Tag: Capital in the Twenty-First Century

Fifteen Theses on “The Wealth of Humans” and “After Piketty”

Posted on by Brad DeLong

Notes for the July 11, 2017 Research on Tap http://www.bradford-delong.com/2017/06/equitable-growth-research-on-tap-after-piketty-tue-jul-11-2017-at-500-pm.html event:

  • Ryan Avent (2016): The Wealth of Humans: Work, Power, and Status in the Twenty-first Century http://amzn.to/2t9TtWe
  • Heather Boushey, J. Bradford DeLong, and Marshall Steinbaum: After Piketty: The Agenda for Economics and Inequality http://amzn.to/2t9UI7y

Meditations on Ryan Avent:

Ryan Avent: What will happen to ‘The Wealth of Humans’? http://www.aei.org/publication/the-wealth-of-humans-a-qa-with-ryan-avent/: “This really dramatic technological change… the digital revolution… is adding hugely to the amount of effective labor that’s available to firms…. A lot of routine tasks in factories and in offices… [to] be automated…. High-skilled jobs… use these new technologies to do work that used to require a lot more people to do and in the process are displacing workers… enormous, abundant labor…. Employer[s] with… huge reservoir[s] of willing workers at very low wages… say…. “I don’t need to invest in this labor-saving technology…. replace my cashiers with automated checkout… replace the people moving boxes in the warehouse with robots”. And so you get this sort of self-limiting technological change…. The more powerful the digital revolution… the more people… looking for low-wage work… the less of an interest firms have in using machines to replace them…”

  1. For the past thirty and the next thirty years—but probably not more—we are in all likelihood facing the increasing drift toward inequality driven by the rise of the Overclass as identified by Thomas Piketty. As long as the Overclass has enough control over the political system to manipulate it to reap enough rents to peg the rate of return on wealth—not physical capital, wealth—at 5%/year, we will see much if not all of the benefits from economic growth flowing to this Overclass, which will increasingly be an overclass of heirs and heiresses, rather than one that can claim that its wealth is due to some sort of meritocratic chops.

  2. For the past ten years and the next ten years—if not more—our biggest and principal problem has been an economy in secular stagnation afflicted by slack demand, and that in a high -pressure economy like we had under Clinton in the late 1990s or Kennedy-Johnson in the 1960s, most of what we see as our economic problems would not melt completely away but be much reduced. Robots and artificial intelligence were overwhelmingly seen not as problems but as opportunities in the high-pressure economy of the later 1990s.

  3. A generation ago we feared. But then we feared not the robot but the mainframe—and our fears of the mainframe then were like our fears of the robot now, save that while we now fear that robots will leave us with no work to do, we feared then that mainframes would leave us with no meaningful work to do and no work to do save being a mainframe-controlled dumb robot. As the Apple commercial said, we feared that 1984 would be like 1984: https://www.youtube.com/watch?v=2zfqw8nhUwA. Those fears were vastly overblown: we did not become robots subordinated to mainframes; instead, microcomputers and the internet became our personal intelligent tools.

  4. The human brain is a massively parallel supercomputer that fits inside half a shoebox. It draws 50 watts of power. It is an amazing innovation, analysis, assessment and creation machine. 600 million years of proto-mammalian and mammalian evolution coupled with the genetic algorithm means that almost every single human can solve AI problems far beyond our current engineering reach—so much so that much of what our machines find impossible our brains find so trivially easy that we call such capabilities “unskilled”. When combined with our brains, human fingers are amazingly fine manipulation devices. And human back and leg muscles—especially when testosterone soaked—are quite good at moving heavy objects. Thus back in the environment of evolutionary adaptation, we used our brains, our big muscles, and our fingers to lead cognitively interesting—if stressful and short—lives.

  5. Back in the environment of evolutionary adaptation, we used our brains, our big muscles, and our fingers to lead cognitively interesting—if stressful and short—lives. Short: life expectancy at brith of 25 or so. Stressful: watching relatively young people die around you all the time is a significant source of stress. And in order for the average woman to have two children who survive to reproduce, the average woman would have had to have three reach adulthood, about four reach the age of five, about six live births, and about nine pregnancies—that’s the average. Up until 250 years ago, the average woman spent about six years pregnant and eighteen years breastfeeding. Some more. Some less.

  6. History has rolled forward since the hunter-gatherer age. And as history has rolled forward, we have figured out other things to do to add economic and sociological value than using our backs and legs to move things, our fingers to grasp things, and our brains to decide what to hunt and gather. Using backs to move heavy objects and our fingers to perform fine manipulations in cognitively-interesting ways has, relatively, declined.

