…and then regaining it for people with chronic conditions…. $240 per member per month for Medicaid members in the mid-2000s is a massive number…. I am speculating that a decent chunk of the cost growth slowdown and differential for Expansion states compared to non-Expansion states is a more streamlined set of care…. In 2013, a person who made a few dollars too many, or had been on a program for a month too long would be dropped from Legacy Medicaid, and previously manageable conditions could become unmanaged. In 2014 in expansion states, that person would be dropped from Legacy Medicaid and instantly re-enrolled into Federally funded Expansion Medicaid. The only difference they would see in most expansion states was a different ID card in the mail three weeks later…
Yes, the State-Level Benefits of the Medicaid Expansion Are Very Large. Why Do You Ask?: Afternoon Comment
An interesting catch by CBPP from KHN:
State Medicaid Spending Growing Slower in Expansion States Than Others: “States that have expanded Medicaid… expect their share of Medicaid spending to grow more slowly this year than states that have not expanded… 4.4% this year, compared to 6.8% among non-expansion states…
That is $6 billion in 2014 alone. If it is permanent–capitalize it at 4%–that is $150 billion more that the non-expanding states have lost. That is serious money. And there is more, because:
States expanding Medicaid also typically cited net state budget savings beyond Medicaid. States reported that expanded coverage through Medicaid could allow for reductions in state spending for services such as mental health, correctional health, state-funded programs for the uninsured and uncompensated care.
Why? It really does look like trying to get your health-insurance system in shape by greatly curbing the number of uninsured makes places where you can save money without harming quality of care very obvious.
Moreover:
The uninsured rate among non-elderly adults has fallen by 38 percent in expansion states but only by 9 percent in non-expansion states, an Urban Institute survey found. The fact that the federal government picks up the entire cost of newly eligible individuals under the expansion allows states to expand coverage while limiting their costs…
Afternoon Must-Read: David Hendry: Climate Change: Lessons for Our Future from the Distant Past
…over the last 500 million years… provides a stark warning. Human activity is producing greenhouse gases, and as a consequence global temperatures and ocean heat content are rising. Such trends raise the risk of tipping points. Economic analysis offers a number of ideas, but a key problem is that distributions of climate variables can shift, invalidating stationarity-based analyses, and making action to avoid possible future shifts especially urgent…
Things to Read on the Afternoon of October 27, 2014
Must- and Shall-Reads:
- Bad Stock-Market Timing Fueled Wealth Disparity
- China strives incoherently for the ‘socialist rule of law’
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Carter Price: Miscalculating the Wealth of the Rich Reveals Unintended Biases: “In an ambitious effort… Philip Armour… Richard Burkhauser… and Jeff Larrimore… estimate… trends in inequality based on… Haig-Simons… income… consumption plus change in net wealth… [and] claim inequality has not been rising over time…. [Unfortunately] their methodological choices bias the results to downplay relative income growth at the top…. >The Haig-Simons measure introduces substantial volatility as well based on changes in the market valuation of assets…. Mark Zuckerberg… [was] one of the poorest people in the world in 2012 because his net worth fell by $4.2 billion…. Haig-Simons… factor[s] out volatility in realized capital [gains]… but… introduces… volatility in the valuation of capital holdings…. Inflation in housing prices during the 2000s… show[s] up as a rising Haig-Simons income… [but] much of this valuation was a bubble…. The authors… include near-cash benefits… a single national housing index… the Dow Jones Industrial Average… for all types of stock income… limitations on details of high-income households…. Each of these methodological choices will artificially bias their estimates toward a lower valuation of income growth at the top of the distribution…”
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Piketty and the Elasticity of Substitution: “A particularly technical and effective critique of Piketty is from Matt Rognlie…. Loukas Karabarbounis and Brent Neiman… show that the gross labor share and the net labor share move in the same direction when the shift is caused by a technological shock… point out that the gross and net elasticities are on the same side of 1…. Rognlie’s point about these two elasticities being lower than 1 doesn’t hold up if capital is gaining due to a new technology that makes capital cheaper…” -
