As the U.S. rural economy changes, social safety net programs buoy rural residents above the poverty line

Posted on by Maria Monroe
Glouster, Ohio, seen here on Oct. 22, 2017, has seen better days but is still standing.

Over the past few years, rural poverty in the United States has been described in gripping best-sellers, through the words of politicians, and on op-ed pages. In a new Washington Center for Equitable Growth working paper released today, James Ziliak, the director of the University of Kentucky’s Center for Poverty Research, adds to the discussion with a rich set of descriptive statistics. He deploys these numbers to argue that, in the absence of a tight labor market, social safety net programs are one of the most effective tools we have for ameliorating rural poverty.

Ziliak frames his discussion around the National Advisory Commission on Rural Poverty’s 1967 report, “The People Left Behind,” issued in an era during which rural poverty rates were double those of urban rates, and policymakers had healthy appetites for new poverty eradication strategies. Ziliak documents what has changed and what has stayed the same since the commission issued its report, showing that things are not getting better. Though urban poverty rates have caught up with rural rates, levels of poverty in rural areas have stagnated or, among some demographic groups, grown since 1967. There has been a striking increase in poverty among male-headed rural households since the end of the 1970s, no matter the head of household’s level of education. (See Figure 1.)

Figure 1

Poverty rates in similar households headed by women are even higher: Rates among rural households headed by women without a high school diploma hover around 50 percent. (See Figure 2.)

Figure 2

Several factors account for the persistence of rural poverty over time, but one important driver is the paucity of opportunities to work. Slow job growth in traditional rural industries and changing job qualifications leave low-educated rural residents with fewer options than in years past. Strikingly, since 1967, low-educated rural men have experienced a precipitous drop in employment rates. (See Figure 3, which focuses changes in men’s experiences because women’s entry into the labor market across the United States during this period makes it hard to interpret changes in women’s employment levels during this time.)

Figure 3

Ziliak argues in his working paper that even though the picture of U.S. rural poverty is stark in the face of declining labor market conditions, rural poverty could look even worse than it does. Despite spells of unemployment and depressed wages, some rural families that would have experienced poverty due to market forces are buoyed above the poverty line by social safety net programs. For many families facing the vagaries of the labor market, the tax and transfer system makes an appreciable difference. Programs such as unemployment insurance, the Earned Income Tax Credit, the Supplemental Nutrition Assistance Program, and Medicaid keep the lights on, bellies full, and children healthy.

Ziliak’s argument is borne out by the numbers. Figure 4 shows that during the same period in which rural men’s labor force participation was declining (as shown in Figure 2) and their household poverty rates were increasing (as shown in Figure 1), there was also a monotonic increase in the number of rural households headed by men buoyed above the federal poverty threshold because of income from the tax and transfer system.

Figure 4

For households headed by women, too, the numbers bear out the importance of the tax and transfer system. While rural poverty for households headed by women has persisted over the past 50 years (as seen in Figure 2), an appreciable percentage of women’s households have maintained income levels above the federal poverty threshold, thanks to income transfers. As seen in Figure 5, between 1979 and 2015, at least 1 in 10 households headed by rural women without a bachelor’s degree were pushed above the poverty threshold by social safety net programs. In the aftermath of the Great Recession, this ratio was 1 in 5 among rural households headed by women without high school diplomas.

Figure 5

Turning to the current policy landscape, Ziliak discusses policy proposals that would attach work requirements to more of these transfer programs. He suggests that in rural America, work requirements are misguided, remarking that they are “a blunt policy instrument because the demand for labor is lacking in many rural communities, especially those more distant from urban centers.”

In fact, where jobs are scarce and the social safety net is all that stands between people and poverty, work requirements would mean upticks in poverty rates. In a companion piece to be released by the Aspen Institute on Monday, Ziliak argues that policymakers should look to other policy solutions. He discusses the potential of policies that help job-seekers to relocate, though he acknowledges there may be some limitations to this strategy in light of changing labor markets in urban areas. He also suggests that assistance with transportation costs and improved broadband access could prove to be useful tools for matching rural residents to work opportunities.

These thorny policy questions about how to best bring meaningful work opportunities to members of rural communities in the United States is an ongoing policy discussion that has attracted attention across Washington, D.C. policy circles. Advocates and analysts are re-evaluating whether and how place-based policies might meet the needs of rural communities, especially in light of new research showing that encouraging migration to areas with tighter labor markets might not be a feasible policy response. While politicians and pundits debate the long-term path forward, Ziliak’s work shows that right now, safety net programs are playing a crucial role in keeping rural families from experiencing extreme want. Policymakers considering job requirements and other policy changes that would make benefits more difficult to access should keep Ziliak’s findings in mind as they weigh their options.

Posted in Uncategorized

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

Posted on by Maria Monroe

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.”
Posted in Uncategorized

Competitive Edge: Revitalizing U.S. antitrust enforcement is not simply a contest between Brandeis and Bork—look first to Thurman Arnold

Posted on by Maria Monroe

Antitrust and competition issues are receiving renewed interest, and for good reason. So far, the discussion has occurred at a high level of generality. To address important specific antitrust enforcement and competition issues, the Washington Center for Equitable Growth has launched this blog, which we call “Competitive Edge.” This series features leading experts in antitrust enforcement on a broad range of topics: potential areas for antitrust enforcement, concerns about existing doctrine, practical realities enforcers face, proposals for reform, and broader policies to promote competition. Jonathan B. Baker has authored this month’s contribution.

The octopus image, above, updates an iconic editorial cartoon first published in 1904 in the magazine Puck to portray the Standard Oil monopoly. Please note the harpoon. Our goal for Competitive Edge is to promote the development of sharp and effective tools to increase competition in the United States economy.