  7. As our use of our backs and fingers guided by our brains to create value has declined, we have turned to: (1) turning many of us into robots ourselves, performing simple routinized repetitive and vastly boring tasks to fill in the gaps in value chains between the robots that we know how to build; (2) jobs as microcontrollers for domesticated animals and machines—the horse does not know what plowing the furrow is—(3) finding jobs as relatively simple accounting and software bots, keeping track of stuff, what it is useful for, and how its use is to be decided; (4) becoming personal servitors; (5) becoming social engineers—trying to keep all those things and all those people—especially, perhaps, trying to keep those brains soaked in testosterone—somehow working in harmony, somehow pulling together, although admittedly with limited success; and (6) remaining innovators, analyzers, assessors, and creators as well.

  8. Backs started to go out with the domestication of the horse. Fingers began to go out with the invention of the spinning jenny. But humans-as-microcontrollers, humans-as-accounting-‘bots—paper shufflers—and humans-as-the-robots we cannot yet build—took up all the job slack. Every horse needs a microcontroller. And a human brain was the only possible option. Even today, to a large amount every textile machine needs a human watching it at least part of the time. It doesn’t know when it’s gone wrong. It has no clue how to fix itself. It no more understands the idea of “fixing” any more than Alpha-Go understands that it is playing Go, and not just solving a problem of outputting a two-element vector in response to a 19 x 19 matrix of inputs with the additional structure that the output changes the matrix and that the possible matrices have a value-function structure.

  9. Now, however, we can finally peer into a future in which the microcontrollers and the accounting bots are on their way out in a manner analogous to the backs and the fingers. But this is our future. This is not our present. For the past ten years and the next ten years—if not more—our biggest and principal problem has been an economy in secular stagnation afflicted by slack demand, and that in a high -pressure economy like we had under Clinton in the late 1990s or Kennedy-Johnson in the 1960s, most of what we see as our economic problems would not melt completely away but be much reduced.

  10. What do we see when we peer into a future in which the microcontrollers and the accounting bots are on their way out in a manner analogous to the backs and the fingers? Fortunately, one thing this brings with it isthe forthcoming extinction of the the jobs that treat humans as simple robots: simple cogs in the machine that is Henry Ford’s River Rouge assembly line. Many occupations that vastly underutilize the massively parallel supercomputer that fits in half a shoebox are on the way out—and good: for those are not properly “human” jobs at all.

  11. Not yet, but starting soon, and continuing for perhaps the next hundred years, we face the deep problem of the obsolescence of human brains as resources that can be employed—or, rather, underemployed—to create substantial economic value. Over the past six thousand years, ever since the domestication of the horse, we have seen the erosion, at first slowly and in the past two centuries rapidly, of the obsolescence of human muscles as resources that can be employed to create substantial economic value. But we have benefited because human brains underemployed—as microcontrollers for domesticated animals and machines, and as relatively simple accounting and software bots—have nevertheless been of great and increasing value. But now our microcontrollers are better microcontrollers than human brains, and our software accounting ‘bots are becoming better accounting ‘bots than human brains. Not next year, and not next decade, but further out by some unknown time, humans’ jobs will be as: personal servitors, social engineers, and innovators, analyzers, assessors and creators. Here we might well, someday, have a huge problem.

  12. The market economy will amply fund AI research that replaces workers in capital intensive production processes by machines. Such industries have mammoth returns to scale. They thus tend to be characterized by large oligopolies. And so the firm that funds such labor-replacing research will capture with its own scale and in its own value chain a substantial part of the benefits of such R&D. That means that the combination of coming AI with a market economy might well be absolute poison for equity and equitable growth. It will race ahead with shedding workers in capital intensive production processes.

  13. The market economy will not amply fund AI research that assists and amplifies workers in labor intensive production processes. Such tend to be small scale. The inventors and the innovators cannot capture even a small part of the benefit in their own production processes and value chains. And intellectual property is a very weak reed indeed to rely on to fix the problem—in fact, intellectual property is more likely to be the problem than the solution, cf. Nathan Myhrvold, and Intellectual Ventures.

  14. The combination of coming AI with a market economy might well be absolute poison for equity and equitable growth. It will race ahead with shedding workers in capital intensive production processes. There will be—as Laura Tyson and Mike Spence pointed out in their contribution to Heather, Marshall, and my After Piketty book—a synergy between the dangers posed by the Rise of the Robots on the one hand and the inequality generating forces analyzed by Thomas Piketty in his Capital in the Twenty-First Century on the other.