Why should policymakers care about economic inequality?: “It was long assumed economic growth led to less economic inequality but also that any economic policy efforts to alleviate inequality would necessarily slow economic growth. These views, however, were formed in an era before there was sufficient data to truly test this view…. In an early survey… Roland Benabou at Princeton University in 1996 found that the vast majority of studies said high and rising inequality harmed economic growth…. Sarah Voitchovsky… find[s]… substantial disagreement about the relationship between inequality and growth…. Recent work by… Andrew Berg, Jonathan Ostry, and Charalombos Tsangaridis… Roy van der Weide… and Branko Milanovic of the City University of New York have robustly found a negative relationship between economic inequality for developed countries and within the United States…. Other studies find that a highly skewed distribution of income and wealth depresses consumption… leading to unsustainably excessive borrowing…”
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BOE’s Cunliffe Says Bankers Earn Too Much, Reducing Returns to Investors: “Jon Cunliffe… noted that bankers continue to be paid very highly relative to the returns they generate for shareholders. ‘Another driver of low returns on assets and equity is the fact that banks’ pay bill has not adjusted to the smaller returns banks are now earning,’ he said. ‘Put simply, shareholders have gone from getting 60 cents for every dollar in pay for staff to getting 25 cents per dollar…. But, given lower levels of leverage, it is unlikely that we will see, or want to see again, the returns on equity that we saw before the crisis. In the new world, pay bills may well have further to adjust.’” -
Exploding wealth inequality in the United States: “The share of total income earned by the top 1%… less than 10% in the late 1970s but now exceeds 20%…. A large portion of this increase is due to an upsurge in the labor incomes earned by senior company executives and successful entrepreneurs. But… did wealth inequality rise as well?… The answer is a definitive yes…. We use comprehensive data on capital income—such as dividends, interest, rents, and business profits—that is reported on individual income tax returns since 1913. We then capitalize this income so that it matches the amount of wealth recorded in the Federal Reserve’s Flow of Funds…. In this way we obtain annual estimates of U.S. wealth inequality stretching back a century. Wealth inequality, it turns out, has followed a spectacular U-shape evolution over the past 100 years…. How can we explain the growing disparity in American wealth? The answer is that the combination of higher income inequality alongside a growing disparity in the ability to save for most Americans is fueling the explosion in wealth inequality. For the bottom 90 percent of families, real wage gains (after factoring in inflation) were very limited over the past three decades, but for their counterparts in the top 1 percent real wages grew fast. In addition, the saving rate of middle class and lower class families collapsed over the same period while it remained substantial at the top…. If income inequality stays high and if the saving rate of the bottom 90 percent of families remains low then wealth disparity will keep increasing. Ten or twenty years from now, all the gains in wealth democratization achieved during the New Deal and the post-war decades could be lost…. There are a number of specific policy reforms needed to rebuild middle class wealth…. Prudent financial regulation to rein in predatory lending, incentives to help people save… steps to boost the wages of the bottom 90 percent of workers are needed…. One final reform also needs to be on the policymaking agenda: the collection of better data on wealth… -
Why Europe is doomed: “‘Merkel felt betrayed by Draghi’s speech…. Her entourage is also deeply skeptical about Draghi’s plan to buy up asset-backed securities (ABS) and covered bonds in the hope of encouraging commercial banks to lend… worry that if this scheme doesn’t work, the ECB president will be tempted to launch full-blown government bond buying, or quantitative easing. This is a taboo in Germany and a step Merkel’s allies fear would play into the hands of the country’s new anti-euro party, the Alternative for Germany (AfD).’… Euro-zone inflation has fallen to just 0.3 percent, more than low enough to hurt their not-really-recovering economy…. But instead of doing anything about it, the ECB has just told people to pay no attention to the disinflation behind the curtain…. This façade lasted until August. That’s when ECB chief Mario Draghi finally admitted, in some off-script remarks, that inflation had fallen too low, and Europe’s governments had to help out by doing less austerity. Cue the German freakout. Now here’s what you need to remember about the ECB. It hasn’t been willing to do anything without the German government’s buy-in…. Once you understand that, you understand why Europe has floundered from one existential crisis to the next. There will be a problem, the ECB will dawdle, then it will try to persuade Angela Merkel to get on board, they’ll debate whether it should do too little too late or too late too little, and then, finally, the ECB will do just enough to keep the euro zone from falling apart. But now even the bare minimum is too much for Merkel…” -
Is the Affordable Care Act Working?: “After a year fully in place, the Affordable Care Act has largely succeeded in delivering on President Obama’s main promises”
Should Be Aware of:
- A new Warsaw museum devoted to Jewish-Polish history
- Polls Signal Ukraine’s Westward Shift
- ‘Mitch Is Just A Most Unpleasant Man’