Jonathan B. Baker

Growing market power in the United States today puts a spotlight on our nation’s antitrust laws—the critical policy tool for restoring competition where it is lacking—from airlines and brewing to hospitals and dominant online platforms. But how can these laws be made more effective in this environment? The best guide from the past is Thurman Arnold, President Franklin D. Roosevelt’s longest-serving antitrust enforcer.

Arnold helped shape a political consensus for effective antitrust enforcement. Yet his singular contribution is often overlooked in the present-day debate over antitrust’s future. That achievement—the embrace of an antitrust enforcement playbook for supervising large firms that is competition-promoting and economic growth-enhancing—is endangered today.

To put Arnold’s achievement in perspective, let me briefly summarize more than a century of U.S. antitrust history. For decades after 1890—the year Congress enacted the Sherman Antitrust Act—antitrust laws were enforced inconsistently, and government policy toward large firms was the subject of bitter political debate. That changed after Arnold took the helm of the Justice Department’s Antitrust Division toward the end of the New Deal, and the so-called structural era of U.S. antitrust history began to take shape. The strong rules put in place beginning in the 1940s were relaxed in the late 1970s and 1980s, when antitrust doctrine entered its “Chicago school” era, named after the conservative proponents of this new approach who were associated with the University of Chicago.

To a considerable extent, the present-day debate over antitrust’s future is tied to competing accounts of what happened in the 1940s and 1980s. Progressives emphasize the ideas of antitrust advocate and Supreme Court Justice Louis Brandeis, while conservatives highlight the views of Chicago alumnus, law professor, and appellate Judge Robert Bork. Both narratives neglect Arnold’s critical achievement and relevance for the current debate.

A prominent progressive account interprets the tough antitrust rules put in place during the structural era, including their hostility to all but the smallest mergers, as a triumph for Brandeis snatched away three decades later by Bork. In this story, economic policy in the 1940s represents what Progressive era reformers would call a victory of “the people” over “the interests.” In this view, after decades of bitter political debate over the role of large firms in the U.S. economy—what Brandeis termed a “curse of bigness”—was checked by antitrust and regulation.

This progressive narrative assimilates the development of modern antitrust doctrine into a broader chronicle of 20th century progressive political achievements that also features an expansion of political rights, greater inclusion of historically disadvantaged groups into mainstream political and economic life, and increased economic security for the less fortunate.

There is a basis for this narrative. Mid-20th century courts saw antitrust laws as advancing social and political goals—particularly Brandeisian concerns to protect democracy from the outsized influence of concentrated economic power and to ensure an opportunity for small businesses to compete—along with pursuing economic goals such as preventing firms with market power from exploiting consumers and other victims. Occasionally, monopolies were broken up. In much of the communications, energy, financial services, and transportation industries, direct economic regulation of big business, another of Brandeis’ enthusiasms, supplanted and supplemented antitrust law.

The competing conservative account interprets the 1940s very differently. The Chicago school maintains that populist antipathy to big business was taken too far, but thankfully corrected beginning in the late 1970s. In this view, Chicagoans such as Bork preserved economic vitality by freeing markets from excessive antitrust enforcement and economic regulation.

There is a basis for this narrative, too. In response to the Chicago critique, even proponents of robust antitrust enforcement such as Robert Pitofsky acknowledged that the mid-20th century antitrust rules had chilled the pursuit of efficiencies, and that some change of course would be beneficial.

Yet both the progressive and conservative accounts leave out an important factor. It is a mistake to view antitrust policy as simply a contest between Brandeis and Bork over whether competition policy should tilt toward consumers, workers, and farmers, on the one hand, or big business on the other. A third and better interpretation understands 1940s antitrust as something new—the reflection of an informal political consensus that rejected extensive economywide economic regulation, on the one hand, and laissez-faire deregulation on the other—in favor of close scrutiny of the competitive implications of the conduct of large firms in concentrated markets.

This informal political consensus meant that antitrust law became a positive-sum policy, focused on fostering economic growth and productivity rather than just a zero-sum distributional choice. That consensus was politically acceptable so long as the gains from making markets competitive were shared across the economy.

Thurman Arnold helped give birth to this new approach as the leader of the Department of Justice Antitrust Division from 1938 through 1943. Arnold ramped up enforcement, but his program was not a Brandeisan mix of deconcentration and regulation. “Unlike the Brandeisians,” the historian Ellis Hawley wrote, “Arnold never seemed greatly concerned about the mere possession of economic power or the social evils of bigness per se.” Arnold accepted that large firms were desirable “as long as they were efficient and passed along the savings to consumers.”

Arnold targeted industrywide problems with multiple lawsuits, which were often resolved through consent settlements. He also urged the courts to enforce tough checks on the anticompetitive conduct of large firms in concentrated markets. Arnold’s approach was ratified in key judicial decisions governing price-fixing and monopolization and by Congress when it enacted new merger legislation. “By linking antitrust to consumer interests, and in defining consumer interests as he did,” biographer Spencer Weber Waller explains, “Arnold set the stage for modern antitrust.”

Achieving the consensus that Arnold brokered was far from inevitable. For decades, political conflict over the role of large firms in the economy seemed impossible to resolve. The recognition that the U.S. political system reached an informal bargain explains why political conflict over large firms died down after the 1940s, to the point where historian Richard Hofstadter, writing in 1964, described antitrust as “one of the faded passions of American reform.”

The benefits of antitrust enforcement as an alternative both to widespread economic regulation and to the threat of market power posed by laissez-faire economic policies have long been understood, but the full import of Arnold’s accomplishment has not been widely recognized. Modern antitrust law is a neglected but highly consequential achievement of the World War II generation. The achievement stands alongside more heralded developments in economic policy, particularly international economic institutions and social safety net policies, in helping to construct a society that captured and shared broadly the benefits of economic growth. These developments collectively supported the American Dream of greater economic opportunity and better living standards.