  15. Technological progress could rescue us from Pikettyian dystopia. Robots could be intelligent tools. AI could be gold for equity: amplifying the capabilities of workers in labor intensive production processes would, as John Maynard Keynes once said, bring us vastly closer to economic El Dorado. Recall how a generation ago we feared not the robot but the mainframe—and our fears of the mainframe then were like our fears of the robot now, save that while we now fear that robots will leave us with no work to do, we feared then that mainframes would leave us with no meaningful work to do and no work to do save being a mainframe-controlled dumb robot. As the Apple commercial said, we feared that 1984 would be like 1984. But we are unlikely to see a repeat of the microcomputer revolution. Firms will not invest on a large scale in AI that amplifies the capabilities of labor in labor intensive industries. It will not happen unless some NGO does. How about an engineering school? How about an engineering school at a public university?

After Piketty: Capital in the Twenty-First Century, Three Years Later

Posted on by Brad DeLong

Introduction to: After Piketty: The Research Program Starting from Thomas Piketty’s Capital in the Twenty-First Century http://delong.typepad.com/2016-08-31-piketty-volume-intro_hb052516.pdf

Thomas Piketty’s Capital in the Twenty-First Century is an astonishing, surprise bestseller.

Its enormous mass audience speaks to the urgency with which so many wish to hear about and participate in the political-economic conversation regarding this Second Gilded Age in which we in the Global North now find ourselves enmeshed.1 C21’s English-language translator Art Goldhammer reports (this volume) that there are now 2.2 million copies of the book scattered around the globe in 30 different languages. Those 2.2 million copies cannot and should not but have an impact. They ought to shift the spirit of the age into another, different channel: post-Piketty, the public-intellectual debate over inequality, economic policy, and equitable growth ought to focus differently. We have assembled our authors and edited their papers to highlight what we, at least, believe economists should study After Piketty as they use the book to trigger more of a focus on what is relevant and important.

Link to: After Piketty: The Agenda for Economics and Inequality

Read MOAR

A Few Notes on the CUNY “After Piketty” Panel…

Posted on by Brad DeLong
Cursor and After Piketty

After Piketty: The Agenda for Economics and Inequality http://amzn.to/2q0TevJ

Themes worth noting from the After Piketty CUNY launch event—that I missed, being on the wrong coast.

But having been on the wrong coast, I can now add, in a l’esprit d’escalier sense, what I would have said if I had been there, had been thinking very quickly, and had the last word:

(1) “Capital” vs. “Wealth” in PIketty’s Capital in the 21st Century

Branko Milanovic: Not a confusion, but the use of “capital” for wealth was criticized because for economists “capital” is productive capital: the input into the production function in the theory of growth, and so on. But “wealth”, for people who work on income distribution like myself, includes all other things, including real estate, and other things which are even not necessarily immediately marketable. Although, obviously, real estate is. So there is a little bit of a difference between the two. In the book… the two are really conflated…

Paul Krugman: The place where I think is closest to him being—wrong is not quite the right word—where there is a really serious critique from the economists’ point of view—I defer the historical social issues to other people–he makes a lot about the rising ratio of capital to income. That we’ve been accumulating capital in a way. That we had a lot of capital destroyed by the by the wars of the 20th century. Then we restore it and we get a much more capital. He talks about this as a story of there’s more and more capital out there and that this given certain parameters whatever it tends to raise the capital share of income even as it reduces the rate of return. The thing that has become clear is that an awful lot of that rise in the value of capital is real estate. A lot of the Piketty book is written as if there’s capital and there’s labor. That is true. But an awful lot of the capital by value turns out to be housing. That does change your picture significantly. It doesn’t mean that the underlying thesis is wrong, but it means that that it’s a little harder to make his case than might otherwise have seemed to be the case…

Brad DeLong: If “capital” in Piketty is taken to mean what neoclassical economists typically mean by “capital”—the argument K in some aggregate production function, produced means of production elastically produced under constant returns to scale and valued at their replacement cost—then Piketty’s argument does appear to have a major problem. We then face what Keynes called the euthanasia of the rentier as the capital stock-annual output ratio rises: the observed technical elasticity of substitution between capital and labor strongly suggests that the rate of profit falls more in relative terms than the capital stock-annual output ratio rises, and so the wealthier superrich receive a smaller share of society’s income over time.

But it was never Piketty’s intention for “capital” in his book to mean only he argument K in some aggregate production function, produced means of production elastically produced under constant returns to scale and valued at their replacement cost. As Thomas writes in his contribution to After Piketty:

Had I believed that the one-dimensional neoclassical model of capital accumulation (based upon the so-called production function Y = F(K,L) and the assumption of perfect competition) provided an adequate description of economic structures and property relations, then my book would have been 30 pages long rather than 800 pages long. The central reason my book is so long is that I try to describe the multidimensional transformations of capital and the complex power patterns and property relations that come with these metamorphoses (as the examples given above illustrate). I should probably have been more explicit about this issue, and I am grateful to Suresh for giving me the opportunity to clarify this important point…

Piketty’s intention was always to, in Suresh Naidu’s terms, be “wild Piketty” rather than “domesticated Piketty”. The book is about all of those assets that are claims on society’s income—monopoly rents, spoils of rent-seeking, real estate, brands, control over value chains, as well as productive physical capital receiving its marginal product.

