Category: Equitablog

*Paul Krugman: On Gattopardo Economics: “Thomas Palley… raises an interesting point…

…disappointed that Piketty’s book relies mainly on conventional, mainstream economics… labor and capital… paid their marginal product… True, when discussing the rise of “supermanagers” Piketty talks about imperfect competition and rents, but that’s not the core of his work…. Palley and others are disappointed…. The thing to bear in mind, however, is that you really don’t need to reject standard economics either to explain high inequality or to consider it a bad thing…. You can be perfectly conventional in your economics–or, my own attitude and what I think is Piketty’s, willing to use conventional models when they’re convenient and seem useful without treating them as irrefutable truth–while still taking inequality very seriously.

I think Thomas Palley has a stronger point than Krugman does. As I wrote, well, last night:

Brad DeLong: The Daily Piketty: Thursday Focus: April 24, 2014: “I had not fully realized just how heavy a lift Piketty has in trying to persuade the American neoclassical growth-economics community within economics departments. Their–our–default view of the world is–very strongly–that it is characterized by a Cobb-Douglas aggregate production function, in which the rate of profit moves inversely with the L ratio and in which as a result the capital income share of total income is constant.

You may say: “But if you have a model in which you assume the capital income share is constant, you then have no chance of ever explaining fluctuations in income distribution. How can you use a model in which fluctuations in income distribution do not happen to criticize anyone trying to explain why they do?” And this is a more than fair cop. But that the habit of thought is not rational doesn’t keep American neoclassical growth-economists in economics departments from doing it: their–our–first reaction to Piketty is: “That can’t be right, because in our model the capital-income share of total income is invariant to shifts in the wealth-income ratio.” And they–we–typically do not take the second step in the argument and say: “wait a minute: in our model nothing causes shifts in income distribution, so we need a different model”.

And, as I have also said before, I think Suresh Naidu gets this point right:

Suresh Naidu: The Slack Wire: Notes from Capital in the 21st Century Panel: “I think there is a ‘domesticated’ version of the argument…

that economists and people that love economists will take away. Then there is a less domesticated one, one that is more challenging to economics as it is currently done. I’m curious which one Thomas believes more. I worry that the impact of the book will be blunted because it becomes a “Bastard Piketty-ism” and allows macroeconomics to continue in its modelling conventions, which are particularly ill-suited to questions of inequality.

The domesticated version is a story about technology and the world market making capital and labor more and more substitutable over time, and this is why r does not fall very much as wealth accumulates. It is fundamentally a story about market forces, technology and trade making the demand for capital extremely elastic. We continue to understand r as the marginal contribution of capital to the production of the economy. I think this is story that is told to academic economists, and it is plausible, at least on the surface. 

There is another story about this, one that goes back to Keynes. And the idea here is that the rate of return on capital is set much more by institutions, norms and expectations than by supply and demand of the capital market. Keynes writes that “But the most stable, and the least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in future, the minimum rate of interest acceptable to the generality of wealth-owners.” Keynes footnotes it with the 19th century saying that “John Bull can stand many things, but he cannot stand 2 percent.”

The book doesn’t quite take a stand on whether it is brute market forces and a production function with a high elasticity of substitution or instead relatively rigid organization of firms and financial institutions that lies behind the stability of r.  

I think the production approach is less plausible, partly because housing plays such a large role in the data, partly because average wages would have increased along with K/Y, partly because the required elasticity of substitution is too big for net quantities, and partly because of the differences between book and market capital. The (really great) sections from the book on corporate governance actually suggest something quite different, that there is a gap between cash-flow rights and control rights, and this is why Germany has lower market relative to book values. This political dimension of capital, the difference between the valuation written down in the balance sheet and the real power to dispose of the asset, is something that the institutional view of capital can capture better than the marginal product view. This is, I think, also a fruitful interpretation of what was at stake behind the old capital controversies.

The policy stakes from this are also potentially large, because if it is just a very high substitutability, a variety of labor market reforms are taken off the table, as firms just replace workers with machines if you try to raise the wage.

Second, what is gained by producing long-run data? Why do economic historians do what we do? And why is it important that the series go before 1960? Part of the answer is that we discipline the modelling with useful analogies to a past. History gives us a library of options for understanding the present….

The Gilded Age U.S. North was riven with labor conflict and the South was an apartheid state. U.S. military forces were deployed on U.S. territory more times in the late 19th century than any other period, solely for breaking up strikes and repressing labor conflict. And this points us towards one of the costs of inequality, which is a large amount of social conflict. But note that… you could have a peaceful high inequality society by spending a lot on security guards and gated enclaves (or hired economists to tell people it is all efficient and for the best), but that is still costly, in that social resources are getting unnecessarily spent to repress, persuade, and manage social conflict. We see the same thing in unequal societies like India, South Africa or the gulf countries.