From this perspective, the reworking of antitrust law that began in the late 1970s was a response to the economic problems of that later period—a reworking that sought to improve antitrust enforcement without rejecting the hard-won political consensus achieved decades earlier. Bork and the Chicagoans bet that greater efficiencies from relaxing antitrust rules would more than compensate for the increased risk that firms would exercise market power.

We now know that the Chicagoans lost their bet. Since the implementation of Chicago-inspired antitrust deregulation, market power has widened but without accompanying long-term economic welfare gains. Instead, economic dynamism and the rate of productivity growth have been declining, and growing market power has contributed to a skewed distribution of wealth.

With the benefit of hindsight, it is evident that the Chicago-oriented antitrust rules are not up to the task of controlling market power. Beyond the direct economic harms, the greater the license to exercise market power accorded to big businesses, the greater the threat that the political consensus for modern antitrust enforcement, formed in the 1940s, will collapse—setting up a divisive political choice between laissez-faire economic policies and an extensive regulatory response. Whichever side wins, this political conflict would be a setback. It would mark the end of Arnold’s competition-promoting and economic growth-enhancing approach to supervising large firms.

Arnold’s accomplishment teaches that without broad political acceptance, antitrust law cannot succeed in sustaining shared economic growth by fostering competition. Growing market power now threatens to undermine political support for antitrust enforcement, and with it, a notable achievement of Arnold and the Greatest Generation. To protect that achievement, restore competition, and help revitalize the American Dream, we must strengthen antitrust rules today.

Restoring competition requires stronger antitrust rules than those adopted four decades ago. The Chicago era rules have failed to deter anticompetitive conduct adequately, in part because they rely on what turned out to be erroneous assumptions about markets and institutions. But restoring competition does not mean returning to the rules established in Arnold’s time. The structural era rules were not created for an information technology economy, and their revival would excessively chill efficiencies.

Instead, enforcers and courts should bring modern economic thinking to bear. A recent collection of articles in The Yale Law Journal and my forthcoming book rely on economic analysis to identify enforcement initiatives to pursue and presumptions to adopt to make antitrust more effective in controlling market power. With modern economics as a guide, antitrust can restore a competitive economy.

—Jonathan B. Baker is a research professor of law at American University’s Washington College of Law. He is the author of the forthcoming book The Antitrust Paradigm: Restoring a Competitive Economy.

Weekend Reading “What About a Wealth Tax?” Edition

Posted on by Maria Monroe

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

This week, Greg Leiserson released a backgrounder regarding net worth taxes and how they might work in the United States. He discusses how wealth is currently measured and taxed today, and what such a potential wealth tax would look like in the United States. He indicates that a progressive tax on net worth would impose a burden on only the wealthiest families while increasing government revenue.

Brad DeLong compiles his most recent worthy reads on equitable growth both from Equitable Growth and outside press and academics.

Links from around the web

Economists Emmanuel Saez and Gabriel Zucman at the University of California, Berkeley, weighed in on proposal by Representative Ocasio-Cortez (D-NY) for a proposed 70 percent rate for incomes above $10 million. Saez (an Equitable Growth Steering Committee member) and Zucman (an Equitable Growth grantee) dove into the history of high tax rates in the United States for the top income earners and explained that the reason for high rates is not to gain large government revenue. Rather, it is to prevent the establishment of an oligarchical system ruled by and for the wealthy. [nyt]

The New School’s Teresa Ghilarducci discussed the unequal trends in wage growth over the past decade. She explained that in case of the banking industry, average pay increased by 3 percent, yet executives experienced a 7 percent increase while their employees saw a -2 percent change in wages. This low pay can be explained by growing monopsony power, in which employers are the sole source of employment for their workers and thus can set wages low. Ghilarducci directs readers to Equitable Growth’s Kate Bahn for more technical analysis of growing monopsony power. [forbes]

Noah Smith at Bloomberg recapped some of the antitrust and competition papers presented at this year’s AEA Annual Conference in Atlanta. The research made the general call for greater enforcement of the antitrust laws in order to promote better wages and less market concentration, including one by Equitable Growth working paper contributor’s Ioana Marinescu and Herbert Hovenkamp, who look at a new approach to antitrust enforcement by shifting the focus of the courts and regulators on to the power that mergers give companies to suppress wages. [bloomberg]

Barry Ritholtz at Bloomberg examined a recently published paper by Equitable Growth Grantee Arindrajit Dube, Attila Lindner, and Ben Zipperer that looks at minimum wage increases across the United States between 1979 and 2016. They found that low-wage workers saw a 7 percent increase in wages after a minimum-wage law was enacted with little changes in employment due to job losses. Ritholtz argues that low wages fail to increase productivity but that a potential $15 minimum wage will have little or no negative impact on total employment. [bloomberg]

Dylan Matthews at Vox looks into research surrounding the possibility of baby bonds, which are savings accounts of $1,000 or $,2000 that would be given to newborn babies that can appreciate to more than $10,000 by the time they are 18 years old. Naomi Zewde, a postdoctoral researcher at Columbia University, found that the median new worth ratio between white and black young adults was 15:9, meaning white young adults are almost 16 times richer than their black counterparts. If a baby bond policy were enacted, it could narrow that gap to 1:4. [vox]

Friday Figure

Figure is from Equitable Growth’s, “Wealth taxation: An introduction to net worth taxes and how one might work in the United States”

Posted in Uncategorized

Brad DeLong: Worthy reads on equitable growth, January 18–24, 2019

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. Submit! The deadline for Equitable Growth’s Request for Proposals is January 31!