You can claim that Piketty invited this confusion by titling his book Capital in the 21st Century rather than Wealth in the 21st Century. But you would not have to read far in the book to get a sense that it was, indeed, not 30 pages long but 800. IMHO, many critics of Piketty did not read far. What Ryan Avent said of Clive Crook can, I think, stand as an evaluation of a great deal of Piketty criticism:

Why, for instance, doesn’t Mr Piketty say that r must be significantly above g to generate the expected divergence, Mr Crook complains. This, after literally hundreds of pages in which Mr Piketty has walked through when and how the capital-income ratio has been pushed away from its long-run trend rate. You don’t even have to read hundreds of pages to get the qualification Mr Crook wants; you can start with the page on which r>g is first mentioned: “If, moreover, the rate of return on capital remains significantly above the growth rate for an extended period of time (which is more likely when the growth rate is low, though not automatic), then the risk of divergence in the distribution of wealth is very high.” Emphasis mine. I suppose if you only read the book’s conclusion you could miss these details, but who would do that?…

(2) “Patrimonial Capitalism”

Paul Krugman: We still have… an 80s frame of mind… visualize… self-made men, whether it’s Steve Jobs or Gordon Gekko depending upon… your take on the goodness or badness…. [But] increasingly now we are looking at patrimonial capitalism—inherited fortunes. Don’t think Steve Jobs. Think Koch brothers. Piketty makes an argument that that’s increasingly going to be the case[:]… Don’t think “Gilded Age”, which is America and which is an era of self-made men. Instead, think more “Belle Epoque”: late 19th century France, which is very much a dynastic inherited wealth thing….

To date most of the explosion of income concentration at the very top has… been… compensation… bonuses and executive pay. There’s a lot of interesting discussion of that in Capital in the 21st Century. But that is not nearly at the level of rigor of explanation, because it’s hard when nobody really fully understands….

I don’t think it’s a problem of us mislabelling what is truly “capital income”. If you look at what a hedge fund manager or a Fortune 500 CEO receives, he—and almost always he—because of the inherited wealth that he brought to the table. It is associated with the job. whether it’s “earned” in a social sense is a whole different question. What is true is that the way that income comes for such people is very different from the way it comes from an ordinary wage or salary worker. It’s not that there’s a job and there’s pay. It’s that you do something. You climb. It comes in the form of stock options—although those are actually a lot less tied in reality to the price of the stock than people think. The basis tends to get adjusted. In the finance industry it comes from however much profit you’ve managed to make.

What’s odd is that argument is used sometimes to defend preferential tax treatment. And we have the “carried interest” loophole, which lets people in the finance industry pay much lower tax rates. The argument is: well, yes, they’re working hard and all this stuff, but the returns to that labor are highly uncertain, so you don’t want to treat it as normal income. To that, some of us say: you know, I’m writing a book in which you put often an awful lot of work, and then you have no idea how much if any money you’re going to make at the end. And somehow or other I’m paying a full rate.

There’s something going on. To a large extent this is a category of income that must have always existed. John D. Rockefeller, the original John D. Rockefeller, did not inherit his wealth. For most of his life he presumably was making most of his money through the profits of his enterprises rather than as return on his accumulated capital. But it seems to be much more prevalent now than it was before. That is a bit of a problem for the Piketty argument. He is saying: inherited wealth will go back to becoming much more central. But I don’t think it’s a fundamental category error.

Salvatore Morelli: The original Piketty and Saez studies on top incomes in the U.S. were showing that, relatively speaking, labor income was much more prevalent at the top—if we exclude the top 0.001%, of course. But it’s also true that that study in particular was based on tax statistics, so on tax returns. The problem is that not all the capital income is reported in the tax returns. Importantly, a growing share of capital income is not reported. This led Thomas Piketty and Emmanuel Saez and Gabriel Zucman to do a follow-up study, which is now part of the DINA Project—Distributional Income National Accounts. What they did is to take the national account income and distribute it back to the population so that it does not suffer from the tax-reporting bias. When you do that, it’s actually surprising to see how capital income rises across the distribution. Even at the bottom of the distribution you have a lot of capital income—most of capital income from tax-exempt savings accounts was not reported in tax statistics. When you get to even the top 10% people are earning more income from capital and not from labor. The research question is still open. But I wanted to point that out.

Paul Krugman: Returns and profits—dividends and capital gains—which are popping up in your account in the Bahamas are just not going to be in the original Piketty-Saez data. That means that we actually are more like the 19th century than we think we are, yes.