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What It Will Take to Change the Culture of Wall Street: “As I reflected upon my career at Goldman Sachs, though, what stood out was the importance of its organizational structure. That’s something sociologists pay a lot of attention to, while economists generally don’t…. I document… how Goldman drifted from a focus on ethical standards of behavior to legal ones — from what one ‘should’ do to what one ‘can’ do…. The importance of focusing on organizational behavior… culture had more to do with the financial crisis than leverage ratios did…. To achieve sustained success and avoid firm-endangering risks, a firm like Goldman has to cultivate financial interdependence among its top employees…” | Don’t Blame the Apple and Exonerate the Tree | Culture, Not Leverage, Made Wall Street Riskier
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Structuralist Response to Piketty’s Capital in the Twenty-First Century: “New School Economist Lance Taylor released a symposium of literature on Thomas Piketty’s Capital in the Twenty-First Century in conjunction with the INET-sponsored research project on Economic Sustainability, Distribution and Stability…. Lance Taylor: Thomas Piketty’s Capital in the Twenty-First Century: Introduction to a Structuralist Symposium. Prabhat Patnaik: Capitalism, Inequality and Globalization: Thomas Piketty’s Capital in the Twenty-First Century. Nelson Barbosa-Filho: Elasticity of substitution and social conflict: a structuralist note on Piketty’s Capital in the 21st Century. Gregor Semieniuk: Piketty’s Elasticity of Substitution: A Critique. Lance Taylor: The Triumph of the Rentier? Thomas Piketty vs. Luigi Pasinetti and John Maynard Keynes.” -
A Deeper Understanding of Secular Stagnation: “According to Eggertsson and Mehrotra… policymakers can move an economy out of this nasty equilibrium… monetary policy can help boost the economy only if the central bank credibly commits to a higher inflation target. This result is interesting given Summers’s claim that monetary policy may not be helpful in just such a situation. In this way, the model supports a critique of Summers’s original formulation of secular stagnation best articulated by the Economist’s Ryan Avent…. Backing up Summers… fiscal policy is helpful as well. By increasing the amount of public debt, fiscal policy increases the natural rate of interest…”
Boosting productivity by boosting capital incomes for workers
Aligning the financial interests of senior corporate executives and shareholders to maximize profits is a strategy that almost goes without saying in today’s business world. These incentives for executives usually come in the form of stock options and other means of access to capital income generated by companies. Rarely, though, are these incentives extended to company employees below the senior management level.
The result is a sharp rise in wealth inequality in the United States—as demonstrated earlier this month and again today by University of California-Berkeley economist Emmanuel Saez and co-author Gabriel Zucman of the London School of Economics in their new National Bureau of Economic Research working paper. But why can’t a broader swathe of employees access these capital-income incentives in order to align their productivity with the expectations of shareholders and in the process perhaps slow the widening wealth gap in the United States?
Profit sharing—broad-based distribution of stock options, employee stock purchase plans, and other capital-income incentives—would give workers a different kind of stake in the productivity of the firms they work for compared to their labor income. Yet these ways of sharing capital income to boost the productivity of workers are as rare in the United States as corporate pay packages with capital-income incentives are ubiquitous. One result is that gains from productivity haven’t been flowing to the majority of workers.
Why would employers and shareholders want to put in place more broad-based capital-income incentives? Research by Richard Freeman of Harvard University and Alex Bryson of the National Institute of Economic and Social Research looked at the differences between workers who took up an employee stock purchase plan and those who didn’t at a large multinational firm. They found that workers who entered into the plan worked harder for longer hours and were less likely to quit or be absent from the job.
Freeman, along with Douglas Kruse and Richard Blasi of Rutgers University, also edited a volume on this topic that contains much more empirical evidence of worker productivity gains engineered through such capital income programs. And Laura Tyson of the Haas School of Business points out that research finds a positive association between profit sharing and productivity.
Of course, there are potential issues with these kinds of “shared capitalism” programs. Workers run the risk of not being diversified enough if they only invest in the stock of their employer. They also run the risk of selling stocks in a panic if a recession hits and thus missing out on the potential upside gains when the economy recovers. An article by Josh Zumbrun in today’s Wall Street Journal shows how this dynamic played out during the Great Recession.