Worthy reads not from Equitable Growth:

  1. Read Pedro Nicolaci da Costa, “The U.S. Job Market Doesn’t Feel so Hot Despite the Low Unemployment Rate,” in which he writes: “Workers need the economy to stay hot so they can begin to see the dividends of high growth … There are several reasons a purportedly booming U.S. economy doesn’t feel like much of a boon to millions of American workers, chief among them the startling lack of wage growth many have experienced over the past four decades … A business- and bank-friendly mindset at the Federal Reserve, whose top officials spend a lot more time with their high-flying Wall Street and industry contacts than with workers and community leaders, deepens this imbalance … Because of the Fed’s proximity to its business contacts, it tends to think of workers as labor costs (not investments in human capital) and wages as inflation (not improvements in standards of living). This colors the Fed’s definition of ‘full employment,’ making policymakers easily swayed by dubious claims from business executives about chronic labor shortages—made without any contention about why wages are not rising on a sustained basis.”
  2. Dani Rodrik joins those who believe that President Donald Trump and his administration have too little competence and too childish an understanding of the world to do substantial, persistent damage to equitable growth. I would like to believe him, but I worry that Italy under former Prime Minister Silvio Berlusconi may be a relevant case that is a counterexample. As I see it, Berlusconi’s kleptocratic and chaos-monkey nature robbed Italy of a decade of economic growth. Read Dani Rodrik, “Trump’s Trade Game,” in which he writes: “Though Trump’s unilateralism and mercantilism are bad … one should not exaggerate … If other countries do not overreact—and, so far, they have not—the consequencesfor world trade will remain manageable … The shift in global demand from goods to (less tradable) services; the increased skill-intensity of manufacturing … automation … reshoring … China’s transition … to domestic-demand-led growth … are likely to have a larger impact on trade than Trump’s bluster ever could.”
  3. Read Oliver Blanchard’s extremely good American Economic Association Presidential Address, “Public Debt and Low Interest Rates.” The takeaway: Fear of government debt should be a second-order consideration in a time of low interest rates. And I would go further: Because problems created by government debt can be dealt with at low societal cost via financial repression, it should be not a second-, but a third- or fourth-order consideration. Blanchard, in his address, makes this important point about “new theoretical foundations for how to think about fiscal policy and debt, which will stimulate the policy research agenda for the profession for years to come.”
  4. The first truly good conceptual framework I have seen from a journalist on where the future of employment growth may lie, based on the work of David Autor. Read “The Future Of Work,” in which the NPR reporter Greg Rosalsky writes: “Three trends … help explain where employment … may be headed … ‘Frontier work’ … Jetson jobs … all about new technology … Supervisor, Word Processing (1980); Robotic Machine Operator (1990); Chief Information Officer (2000); Technician, Wind Turbines; and Intelligence Analyst (2010) … ‘Wealth work … jobs that primarily provide fancy-schmancy services to the rich … Hypnotherapist and Gift Wrapper (1980), Fingernail Former and Marriage Counselor (1990), Mystery Shopper, Horse Exerciser—our personal favorite—and Barista (2000); Oyster Preparer and Sommelier (2010) … ‘Last mile’ … what’s left after machines have eaten the tasks … the atrophied husk remaining of a job when most of it has been automated … an airline ticket agent. A couple of decades ago … greet customers, help check baggage, and assign seats on the plane. Now … throwing bags on a conveyor belt and checking IDs. And so you can think of that as sort of the last mile, the last little bit of the job that remains.”
  5. The invariable rule in America—except for African Americans—is that it takes one, or at most two, generations for immigrants to essentially converge to white native-born outcomes as far as the labor market (but not wealth accumulation!) is concerned. It was true for the Famine Irish, write William J. Collins and Ariell Zimran in “The economic assimilation of the Famine Irish in America.” They write: “Negative sentiment toward immigrants is often based on fears about their ability to integrate into economic, political, and social institutions. This column analyses the impact of the influx of Irish immigrants into the U.S. in the 19th century. It shows that the children of immigrants had assimilated in terms of labour market outcomes within one generation, providing some perspective for the current debate about immigration policy.”
  6. As Karl Marx wrote in the middle of the 19th century, imbalances in pre-capitalist economies do not produce aggregate demand crises and collapses. Why don’t they? Because Pharaoh can always command that another pyramid be built, the king can always set out on another crusade, and the bishop can always build another cathedral. The expenditures that provide employment for those not producing the consumption-goods-in-demand only have to make profit-and-loss sense under the capitalist mode of production. Capitalist economies suffer Hayek-Minsky crises when deluded financial markets suddenly recognize that they have been overoptimistic, have overinvested, and need to shift investment-goods production back down, not to normal but way below normal. And the collapse comes as near-universal bankruptcy and financial disruption prevents any such smooth expenditure-shifting. That Hayek-Minsky overinvestment crisis is what Paul Krugman, I, and other China pessimists have been fearing would happen for two decades now. But perhaps socialism with Chinese characteristics is insufficiently capitalist for that Hayek-Minsky logic to apply, and Paul and I and others should have been paying more attention to Uncle Karl. Read Paul Krugman, “Will China’s Economy Hit a Great Wall?,” in which he writes: “I issued a warning … The Chinese economy … is, I wrote, ’emerging as a danger spot’ … Unfortunately [that] was more than 6 years ago. And it’s not just me. Many people have been predicting a China crisis for a long time, and it has kept on not happening. But now China seems to be stumbling again. Is this the moment when all the prophecies of big trouble in big China finally come true? Honestly, I have no idea. On one side, China’s problems are real. On the other, the Chinese government … has repeatedly shown its ability and willingness to do whatever it takes.”
  7. This is a brilliant paper by Matthew Smith, Danny Yagan, Owen M. Zidar, and Eric Zwick, “Capitalists in the Twenty-First Century,” but I have a worry: Those at the upper tail of the income distribution are, to a substantial degree, those whose (a) broadly construed portfolios are ludicrously risky and who (b) happen to be unusually lucky. I am not sure the authors have properly accounted for luck here. Read their new paper, in which they write: “Entrepreneurs who actively manage their firms are key for top income inequality. Most top income is nonwage income, a primary source of which is private business profit. These profits accrue to working-age owners of closely-held, mid-market firms in skill-intensive industries. Private business profit falls by three-quarters after owner retirement or premature death. Classifying three-quarters of private business profit as human capital income, we find that most top earners are working rich: They derive most of their income from human capital, not physical or financial capital. The human capital income of private business owners exceeds top wage income and top public equity income. Growth in private business profit is explained by both rising productivity and a rising share of value added accruing to owners.”
Posted in Uncategorized