There is a place where the analogy breaks down, however. We live in a world where much more of everyday life occurs on markets…. From health care to schooling to philanthropy to politicians, we have put up everything for sale. Inequality in this world is potentially much more menacing than inequality in a less commodified world, simply because money buys so much more. This nasty complementarity of market society and income inequality maybe means that the social power of rich people is higher today than in the 1920s, and one response to increasing inequality of market income is to take more things off the market and allocate them by other means.

Finally, let me suggest that if we’re aiming for politically hopeless ideas, open migration is as least as good as the global wealth tax in the short run, and perhaps complementary…

If you want to do a serious study of the effects of a positive resource-driven macro productivity shock on a small open fixed exchange-rate economy, here’s your chance!

As Thomas Piketty Day at the University of California at Berkeley comes to an end, we eat Hawaiian poke and sausage-stuffed mushrooms catered from the truly excellent Assemble, and watch the sunset over the Golden Gate from the back patio of the Gourinchas/Fourcade palazzino. We muse on the extent to which Thomas Piketty’s patterns of movement for the rate of profit r minus the economy’s growth rate g are at bottom patterns of changing land valuation, with the fall of European agriculture as a source of wealth and the rise of urban location as the source of wealth.

What was supposed to be a 20-person economics departmental seminar turned into a 400-person public lecture extravaganza–we really should have made him give two talks at least…

This morning’s Daily Piketty brings two especially interesting things: a very nice interview from Matt Yglesias, and PEG pointing out that a Benjamin Disraeli-style conservative would see Piketty as an ally pointing the way to how to successfully implement a market economy that was a genuine opportunity society:

• Matthew Yglesias
• Pascal-Emmanuel Gobry

One thing that I had not fully realized before yesterday:

Continue reading “The Daily Piketty: Thursday Focus: April 24, 2014” →

Ezra Klein: What’s the liberal equivalent of climate denial?: “Kahan… argu[es]… being right is irrelevant.

It’s not whether one gets the answer right or wrong but how one reasons that counts…

A liberal who works backwards from conclusions but happens to believe in climate change is

to be congratulated for being lucky that a position they unreasoningly subscribe to happens to be true…

but nothing more. Here, Kahan makes a serious mistake. Political reasoning doesn’t take place inside our heads. It takes place inside our parties. No one can personally investigate the vast array of issues facing the country. In terms of getting the right answers, the most important decision people make is choosing whom to trust…. Majority parties bear the heavy responsibility of actually getting policy right…. That’s less true for minority parties. They have the luxury of being irresponsible…. But even minority parties have reason to calm the tribal impulses of their members. Winning elections requires winning the support of many voters who aren’t hardcore conservatives or liberals….

Continue reading “Afternoon Must-Read: Ezra Klein: What Is the Liberal Equivalent of Climate Denial?” →

Must-Reads:

1. Paul Krugman: Inequality 1992: “I happened to notice Greg Mankiw citing some bogus claims that the one percent is an ever-changing group, not a persistent elite, and I thought ‘Wait–didn’t we deal with that one long ago?’ And that brought to mind the piece I wrote for the American Prospect 22 years ago, ‘The rich, the right, and the facts.’ (It doesn’t say this on the Prospect site, but it was indeed published in 1992). See the section on income mobility. The truth is that inequality denial is largely a crusade of cockroaches–the same bad arguments just keep coming back. Oh, and I do think that my old piece looks surprisingly contemporary. In particular, I was focused on the one percent even then…” http://prospect.org/article/rich-right-and-facts-deconstructing-income-distribution-debate

2. Mary Daly et al.: Interpreting Deviations from Okun’s Law: “The traditional relationship between unemployment and output growth known as Okun’s law appeared to break down during the Great Recession. This raised the question of whether this rule of thumb was still meaningful as a forecasting tool. However, recent revisions to GDP data show that its relation with unemployment followed a fairly typical cyclical pattern compared with past deep recessions and slow recoveries. The comparatively common patterns suggest that rumors of the death of Okun’s law during the Great Recession were greatly exaggerated.”