Broadening the base of capital income won’t singlehandedly reduce the dramatic levels in wealth inequality in the United States. But the formidable amount of research and on-the-ground corporate experience with these programs suggests taking a new look at their benefits and their structures. Sharing the gains of capital may align the interests of workers, executives, and shareholders more broadly and boost U.S. productivity, economic growth, and prosperity.
Morning Must-Read: Carter Price: Miscalculating the Wealth of the Rich Reveals Unintended Biases
Carter Price had a nice piece a couple of months ago that it is worth highlighting:
Carter Price: Miscalculating the Wealth of the Rich Reveals Unintended Biases: “In an ambitious effort…
…Philip Armour… Richard Burkhauser… and Jeff Larrimore… estimate… trends in inequality based on… Haig-Simons… income… consumption plus change in net wealth… [and] claim inequality has not been rising over time…. [Unfortunately] their methodological choices bias the results to downplay relative income growth at the top…. >The Haig-Simons measure introduces substantial volatility as well based on changes in the market valuation of assets…. Mark Zuckerberg… [was] one of the poorest people in the world in 2012 because his net worth fell by $4.2 billion…. Haig-Simons… factor[s] out volatility in realized capital [gains]… but… introduces… volatility in the valuation of capital holdings…. Inflation in housing prices during the 2000s… show[s] up as a rising Haig-Simons income… [but] much of this valuation was a bubble…. The authors… include near-cash benefits… a single national housing index… the Dow Jones Industrial Average… for all types of stock income… limitations on details of high-income households…. Each of these methodological choices will artificially bias their estimates toward a lower valuation of income growth at the top of the distribution…
Afternoon Must-Read: Nick Bunker: Piketty, Rognlie, Karabarbounis nad Neiman, and the Elasticity of Substitution | LARS P. SYLL
…Loukas Karabarbounis and Brent Neiman… show that the gross labor share and the net labor share move in the same direction when the shift is caused by a technological shock… point out that the gross and net elasticities are on the same side of 1…. Rognlie’s point about these two elasticities being lower than 1 doesn’t hold up if capital is gaining due to a new technology that makes capital cheaper…
Afternoon Must-Read: Carter Price: Why Should Policymakers Care About Economic Inequality?
If you did not see this when it came whizzing by, go take a look:
Why should policymakers care about economic inequality?: “It was long assumed [not just that] economic growth led to less economic inequality…
…but also that any economic policy efforts to alleviate inequality would necessarily slow economic growth. These views, however, were formed in an era before there was sufficient data to truly test this view…. In an early survey… Roland Benabou at Princeton University in 1996 found that the vast majority of studies said high and rising inequality harmed economic growth…. Sarah Voitchovsky… find[s]… substantial disagreement about the relationship between inequality and growth…. Recent work by… Andrew Berg, Jonathan Ostry, and Charalombos Tsangaridis… Roy van der Weide… and Branko Milanovic of the City University of New York have robustly found a negative relationship between economic inequality for developed countries and within the United States…. Other studies find that a highly skewed distribution of income and wealth depresses consumption… leading to unsustainably excessive borrowing…”
Afternoon Must-Read: Jon Cunliffe: Bankers Earn Too Much, Reducing Returns to Investors
…relative to the returns they generate for shareholders. ‘Another driver of low returns on assets and equity is the fact that banks’ pay bill has not adjusted to the smaller returns banks are now earning,’ he said. ‘Put simply, shareholders have gone from getting 60 cents for every dollar in pay for staff to getting 25 cents per dollar…. But, given lower levels of leverage, it is unlikely that we will see, or want to see again, the returns on equity that we saw before the crisis. In the new world, pay bills may well have further to adjust.’