Wealth taxation: An introduction to net worth taxes and how one might work in the United States

Posted on by Maria Monroe

Overview

Increasing wealth inequality has spurred calls for the adoption of a federal net worth tax in the United States. This brief provides an introduction to net worth taxes, also referred to as wealth taxes. It summarizes how a net worth tax works, reviews the revenue potential of such a tax, and describes the distribution of the economic burden that would be imposed.

Download File
Wealth taxation: An introduction to net worth taxes and how one might work in the United States

What is wealth?

A family’s wealth is the total value of all the assets members own less their debts, which are also known as liabilities. Wealth is a measure of the economic resources a family controls at any given time.

Assets can be financial or nonfinancial. Bank accounts and retirement savings plans such as 401(k) plans are common financial assets. Cars and houses are common nonfinancial assets. Home mortgages are the largest source of debt for U.S. households. High-wealth families own assets that are much less commonly held by the broader population. These less-common assets include ownership stakes in noncorporate businesses, complex financial products such as investments in hedge funds or private equity funds, and valuable works of art. See Table 1 for a breakdown of U.S. household wealth as estimated by the Federal Reserve’s Financial Accounts of the United States in 2016.1

Table 1

What is a net worth tax?

A net worth tax is an annual tax on the wealth a family owns. A key feature of net worth taxes is that the tax is imposed on the people who ultimately own assets, not intermediaries. Notably, this means that a business does not pay tax on its assets; instead, shareholders pay tax on the value of the business, which includes the value of its assets.2 Net worth taxes are sometimes referred to as wealth taxes, but a net worth tax is only one way of taxing wealth. Property taxes, capital gains taxes, and corporate taxes are also taxes on wealth.

Two key design choices for a net worth tax are whose wealth to tax and what kinds of wealth to tax. Member nations of the Organisation for Economic Co-operation and Development that impose a net worth tax today or did so in the past have typically exempted most families from the tax by providing a generous exemption. Families pay the tax only if their wealth exceeds the exemption. A net worth tax at a 1 percent rate with a $1 million exemption, for example, would charge a family a tax equal to 1 percent of their wealth above $1 million. Such an exemption would have exempted more than 90 percent of U.S. tax units in 2016.3 (See Table 2.) A family with $2 million of wealth would owe $10,000 in tax, for an effective rate of 0.5 percent on their total wealth. Just as with income taxes, net worth taxes may have a flat rate or a progressive rate structure.

Table 2

Net worth taxes may also offer preferences for assets such as owner-occupied real estate or retirement savings. While these preferences may be motivated by reasonable policy concerns, tax preferences are generally not the best approach to addressing them. As with any other tax, policymakers should aim for a broad base to minimize the burden of the tax for any desired level of revenue. But to avoid unnecessary complexity, net worth taxes typically provide generous preferences or exemptions for consumer durables such as home furnishings.

How is wealth taxed in the United States today?

The United States does not have an explicit net worth tax, but both the federal government and state and local governments tax wealth in a number of ways under current law. Perhaps most notably, state and local governments in the United States rely on property taxes to an unusual extent among OECD countries.4 Property taxes are taxes on the value of a specific asset—real estate. In contrast to net worth taxes, property taxes do not subtract the value of the mortgage from the value of the asset in computing the tax liability. The federal government also taxes capital gains, dividends, corporate income, income attributable to pass-through businesses, and estates—all of which are taxes on wealth.

There are important economic relationships between a net worth tax and income taxes. Assets have value primarily due to the stream of income they are expected to generate or could generate in the case of owner-occupied housing. Net worth taxes and income taxes differ in terms of the timing of tax payments, how they apply to uncertain income streams, and how they apply to complex business structures, among other dimensions.

A major weakness of the federal government’s current approach to taxing wealth is that capital gains are realized only when an asset is sold. Increases in the value of an asset are ignored for tax purposes until the owner sells the asset. Thus, asset owners can choose when to pay tax because they can choose when to sell assets. One reason policymakers may find a net worth tax attractive is that it addresses this limitation of the current system.

One factor that may partially explain why the United States does not have a federal net worth tax is that there is debate as to the constitutionality of a federal net worth tax. But the unresolved nature of this debate is no reason to foreclose discussion of the merits of the tax, and there are compelling reasons such a tax should be upheld.5

Who would bear the burden of a net worth tax?

A net worth tax applied to wealthy families in the United States would be highly progressive. The economic incidence of the tax—meaning the economic burden of the tax, which is conceptually distinct from the legal obligation to pay the tax—would lie primarily on the owners of wealth.6 Taxing wealth ownership (as a net worth tax does) rather than asset use (as business taxes indirectly do) allows for superior targeting of the burden of the tax on wealth owners.

The distribution of wealth itself in the United States is highly skewed. The wealthiest 1 percent of families holds about 40 percent of all wealth, and the wealthiest 5 percent holds 65 percent of all wealth.7 (See Figure 1.)