Branko Milanovic: There is an analysis based on the French data only, because that’s the only country which apparently has the data, which shows what percentage of people would inherit what amount of money which would allow them, given improving life expectancy, to with that money live at a medium level of income for that country. That is, actually, a very impressive statistic. When you think that if I inherit something that would actually allow me to live at the mean income level of my country until I die, it is really a very strong sort of inequality that brings back the role of inheritance very strongly….

Brad DeLong: In the old days you would not get stock options—you would simply be handed the stock in a corporate organization or reorganization. Rather than showing up in the income statistics at its option value when your stock options were granted you and then at the difference between market value and strike price when you exercised your options, they would not show up in the income statistics at all. Thus even leaving to one side all of the tax-avoidance, tax-evasion, and data-quality issues, it is somewhat misleading to say that the superrich get much much more of their income from “labor” now than they used to.

And, of course, calling it “labor” and invoking marginal product theory is totally misleading. The most that the ideologues of the right seeking to justify the superrich will say is that “tournaments” are effective effort-elicitation mechanisms: that because of the cognitive biases and deficits of the CEO-financier-entrepreneurial class, you elicit an enormous amount of effort from many people relatively cheaply by offering a few really big prizes.

But the societal benefits of all of this enormous effort are missing. Corporate control is no better than it was in the 1950s. CEOs are no better than in the 1950s. Economic growth is certainly worse than in the 1950s. And as for risk management—ha!

(3) Politics: Belle Époque France and Progressive Era America

Paul Krugman: One piece that really impressed me in Piketty was the discussion of the Third French Republic, which is “liberte, egalite, fraternite”, and yet politics is dominated by vast inherited wealth dynasties. A point he makes is that the intellectual domination—that the fact that inherited wealth in effect managed to set the terms of discussion and to define what was responsible, what you could do. You
can easily see that looking at a lot of things are going on in America now. How that happens we can talk about. We can talk about foundations. We can talk about influence. We can talk about all of those things…. A countervailing thing… [is] the United States in the Progressive Era… a vastly unequal society… in which it was quite common for people—often people who were themselves very much on the top—to express ideas that would be regarded as radically left-wing today… to talk about the dangers of vast wealth… the importance of high inheritance taxes to prevent concentration… people—I believe including Theodore Roosevelt—saying things like: we would want to tax this wealth even aside from the revenue we raise, for we want to make sure that these great fortunes do not accumulate. For anyone to try to say that now you would be accused of being a radical Marxist. Maybe the dominance of patrimonial wealth is not—the intellectual dominance is not necessarily as large as we might imagine…

Brad DeLong Andrew Carnegie’s “he who dies rich dies disgraced”… The transformation to what we have today is very interesting… I remember a panel I did at Rice University with R. Glenn Hubbard. The two-step was something like: financial inheritance really does not matter because the truly valuable things our children inherit from us is the good values we inculcate in them—therefore, because they have good values, they deserve to inherit our money too. It did not seem to me to make much sense.

(4) Stakeholders

Paul Krugman: The last thing I want to say is: countervailing institutions…. Maybe my imagination is limited, but it’s hard for me to think of anything that I know in my history that is comparable to the historical but now largely vanished role, at least in this country, of unions. Organized labor has always been the huge counterweight to organized wealth. That diminution—if you ask me what would be the one thing that I would want to see happen to get us back, it would be somehow rather to restore the role of a substantial effective labor movement….

I almost hate to use the language of responsibility, not out of any personal moral aversion but because I don’t think they care. The point was that they did in fact. In the America I grew up in, there were large corporations viewed themselves as representing a variety of stakeholders—not simply not simply the stock investors. That included labor. That was partly either because they were unionized or because they knew there were unions out there, and knew that they knew would become unionized if they did not represent all stakeholders. Thus there is certainly a way in which the private sector can play a role in being an institution for equality. That is in fact the way America was for about 40 years after WWII. So it can happen here. Whether and how we get to make that happen now—I don’t know. Think about a corporate executive who has various interests. He wants to be rich. He wants to not have this employees hate him. If there’s a ninety-one percent marginal tax rate, as there was in the in the 50s, he’s probably going to pay more attention to the to the personal non-pecuniary aspects of the job. Part of the explosion of top incomes probably does reflect the fact that we’ve made it possible for people to keep whatever they get by making life harder for other people…

Brad DeLong: How much soft compensation did CEOs receive in the era of social democracy anyway?

The big countervailing institution is supposed to be the government: we are supposed to vote for progressive taxes, on the grounds that most of what produces the superrich is good luck, and good luck is a very good thing to tax—we would all agree to very high taxes on good luck if we were to make decisions back behind the veil of ignorance.