3. Richard Mayhew: ObamaCare and Medical Loss Ratios: “The Medical Loss Ratio (MLR) is… the sum of money spent on claims by an insurance company plus the sum of money spent on a few quality improvement and medical management programs divided by the sum of money collected as premiums.  Under Obamacare… small groups and individual policies as a pool have to have an MLR of at least 80%…. This is a consumer protection piece.  Junk insurance and more importantly half-decent benefit packages that are overpriced is no longer practical to sell…. Most of the integrated payer-providers, co-ops and larger non-profits tended to be close to regulated MLR levels in 2012. The big difference has been moving the for-profits pay-out rates much higher. It is changing the business model from looking for reasons post-facto to deny claims towards better medical management and efficiency as there is no longer an ability for a company to spend 30% of revenues on bureaucrats looking to say no…. Mayhew Insurance can move some of the specious No’s to quality improvement and medical management roles, but the plan to have a gold-plated fountain in the lobby has been reconsidered…”

4. Martin Wolf: A more equal society will not hinder growth: “Over the past half century, notes the IMF… inequality has been rising in high-income countries and falling in developing countries… the difference between market and post-intervention inequality in high-income economies is smaller than elsewhere…. Inequality reduces growth. The direct impact of redistribution is negligibly negative. But the indirect effect, via reduced inequality, is beneficial to growth…. Increasing already very high levels of redistribution will harm growth. Yet, below the policy extreme, further redistribution does not harm growth…. Not only does inequality damage growth, but efforts to remedy it are, on the whole, not harmful. These are just statistical relationships derived from data that cover a large number of heterogeneous countries. Nonetheless, the findings suggest that trade-offs between redistribution and growth need not be a big worry…”

5. Suresh Naidu: Notes from Capital in the 21st Century Panel: “There is a ‘domesticated’ version of [Piketty’s] argument… a story about technology and the world market making capital and labor more and more substitutable over time, and this is why r does not fall very much as wealth accumulates…. This is story that is told to academic economists, and it is plausible, at least on the surface. There is another story… that the rate of return on capital is set much more by institutions, norms and expectations than by supply and demand of the capital market…. I think the production approach is less plausible… because housing [with land] plays such a large role… average wages would have increased along with K/Y [if factors are paid marginal products]…. The (really great) sections from the book on corporate governance actually suggest something quite different… a gap between cash-flow rights and control rights…. This political dimension of capital, the difference between the valuation written down in the balance sheet and the real power to dispose of the asset, is something that the institutional view of capital can capture better than the marginal product view. This is, I think, also a fruitful interpretation of what was at stake behind the old capital controversies…. If it is just a very high substitutability… labor market reforms are… off the table, as firms just replace workers with machines if you try to raise the wage…”

Continue reading “Things to Read on the Afternoon of April 23, 2014” →

It’s Piketty Day here at Berkeley. So let me note that Robert Solow has another good Piketty review:

Robert Solow: ‘Capital in the Twenty-First Century’ by Thomas Piketty, Reviewed: “Inequality… has been worsening…

the widening gap between the rich and the rest…. A rational and effective policy for dealing with it… will have to rest on an understanding of the causes… the erosion of the real minimum wage; the decay of labor unions and collective bargaining; globalization and intensified competition from low-wage workers in poor countries; technological changes and shifts in demand that eliminate mid-level jobs…. Each of these candidate causes seems to capture a bit of the truth. But even taken together they do not seem to provide a thoroughly satisfactory picture…. They do not speak to the really dramatic issue: the tendency for the very top incomes—the “1 percent”—to pull away from the rest of society. Second, they seem a little adventitious, accidental; whereas a forty-year trend common to the advanced economies of the United States, Europe, and Japan would be more likely to rest on some deeper forces….

Continue reading “Piketty Day Here at Berkeley: The Honest Broker for the Week of April 26, 2014” →

@Steen_Jakobsen:

Fed – Realise we have been looking for higher rates in 2 yrs time every year since 2008!

It does all hinge on how rapidly our cyclical unemployment is turning into structural unemployment. If it is–if those out the labor force are never coming back and will never downward pressure on the inflation rate–then this time is in different, and we are likely to see the Federal Reserve raising short-term safe interest rates to 2% per year by early in 2017. More likely given everything we have seen, however, is that come 2015 inflation is still showing no significant signs of persistently breaching 2% per year, and so there will be no excuse for raising short-term safe interest rates. Thus this pattern of always expecting higher interest rates in two years will continue.

You would think that at some point the Federal Reserve would start seriously thinking about me for a Volcker or Roosevelt-like regime change. But no…

Mary Daly et al.: Interpreting Deviations from Okun’s Law: “The traditional relationship between unemployment and output growth…

…known as Okun’s law appeared to break down during the Great Recession. This raised the question of whether this rule of thumb was still meaningful as a forecasting tool. However, recent revisions to GDP data show that its relation with unemployment followed a fairly typical cyclical pattern compared with past deep recessions and slow recoveries. The comparatively common patterns suggest that rumors of the death of Okun’s law during the Great Recession were greatly exaggerated.