Figure 1

Families with high wealth relative to their income will bear relatively more of the burden of a net worth tax than an income tax. Families with low wealth relative to their income will bear relatively less. A net worth tax, or other means of taxing wealth, would thus generally shift the tax burden not only from low-wealth families to high-wealth families, but also from younger families to older families and from families of color to white families.

How much revenue could a net worth tax raise?

The revenue potential of a net worth tax in the United States is large. The wealthiest 1 percent of families holds $33 trillion in wealth, and the wealthiest 5 percent holds $57 trillion in wealth.8

Estimates of the revenue raised by a net worth tax are highly uncertain, as they depend on both the detailed specification of the tax and assumptions about how families would respond to the tax, for which little guidance is available in the academic literature. One important ingredient in this estimation is the elasticity of taxable wealth, which summarizes the various behavioral responses to the tax. Those responses affect the amount of wealth that taxpayers would report on their tax returns. To reduce their net worth tax liabilities, high-wealth individuals might, for example, hide wealth abroad or increase their spending (thus reducing their wealth).

Probably the most significant challenge in implementing a net worth tax is that determining tax liabilities requires a valuation for all of the assets subject to the tax. In many cases, it is straightforward to generate these valuations. Publicly traded securities, for example, have readily available market valuations. Local governments regularly value real estate for property taxes, though not without dispute and subject to rules that artificially alter the value in some jurisdictions. But other assets are harder to value such as ownership stakes in a closely held business. Owners of a closely held business would have a financial incentive to undervalue them to avoid paying tax. This type of response would be reflected in an estimate of the elasticity of taxable wealth and thus also in a revenue estimate.

Why might policymakers adopt a net worth tax?

Taxes impose burden to raise revenues. In developing tax legislation, policymakers should evaluate the change in burden and the change in revenues that would result.9 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.

Posted in Uncategorized

Weekend reading: “Regional inequalities” edition

Posted on by Ed Paisley

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

 

This week, Equitable Growth released the next episode in our “In Conversation” series, in which our Executive Director and Chief Economist Heather Boushey discusses the research of prominent economists and how their research relates to contemporary policy debates on inequality and growth. In this edition, Heather talks to Princeton University Professor of Economics, Public Policy, and Finance Atif Mian on the role of debt in the most recent U.S. Recession and boom-and-bust cycles generally as well as some potential negative consequences of the contemporary low-interest-rate environment.

Equitable Growth Computational Social Scientist Austin Clemens examines recent progress toward consensus on measuring U.S. income inequality. Building off of a panel discussion at the recent ASSA Annual Meeting of the American Economic Association, Austin compares the measures of inequality used by the Congressional Budget Office, by Gerald Auten at the U.S. Treasury Department’s Office of Tax Analysis and David Splinter at the congressional Joint Committee on Taxation, and by Thomas Piketty at the Paris School of Economics and Emmanuel Saez and Gabriel Zucman at the University of California, Berkeley.

In his weekly “Worthy Reads” column, UC-Berkeley economist and Equitable Growth columnist Brad Delong highlights recent research and writing in economics from Equitable Growth and other economists. In addition to pointing to articles by economist Kate Bahn and Senior Policy Advisor Liz Hipple on empirically backed labor market policies, Brad summarizes the findings of a recent working paper by economists Doruk Cengiz, Arindrajit Dube, Attila Lindner, and Ben Zipperer on the effects of the minimum wage on low-wage jobs.

Links from around the web

 

Claire Kelloway in Washington Monthly magazine delves into the causes and consequences of market concentration in the agricultural industry. Kelloway explains how “Big Ag” has increased costs and depressed earnings for farmers across the country, often damaging the economic well-being and growth prospects of entire regions that rely heavily on the industry. Kelloway argues that renewed antitrust enforcement is the best strategy to address agricultural market concentration head-on, thereby increasing farmers’ earnings and jumpstarting competition and regional growth.

In the same issue of the magazine, Daniel Block also addresses the growing problem of regional inequality across the United States. Block examines how deregulation, underinvestment, and the demise of antitrust enforcement have facilitated the economic decline of many of America’s small cities and towns. On top of strengthened antitrust enforcement from the airlines to the agricultural industry, Block argues for renewed federal investment in rural America—with a focus on education, technology, and other pillars necessary to create an innovative, entrepreneurial ecosystem.

Matthew Shaer in The New York Times Magazine highlights another negative consequence of the economic neglect of many rural communities in the United States. Increasingly deprived of the state and federal funds they need, many local municipalities have become increasingly dependent on fines and fees from residents, especially via the criminal justice system, to fund basic local services. Yet given low wages and a worsening drug use crisis, many low-income residents are unable to afford these costs, trapping them in a cycle of debt, imprisonment, and chronic poverty.

David Harrison in The Wall Street Journal analyzes the findings of a recent study from Harvard Business School on the negative effects of the contemporary caregiving crisis in the United States. The researchers at HBS found that almost three quarters of Americans have caregiving responsibilities, and that 32 percent of this group has had to leave a job to meet this obligation. Harrison’s article demonstrates that policymakers and employers must work to find solutions for these workers to avoid further exacerbating labor shortages.

Henry Grabar at Slate discusses recent empirical findings on wages in cities for workers with different educational backgrounds. Despite evidence demonstrating that employment growth since the recession has been concentrated in big cities, Massachusetts Institute of Technology economist and Equitable Growth Research Advisory Board member David Autor finds that since 1970, the wage premium for living in cities has increased for college-educated workers but virtually vanished for less-educated workers. To reverse this trend, Autor argues that policymakers must work to rebuild middle-class jobs in America’s cities and to build affordable housing to reduce expenses for low-wage workers given the high rent in many cities.