The Trump minority coalition—and the right-wing coalition generally—have been running, ever since the late-nineteenth century breaking of real American Populism on the anvil of racism, on the claim that the superrich are worthy because they are people like us while progressive taxes are illegitimate because the benefits flow to them, and they are not people like us. Obamaphones!

Alexis de Tocqueville had something very interesting to say about this, back at the end of the 1840s, in the very brief interregnum between Orleanist Monarchy and Second French Bonapartist Empire that was the Second French Republic:

I was at once struck by a spectacle that both astonished and charmed me. A certain demagogic agitation reigned, it is true, among the workmen in the towns ; but in the country all the landed proprietors, whatever their origin, antecedents, education or means, had come together, and seemed to form but one class: all former political hatred and rivalry of caste or fortune had disappeared from view. There was no more jealousy or pride displayed between the peasant and the squire, the nobleman and the commoner ; instead, I found mutual confidence, reciprocal friendliness, and regard. Property had become, with all those who owned it, a sort of badge of fraternity. The wealthy were the elder, the less endowed the younger brothers ; but all considered themselves members of one family, having the same interest in defending the common inheritance. As the French Revolution had infinitely increased the number of land-owners, the whole population seemed to belong to that vast family. I had never seen anything like it, nor had anyone in France within the memory of man….

[During the June insurrection,] I returned from my round convinced that we should come out victorious ; and what I saw on nearing the Assembly confirmed my opinion. Thousands of men were hastening to our aid from every part of France, and entering the city by all the roads not commanded by the insurgents. Thanks to the railroads, some had already come from fifty leagues’ distance, although the fighting had only begun the night before. On the next and the subsequent days, they came from distances of a hundred and two hundred leagues. These men belonged indiscriminately to every class of society ; among them were many peasants, many shopkeepers, many landlords and nobles, all mingled together in the same ranks. They were armed in an irregular and insufficient manner, but they rushed into Paris with unequalled ardour : a spectacle as strange and unprecedented in our revolutionary annals as that offered by the insurrection itself. It was evident from that moment that we should end by gaining the day, for the insurgents received no reinforcements, whereas we had all France for reserves.

On the Place Louis XV, I met, surrounded by the armed inhabitants of his canton, my kinsman Lepelletier d’Aunay, who was Vice-President of the Chamber of Deputies during the last days of the Monarchy. He wore neither uniform nor musket, but only a little silver-hiked sword which he had slung at his side over his coat by a narrow white linen bandolier. I was touched to tears on seeing this venerable white-haired man thus accoutred. “Won’t you come and dine with us this evening?”

“No, no,” he replied ; ” what would these good folk who are with me, and who know that I have more to lose than they by the victory of the insurrection — what would they say if they saw me leaving them to take it easy ? No, I will share their repast and sleep here at their bivouac. The only thing I would beg you is, if possible, to hurry the despatch of the provision of bread promised us, for we have had no food since morning”…

(5) Politics

Paul Krugman: The issue polling is interesting because for the most part as I read it it says that likely voters basically have center-left views—that the center-left movement that we say is dying is in fact, on by the issues, almost all of them, what people support. People believe in guaranteed health care. People believe in most of the strong social safety net. They want all of these things.

The most recent polling obviously has the United States has been on two things. Health care, where people just absolutely hate what’s being proposed. They suddenly discover that they love Obamacare now that it’s maybe its way out.

What was interesting—and this is maybe the last word—is the poll that came out I think this morning—Quinnipiac—showed people with very center-left views on almost everything. The one piece of the current administration’s tax agenda that people do approve of is abolition of the estate tax.

So it turns out that people want a strong welfare state, a strong middle class, and patrimonial capitalism…

Brad DeLong: As Heather Boushey said: go figure.

“After Piketty” Publication Day

Posted on by Brad DeLong

Today is our publication day!

Heather Boushey, J. Bradford DeLong, and Marshall Steinbaum, eds.: After Piketty: The Agenda for Economics and Inequality http://amzn.to/2qgPIRE (Cambridge: Harvard University Press: 0674504771).

Let’s see if I can maintain a post an hour today on this, shall we?

Here is my amazon review:

As one of the co-editors of this book, I know it very well. I am greatly pleased with how this project came out—we have very serious people, as Bob Solow would put it, writing very serious takes on what Thomas Piketty has accomplished, where he has gone wrong, and what gaps remain to be investigated by others. Social scientists thinking of citing on, working along lines related to, or drawing on Piketty should certainly read this book. People who have read Capital in the Twenty-First Century who are curious about how serious people are reacting to and assessing the book should read it as well.

