year inflation target.
But if we were targeting a 2% inflation rate–which we are not–should we be targeting a higher rate? I believe that the answer is yes.
To explain why, let me take a detour back to the early nineteenth century and to the first generations of economists–people like John Stuart Mill who were the very first to study in the industrial business cycle in the context of the 1825 crash of the British canal boom and the subsequent recession. John Stuart Mill noted the cause of slack capacity, excess inventories, and high unemployment: in the aftermath of the crash, households and businesses wished to materially increase their holdings of safe and liquid financial assets. The flip side of their plans to do so–their excess demand for safe and liquid financial assets–was a shortage of demand for currently-produced goods and services. And the consequence was high unemployment, excess capacity, and recession,.
Once the root problem is pointed out, the cure is easy. The market is short of safe and liquid financial assets? A lack of confidence and trust means that private sector entities cannot themselves create safe and liquid financial assets for businesses and households to hold? Then the government ought to stabilize the economy by supplying the financial assets the market wants and that the private sector cannot create. A properly-neutral monetary policy thus requires that the government buy bonds to inject safe and liquid financial assets–what we call “money”–into the economy.
All this is Monetarism 101. Or perhaps it is just Monetarism 1. We reach Advanced Macroeconomics when the short-term nominal interest rate hits zero. When it does, the government cannot inject extra safe and liquid money into the economy through standard open-market operations: a three-month Treasury bond and cash are both zero-yield government liabilities, and buying one for the other has no effect on the economy-wide stock of safety and liquidity. When the short-term nominal interest rate hits zero, the government has done all it can through conventional monetary policy to fix the cause of the recession. The economy is then in a “liquidity trap.”
Now this is not to say that the government is powerless. It can buy risky and long-term loans for cash, it can guarantee private-sector liabilities. But doing so takes risk onto the government’s books that does not properly belong there. Fiscal policy, too, has possibilities but also dangers.
My great uncle Phil from Marblehead Massachusetts used to talk about a question on a sailing safety examination he once took: “What should you do if you are caught on a lee shore in a hurricane?” The correct answer was: “You never get caught on a lee shore in a hurricane!” The answer to the question of what you should do when conventional monetary policy is tapped out and you are at the zero interest rate nominal bound is that you should never get in such a situation in the first place.
How can you minimize the chances that an economy gets caught at the zero nominal bound where short-term Treasury bonds and cash are perfect substitutes and conventional open-market operations have no effects? The obvious answer is to have a little bit of inflation in the system: not enough to derange the price mechanism, but enough to elevate nominal interest rates in normal times, so that monetary policy has plenty of elbow room to take the steps it needs to take to create macroeconomic stability when recession threatens. We want “creeping inflation.”
How much creeping inflation do we want? We used to think that about 2% per year was enough. But in the past generation major economies have twice gotten themselves stranded on the rocks of the zero nominal bound while pursuing 2% per year inflation targets. First Japan in the 1990s, and now the United States today, have found themselves on the lee shore in the hurricane.
That strongly suggests to me that a 2% per year inflation target is too low. Two macroeconomic disasters in two decades is too many.
1149 words
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If not r > g, what’s behind rising wealth inequality?
The Initiative on Global Markets at the University of Chicago yesterday released a survey of a panel of highly regarded economists asking about rising wealth inequality. Specifically, IGM asked if the difference between the after-tax rate of return on capital and the growth rate of the overall economy was the “most powerful force pushing towards greater wealth inequality in the United States since the 1970s.”
The vast majority of the economists disagreed with the statement. As would economist Thomas Piketty, the originator of the now famous r > g inequality. He explicitly states that rising inequality in the United States is about rising labor income at the very top of the income distribution. As Emmanuel Saez, an economist at the University of California, Berkeley and a frequent Piketty collaborator, points out r > g is a prediction about the future.
But if wealth inequality has risen in the United States over the past four decades, what has been behind the rise? A new paper by Saez and the London School of Economics’ Gabriel Zucman provides an answer: the calcification of income inequality into wealth inequality.
“Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data,” their new working paper, is firstly an impressive documentation of the significant changes in wealth distribution in the United States.
Saez and Zucman create a data series using tax records to measure wealth inequality going back to 1913. The trend is similar to the one for income inequality in the United States: a high level of inequality at the beginning of 20th century that declined substantially during the mid-century only to climb starting in the late 1970s and reaching high levels again in recent years.
Rising wealth inequality since the late 1970s has been a case of the top of the distribution pulling away from everyone else. Specifically, the rise of the 0.1 percent is the dominant story. In 1979, the top tenth of the top 1 percent held 7 percent of the wealth in the United States. By 2012, the share held increased threefold to 22 percent. (An earlier version of this data was highlighted at Equitable Growth’s annual conference in September.) In fact, almost half of the total increase in wealth from 1986 to 2012 went to the top 0.1 percent of wealth holders. The increase is dramatic and brings wealth inequality to a level around that prevailing in 1929.
What caused this increasing concentration of wealth? In short, an increase in income inequality coupled with rising savings inequality. As income flowed upward to those at the top, rich individuals increased the rate at which they saved income. Saez and Zucman refer to this phenomenon as the “snowballing effect.” And Piketty does consider the calcification of top incomes into wealth inequality in “Capital in the 21st Century.”
This effect certainly isn’t the well-known r > g phenomenon. But Saez and Zucman’s research shows that there’s more than one way for wealth inequality to arise.