Friday figure

 

Figure is from Equitable Growth’s, “Progress toward consensus on measuring U.S. income inequality”

Posted in Uncategorized

Brad DeLong: Worthy reads on equitable growth, January 11–17, 2019

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. Submit! The deadline for Equitable Growth’s Request for Proposals is January 31!
  2. Read “In Conversation with Atif Mian” to understand how to do micro foundations right. In his conversation with Heather Boushey, Mian says: “Our number of theories is much larger than the number of observations we have, which is a limiting factor of macroeconomics just from an empirical standpoint … This is where I feel micro data comes in … Let me just give you one quick example … The 2000s … you see credit going up, you see aggregate income going up as well … If it were higher incomes that were driving credit growth, then since income growth is concentrated in the top 1 percent, we should really expect the top 1 percent to borrow a lot more … Yet that clearly was not the case. So, even a basic breakdown of the data along a more micro level starts to give you a lot more insights than you might be able to deduce from just looking at the macro aggregates.”
  3. Let me hoist this column by Kate Bahn from last year, in which she summarizes the evidence that imposing work requirements simply does not work because it has none of the benefits that people wish that it would have and all of the drawbacks you can think of. In “Work Requirements for U.S. Public Assistance Programs Don’t Work,” she explains: “Analysis from the Center on Budget and Policy Priorities finds that imposing work requirements simply doesn’t work. One reason is because increased red tape may lead to eligible recipients losing their benefits even though they are eligible for them. People with volatile work hours or who hold multiple jobs may have a hard time collecting and submitting sufficient documentation to demonstrate they are working regularly. As CBPP points out, completing work-requirement red tape is even harder for self-employed workers, which should be cause for concern as gig-based employment becomes more prevalent.”
  4. Read Liz Hipple on where the labor market is failing—and on how we have learned about these failures from economic research and could learn useful things about other market failures if only we spent more money getting better data. In “U.S. Economic Policies That Are Pro-Work and Pro-Worker,” she observes: “The Measuring Real Income Growth Act, introduced by Senate Minority Leader Chuck Schumer (D-NY), would allow policymakers to see which income segments, demographic groups, and geographic areas of the country are actually experiencing economic growth by disaggregating the Gross Domestic Product statistics that the federal government produces. This is a key first step to better measuring … There are clearly ways that policy could be doing a better job … Unpredictable schedules, the lack of paid leave, and monopsony power are all examples of areas where research shows that breakdowns in the market.”

Worthy reads not from Equitable Growth:

  1. Is employer-side monopsony the reason effective labor demand appears to be so inelastic when increases in the minimum wage are concerned? Or are we just not being creative enough? And why does the idea that in America today, minimum-wage increases are “job killers” continue to have rhetorical purchase? Read Doruk Cengiz, Arindrajit Dube, Attila Lindner, and Ben Zipperer in their working paper “The Effect of Minimum Wages on Low-Wage Jobs: Evidence from the United States Using a Bunching Estimator,” in which they write: “Infer[ring] the employment effect of a minimum-wage increase by comparing the number of excess jobs paying at or slightly above the new minimum wage to the missing jobs paying below it … using 138 prominent state-level minimum wage changes between 1979 and 2016 … we find that the overall number of low-wage jobs remained essentially unchanged over 5 years following the increase. At the same time, the direct effect of the minimum wage on average earnings was amplified by modest wage spillovers at the bottom of the wage distribution.”
  2. Back in the depths of the Great Recession, employers said that they wanted, needed, and required college graduates and the highly experienced. But what they meant was that they thought high unemployment meant that they could get overqualified workers when they went to the labor market. Now that unemployment has fallen, these needs and requirements have vanished. Employers still want overqualified workers. But they are no longer asking for them because they no longer expect to be able to get them. Read Matthew Yglesias, “The “Skills Gap” Was a Lie,” in which he writes: “The skeptics were right … employers responded to high unemployment by making their job descriptions more stringent. When unemployment went down thanks to the demand-side recovery, suddenly employers got more relaxed again … The skills gap was the consequence of high unemployment rather than its cause. With workers plentiful, employers got choosier. Rather than investing in training workers, they demanded lots of experience and educational credentials. And while job skills are obviously important, when the labor market is healthy employers have incentives to try to impart skills to workers rather than posting advertorial content about how the government should fix this problem for them.”
  3. Adam Tooze attributes to me the idea that many of the problems of the past decade stem from the fact that we had “the wrong crisis” and that we then, in large part, reacted to the crisis we had expected but did not, in fact, have. But I think this point is more Matt’s than mine. Read Matthew Yglesias, “The Crisis We Should Have Had,” in which he writes: “The U.S. economy from 2002-2006 … someday soon, the capital flows would come to an end … the value of the dollar would crash, restraining inflation would require high interest rates, and the U.S. economy would feature a period of painful restructuring … Sections of Tyler Cowen’s The Great Stagnation” are about the crisis we should have had … Spence’s “The Next Convergence” … Stiglitz’s recent Vanity Fair article … Mandel’s piece on the myth of American productivity … I can name others … [and] an awful lot of the Obama agenda has been about efforts to address the crisis we should have had. That’s why long-term fiscal austerity is important and why there was no ‘holy crap the economy’s falling apart, let’s forget about comprehensive reform of the health, energy, and education sectors’ moment back in 2009.”
  4. Increasing attention to leverage cycles and collateral valuations as sources of macroeconomic risk seems to be very welcome. Leverage and trend-chasing are the two major sources of demand-for-assets curves that slope the wrong way: When prices drop demand falls, either because you need to liquidate in order to repay now-undercollateralized loans or because you do not want to be long in a bear market. And there is every reason to think the government need to take very strong steps to make effective demand curves slope the proper way. Read Felix Martin, “Will there be another crash in 2019?” in which he writes: “One important detail is that this effect is achieved not only directly, by adjusting the cost of borrowing, but also indirectly by making assets cheaper or more expensive. When the interest rate available from the central bank falls, other, higher-yielding assets become more attractive—so their prices get pushed up. When the policy rate rises, by contrast, alternative assets look relatively less alluring—so they are sold down, until their price falls enough to entice savers back. Because borrowing at any scale depends not just on cost but on collateral, this valuation effect of monetary policy constitutes a second important channel of its effectiveness. When interest rates fall, the value of capital assets used as collateral for loans—be they shares, intellectual property, or real estate—inflates. As a result, credit becomes not only cheaper to service, but easier to access.”
  5. The disjunction between beliefs in the market community and among policymakers makes me most worried about the business cycle outlook. Market observers understand how and what the Federal Reserve believes but are right now betting that events will give it a shock and force it to reverse policy. Such confidence that reality will give a shock that policymakers will not be able to ignore is worrisome. Read Muhammed El-Erian, “Why Fed and Markets Don’t Agree on Prospects for Interest Rates,” in which he writes: “The markets, anticipating no hikes this year and cuts thereafter, estimate the Fed Funds rate in 2020 a full percentage point below the median of the central bank’s dots … There simply isn’t enough data as yet to point with a high degree of confidence to a dominating explanation or combination of explanations … historically based analytical models may not be sufficiently structurally robust to capture this moment.”
Posted in Uncategorized