Must-Read: Y. Berman, O. Peters and A. Adamou: Far from Equilibrium: Wealth Reallocation in the United States

Posted on by Brad DeLong

Must-Read: Well, well, well–since the 1980s modeling the U.S. wealth distribution as an endless non-ergodic inegalitarian spiral seems to fit rather well. That’s a genuine surprise…

Y. Berman, O. Peters and A. Adamou: Far from Equilibrium: Wealth Reallocation in the United States: “We fit observed distributions of wealth–how many people have how much–to a model of noisy exponential growth and reallocation…

…Everyone’s wealth is assumed to follow geometric Brownian motion (GBM), enhanced by a term that collects from everyone at a rate in proportion to his wealth and redistributes the collected amount evenly across the population. We use US data from 1917 until 2012. Firstly, we find that the best-fit reallocation rate has been negative since the 1980s, meaning everyone pays the same dollar amount and the collected amount is redistributed in proportion to his wealth, a flow of wealth from poor to rich. This came as a big surprise: GBM on its own generates indefinitely increasing inequality, and one would expect this extreme model to require a correction that reduces the default tendency of increasing inequality. But that’s not the case: recent conditions are such that GBM needs to be corrected to speed up the increase in wealth inequality if we want to describe the observations. Secondly, our model has an equilibrium (ergodic) distribution if reallocation is positive, and it has no such distribution if reallocation is negative. Fitting the reallocation rate thus asks the system: are you ergodic? And the answer is no. With current best-fit parameters the model is non-ergodic, and throughout history whenever the parameters implied the existence of an ergodic distribution, their values implied equilibration times on the order of decades to centuries, so that the equilibrium state had no practical relevance. http://arXiv:1605.05631

Must-read: Thomas Piketty: “Capital, Predistribution and Redistribution”

Posted on by Brad DeLong

Must-Read: Thomas Piketty: Capital, Predistribution and Redistribution: “In my view, Capital in the 21st Century is primarily a book about the history of the distribution of income and wealth…

…We have been extending to a larger scale the pioneering historical data collection work of Simon Kuznets and Tony Atkinson (see Kuznets, 1953, and Atkinson and Harrison, 1978). My first objective in this book is to present this body of historical evidence in a consistent manner…. Another important objective is to draw lessons for the future and for the optimal regulation and taxation of capital and property relations…. We have too little historical data at our disposal to be able to draw definitive judgments… [but] at least we have substantially more evidence than we used to….

The size of the gap between r and g… can contribute to explaining why wealth inequality was so extreme and persistent in pretty much every society up until World War I…. [But] I do not view r>g as the only or even the primary tool for considering changes in income and wealth in the 20th century, or for forecasting the path of inequality in the 21st century. Institutional changes and political shocks… played a major role in the past, and… will… in the future…. It is obvious that this rise in labor income inequality in recent decades has little to do with r-g….

A higher r-g gap will tend to greatly amplify the steady-state inequality of a wealth distribution that arises out of a given mixture of shocks…. Relatively small changes in r–g can generate large changes in steady-state wealth inequality…. Available micro-level evidence on wealth dynamics confirm that the high gap between r and g is one of the central reasons why wealth concentration was so high during the 18th-19th centuries and up until World War I….

The theory of capital taxation that I present in Capital in the 21st Century is largely based upon joint work with Emmanuel Saez…. We develop a model where inequality is fundamentally two-dimensional: individuals differ both in their labor earning potential and in their inherited wealth…. Optimal tax policy is also two-dimensional: it involves a progressive tax on labor income and a progressive tax on inherited wealth….

In my book, I propose a simple rule-of-thumb to think about optimal annual tax rates on wealth and property. Namely, one should adapt the tax rates to the observed speed at which the different wealth groups are rising over time…. If top wealth holders are rising at 6-7% per year in real terms (as compared to 1-2% per year for average wealth)… and if one aims to stabilize the level of wealth concentration, then one might need to apply top wealth tax rates as large as 5% per year…. Indeed that there is substantial uncertainty about how far income and wealth inequality might rise in the 21st century, and that we need more financial transparency and better information about income and wealth dynamics…. The progressive consumption tax… is in my view a highly imperfect substitute…. Meritocratic values imply that one might want to tax inherited wealth more than self-made wealth, which is impossible to do with a consumption tax alone. Next, and most importantly, the very notion of consumption is not very well defined for top wealth holders….

One of the important findings from my research is that capital-income ratios β=K/Y and capital shares α tend to move together in the long run…. In the standard one-good model of capital accumulation with perfect competition, the only way to explain why β and α move together is to assume that the capital-labor elasticity of substitution σ that is somewhat larger than one…. This is not my favored interpretation…. Maybe robots and high capital-labor substitution will be important in the future. But at this stage, the important capital-intensive sectors are more traditional sectors like real estate and energy. I believe that the right model to think about rising capital-income ratios and capital shares in recent decades is a multi-sector model of capital accumulation, with substantial movements in relative prices, and with important variations in bargaining power over time….