Richard Mayhew: ObamaCare and Medical Loss Ratios: “The Medical Loss Ratio (MLR) is…

the sum of money spent on claims by an insurance company plus the sum of money spent on a few quality improvement and medical management programs divided by the sum of money collected as premiums.  Under Obamacare… small groups and individual policies as a pool have to have an MLR of at least 80%…. This is a consumer protection piece.  Junk insurance and more importantly half-decent benefit packages that are overpriced is no longer practical to sell…. Most of the integrated payer-providers, co-ops and larger non-profits tended to be close to regulated MLR levels in 2012. The big difference has been moving the for-profits pay-out rates much higher. It is changing the business model from looking for reasons post-facto to deny claims towards better medical management and efficiency as there is no longer an ability for a company to spend 30% of revenues on bureaucrats looking to say no…. Mayhew Insurance can move some of the specious No’s to quality improvement and medical management roles, but the plan to have a gold-plated fountain in the lobby has been reconsidered…

Must-Reads:

1. David G. Blanchflower and Adam S. Posen: Wages and Labor Market Slack: Making the Dual Mandate Operational: “We undertake the first econometric analysis of the impact of rises in inactivity (1-LFPR) on wages in the US economy. To the degree that the rise in unemployment in the US is structural… wages should increase because of the negative shock to labor supply…. In contrast, if the rise in inactivity is largely cyclical, labor markets will see downward pressure on wages…. We find… inactives exert additional downward pressure on wages over and above the unemployment rate itself…. This pattern holds across recent decades in the US data, and the relationship strengthens in recent years when variation in participation increases. Our analysis is based on observations by state and year…. The implication… is two-fold. First, low participation is indeed an additional measure of labor market slack…. A substantial portion of those American workers who became inactive should… be expected to spring back into the labor market if demand rises to create jobs…. Second, wage inflation should be considered as the primary target of FOMC policy with respect to the employment stabilization side of the Fed’s dual mandate, at least for now…”

2. Even Soltas: Yes, the Pay Gap Persists: “Mark Perry and Andrew Biggs… at the American Enterprise Institute argued… that no pay gap exists between men and women after you control for the different choices they make…. I took issue…. I found a persistent pay gap on the order of 4 to 10%…. And I also wrote that it’s probably wrong to take all these [controls] as unaffected by pressure or discrimination. Perry responded… that the pay gap might persist because of gender differences in risk tolerance…. [and] because professional athletes and musicians are paid well and tend to be men. Sadly, his argument makes no sense…. 1. My regression has ‘fixed effects’ for occupation. This means that it fully accounts for any occupation-level compensating differentials for risk. So everything Perry and Biggs write about men dying in forestry, or what have you–yeah, my analysis accounts for that. That’s what a fixed effect is. 2. My analysis is of workers paid hourly wages. Professional athletes and musicians are not hourly workers…. Look, I understand why Perry and Biggs have to respond…. They misrepresented the research consensus on the gender pay gap in a major newspaper, and I called them out on it…. The 23-percent number reflects more than discrimination. But if they are going to try to explain away the pay gap, they’re going to need to try a bit harder than this…”

3. Ryan Avent: Inequality: “Capital” and its discontents: “Piketty’s magnum opus is certainly not without its weaknesses, but the quality of the criticism it has attracted provides a sense of the strength of the argument he makes. Consider Clive Crook…. He writes: ‘There’s a persistent tension between the limits of the data he presents and the grandiosity of the conclusions he draws.’ The line doubles as a pleasingly apt description of Mr Crook’s review. He is unhappy…. Why… doesn’t Mr Piketty say that r must be significantly above g to generate the expected divergence, Mr Crook complains…. You don’t even have to read hundreds of pages to get the qualification Mr Crook wants; you can start with the page on which r>g is first mentioned…. Crook then goes on to present his evidence: ‘The trouble is… capital-to-output ratios in Britain and France in the 18th and 19th centuries… were stable’…. Piketty is not arguing that r>g means that rising inequality is inevitable. Indeed, that is close to the precise opposite of his argument, which is that r>g is a force for divergence… which has at times been countered… and which can and should be similarly countered in future. Presumably, if charts of stable capital-income ratios in the 19th century provided a devastating rebuttal to his story, Mr Piketty would not have included them so prominently in the book. I think he must have imagined that readers would look at the text around them as well…”

Continue reading “Things to Read on the Morning of April 22, 2014” →