Progress toward consensus on measuring U.S. income inequality

Posted on by Maria Monroe

A panel discussion at the annual meeting of the American Economic Association earlier this month in Atlanta highlighted recent research on the measurement of income and inequality in the United States. Research that is purely about measurement is relatively uncommon in academic circles, but income measurement has attracted widespread interest for good reason: Rising inequality means that the existing tools we have to track incomes in the economy are not as accurate as they once were.

The panel discussion featured four research teams and their respective data series. Although in some respects the research teams found broadly similar trends in the U.S. economy, there are some significant differences. This diversity of opinion may be confusing to the noneconomist but can be boiled down to two accounting choices. The first is choosing an income concept. And the second is making assumptions about how to distribute income where it is not directly evident in the data.

Why estimates of income inequality differ

Choosing an income concept simply means choosing what will be included in the measurement of income. This may seem simple, but consider your own income. You may have a salary, or wages, but these may not be inclusive of all the money you earn. If you are thinking of your salary, consider that your employer may be making contributions to your 401(k) that are not reflected in your base salary. Likewise, if you have health care, your employer is probably paying for some portion of it, but this also is not generally thought of as salary. But there are other sources of income that most workers never have to consider such as the retained earnings held by corporations.

Representatives on the panel from the Organisation for Economic Co-operation and Development presented the OECD’s own data series, which targets disposable income, while the team from the U.S. Bureau of Economic Analysis presented their data series targeting the bureau’s own measure of personal income. The other two research teams are targeting the same income concept—National Income—which is an aggregate measure of economic output similar to Gross Domestic Product (National Income is GDP plus net income from abroad less depreciation).

This method of decomposing National Income is the approach taken by Gerald Auten at the U.S. Treasury Department’s Office of Tax Analysis and David Splinter at the congressional Joint Committee on Taxation, whose data series shows virtually no increase in inequality in the United States since 1960. This also is the approach taken by Thomas Piketty at the Paris School of Economics and Emmanuel Saez and Gabriel Zucman at the University of California, Berkeley, which, in contrast, finds that the increase in income inequality over that period was significant.

(See Figure 1, which shows the series produced by each of these two teams and includes the after-tax-and-transfer series—transfers being government programs such as Supplemental Nutrition Assistance and the Earned Income Tax Credit—produced by the Congressional Budget Office for comparison from the 2015 supplementary tables for after tax-and-transfer income, ranked by income after taxes and transfers.)

Figure 1

All of the data series in Figure 1 attempt to quantify changes in income inequality after taxes and transfers are applied. CBO’s income concept excludes some income that the other two include, but the two research teams targeting National Income arrive at very different conclusions about inequality despite targeting the same pots of income.

The reason they diverge is that a number of assumptions must be made about income in the economy that we do not observe directly. One of the largest discrepancies between the two series is the way the researchers treat income that is underreported by taxpayers due to tax evasion. Assumptions have to be made about how to distribute that income among Americans, and those decisions can have significant effects on the resulting data. A clear implication from the panel discussion is that there are still differences of opinion about both the appropriate income concept for measuring income inequality and in establishing distributional assumptions about untaxed income.

But there are significant areas of agreement as well. As Figure 1 shows, both CBO and the research team of Piketty, Saez, and Zucman find very similar trends in the rise of inequality. The Bureau of Economic Analysis has only made calculations for 2 years (so the data was not included in Figure 1), but the BEA estimates that in 2012, the top 1 percent of households held 13.1 percent of all U.S. income—relatively close to the CBO’s estimate of 15 percent and Piketty, Saez, and Zucman’s estimate of 16 percent. The OECD has yet to release its own data series.

In contrast, Auten and Splinter’s data series shows that after accounting for taxes and transfers, incomes fluctuated, but the distribution of that income has been largely consistent since 1960. Their findings are an outlier. Still, it is encouraging that even though many decisions go into the calculation of these data series, most teams show largely consistent trends in income inequality. The levels of inequality, though less consistent, are also relatively close in magnitude. That so many different teams are working on this measurement issue is a testament to the urgency of understanding economic inequality and an encouraging sign of academic interest in resolving some of the outstanding measurement differences.

Short versions of all four papers presented earlier this month in Atlanta will be included in ASSA’s May issue of Papers and Presentations. For a primer on the importance of understanding the distribution of income in the United States, see our project page “Disaggregating Growth,” where you will find a selection of materials to understand how the economy is performing for Americans of different income levels, different regions of the country, and more.

Posted in Uncategorized