Very Rough: Exploding Wealth Inequality and Its Rent-Seeking Society Consequences: (Early) Monday Focus for October 27, 2014
…less than 10% in the late 1970s but now exceeds 20%…. A large portion of this increase is due to an upsurge in the labor incomes earned by senior company executives and successful entrepreneurs. But… did wealth inequality rise as well?… The answer is a definitive yes…. We use comprehensive data on capital income—such as dividends, interest, rents, and business profits—that is reported on individual income tax returns since 1913. We then capitalize this income so that it matches the amount of wealth recorded in the Federal Reserve’s Flow of Funds…. In this way we obtain annual estimates of U.S. wealth inequality stretching back a century. Wealth inequality, it turns out, has followed a spectacular U-shape evolution over the past 100 years…. How can we explain the growing disparity in American wealth? The answer is that the combination of higher income inequality alongside a growing disparity in the ability to save for most Americans is fueling the explosion in wealth inequality. For the bottom 90 percent of families, real wage gains (after factoring in inflation) were very limited over the past three decades, but for their counterparts in the top 1 percent real wages grew fast. In addition, the saving rate of middle class and lower class families collapsed over the same period while it remained substantial at the top…. If income inequality stays high and if the saving rate of the bottom 90 percent of families remains low then wealth disparity will keep increasing. Ten or twenty years from now, all the gains in wealth democratization achieved during the New Deal and the post-war decades could be lost…. There are a number of specific policy reforms needed to rebuild middle class wealth…. Prudent financial regulation to rein in predatory lending, incentives to help people save… steps to boost the wages of the bottom 90 percent of workers are needed…. One final reform also needs to be on the policymaking agenda: the collection of better data on wealth…
Taking off from my Mr. Piketty and the Neoclassicists, once we had such guesses we could build a balanced-growth model…
The important quantities would be:
(1) The annual rate of population and labor force growth: n.
(2) The annual rate of labor productivity growth: g.
(3) The warranted annual rate of accumulation ra = n + g: the rate at which wealthholders’ assets need to grow if their wealth-to-national-income ratio to be constant.
(4) The wedge ω between the rates of accumulation and net profit: what share of their current assets the wealth spend, dissipate, lose to Wall Street sharks, consume, give away, and so forth.
(5) The resulting warranted annual rate of net profit rw= n + g + ω: The warranted annual rate of net profit at which wealthholders’ have a constant ratio of their wealth to national income. If the actual average rate of profit r > rw, the rich become richer in relative terms. If the actual average rate of profit r < rw, the rich lose ground in relative terms. If the actual average rate of profit r = rw, the wealth of the rich remains a stable multiple of national income.
From the warranted annual rate of net profit rw, we then need to know:
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How the annual rate of net profit r in the productive sector depends on the size of the stock of physical capital–which is rented out to workers at its marginal product–relative to annual income K/Y.
- To calculate this we need to know:
- What the physical net annual marginal product of capital is at some baseline physical capital-income ratio K/Y, say 3.
- What the elasticity of the net rate of annual profit r in the productive sector with respect to the productive capital-income ratio is.
- To calculate this we need to know:
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How the annual rate of net profit in the rent-seeking sector depends on the size of the stock of rent-seeking property relative to national income R/Y.
- To calculate this we need to know:
- What the rate of rent extraction ε is at some baseline rent-seeking property-income ratio, say 3.
- What the elasticity of the net rate of rent extraction ε in the rent-seeking sector is with respect to the rent-seeking property-income ration R/Y.
- To calculate this we need to know:
If we know all those, we can then calculate:
(6) The physical capital-annual income ratio at the warranted rate of net profit: (K/Y)*
(7) The rent-seeking capital-annual income ratio at the warranted rate of profit: (R/Y)*
(8) (W/Y)* = (K/Y): The total wealth-annual income ratio at the warranted rate of profit: (W/Y)
(9) The income-from-wealth share of total income: rw x (W/Y)*, given:
(10) The physical net annual marginal product of capital at K/Y = 3: ρK
(11) The annual net return on rent-seeking capital at R/Y = 3: ρR
(12) The elasticity of the rate of profit on physical capital: λK
(13) The elasticity of the rate of profit on rent-seeking capital: λR
Which I believe gets us to this spreadsheet. If you download it and edit it in interesting ways, please send me a copy…
For the particular parameters I have chosen, we have the wealthholders cumulatively investing 2.1 times a year’s GDP in productive capital that boosts the wage level, and 0.6 times in year’s GDP in rent-extraction property that subtracts from the wage level. And we have a Belle Epoque and a Future Second Gilded Age in which wealthholders do indeed hold a greater multiple of GDP’s worth of useful, productive, wage-boosting capital–3.4 times a year’s national income–but also hold vastly more rent-seeking property: 5.2 times a year’s national income.
In this interpretation of Piketty, thrift on the part of the rich is indeed beneficial to the working class–as long as it is channeled into productive investment. But if it is used to create, politically maintain, and profit from rent-extraction property… well, it is not so nice.