The last chapter of my book concludes: ‘Without real accounting and financial transparency and sharing of information, there can be no economic democracy. Conversely, without a real right to intervene in corporate decision-making (including seats for workers on the company’s board of directors), transparency is of little use. Information must support democratic institutions; it is not an end in itself. If democracy is someday to regain control of capitalism, it must start by recognizing that the concrete institutions in which democracy and capitalism are embodied need to be reinvented again and again’ (p. 570)…

Over at Project Syndicate: “Piketty vs. Piketty”

Posted on by Brad DeLong

Over at Project Syndicate: Piketty vs. Piketty: BERKELEY – In Capital in the Twenty-First Century, the French economist Thomas Piketty highlights the striking contrasts in North America and Europe between the Gilded Age that preceded World War I and the decades following World War II. In the first period, economic growth was sluggish, wealth was predominantly inherited, the rich dominated politics, and economic (as well as race and gender) inequality was extreme… READ MOAR over at Project Syndicate

The melting away of North Atlantic social democracy

Posted on by Brad DeLong

Over at Talking Points Memo: The Melting Away of North Atlantic Social Democracy: Hotshot French economist Thomas Piketty, of the Paris School of Economics, looked at the major democracies with North Atlantic coastlines over the past couple of centuries. He saw five striking facts:

  • First, ownership of private wealth—with its power to command resources, dictate where and how people would work, and shape politics—was always highly concentrated.
  • Second, 150 years—six generations—ago, the ratio of a country’s total private wealth to its total annual income was about six.
  • Third, 50 years—two generations—ago, that capital-income ratio was about three.
  • Fourth, over the past two generations that capital-income ratio has been rising rapidly.
  • Fifth, the flow of income to the owner of the dollar capital did not rise when capital was relatively scarce, but plodded along at a typical net rate of profit of about 5% per year generation after generation.

He wondered what these facts predicted for the shape of the major North Atlantic economies in the 21st century. And so he wrote a big book, Capital in the Twenty-First Century **READ MOAR at Talking Points Memo

Version with annotations, references, and deleted scenes: https://fold.cm/read/delong/the-melting-away-of-north-atlantic-social-democracy-Fdf2BEBZ

Photo of Thomas Piketty in Sweden, June 30, 2014. (AP Photo/Janerik Henriksson)

Must-Read: Dean Baker: The Upward Redistribution of Income: Are Rents the Story?

Posted on by Brad DeLong

Must-Read: Contra Dean Baker, I suspect that Thomas Piketty would say that the ability of the rich to manipulate property rights and market power in order to keep the rate of profit high even as the economy becomes more capital-intensive is a feature that is “intrinsic to capitalism.” Thus I think Piketty would say that Baker is wrong here at the end:

Dean Baker: The Upward Redistribution of Income: Are Rents the Story?: “The top one percent of households have seen their income share roughly double…

…from 10 percent in 1980 to 20 percent in the second decade of the 21st century. As a result of this upward redistribution, most workers have seen little improvement in living standards from the productivity gains over this period…. The bulk of this upward redistribution comes from the growth of rents in the economy in four major areas: patent and copyright protection, the financial sector, the pay of CEOs and other top executives, and protectionist measures that have boosted the pay of doctors and other highly educated professionals. The argument on rents is important because, if correct, it means that there is nothing intrinsic to capitalism that led to this rapid rise in inequality, as for example argued by Thomas Piketty.

http://cepr.net/documents/working-paper-upward-distribution-income-rents.pdf

Must-read: Henry Farrell: “Piketty, in Three Parts”

Posted on by Brad DeLong

Must-Read: Second to Miriam Ronzoni in the Crooked Timber Piketty symposium is Henry Farrell–who provides the best precis of Piketty as both sociological phenomenon and political actor I have yet seen:

Henry Farrell: Piketty, in Three Parts: “Piketty[‘s]… contribution is better understood in sociological terms…

…Economic knowledge… is the product of social processes… in which socially-legitimated social structures produce socially-legitimated forms of knowledge that are validated in socially-legitimated ways…. In a technocratic age… high-quality statistical data are… legitimate in ways that other kinds of knowledge are not. Piketty and his colleagues[‘]… high-quality data sets… confound… previous… wisdom that we didn’t need to worry about inequality. This makes a vast and important social phenomenon… visible, salient and socially undeniable….

Although efforts to undermine the credibility of the project (such as the notorious Financial Times investigation) have failed, it will continue to get empirical pushback. However, this pushback is likely to further increase the salience of the problem of inequality, by making it a major object of scientific inquiry…. If you (whether for principled or unprincipled reasons) don’t want inequality to be a problem that people pay attention to, and want to try and solve, then the Piketty book is likely to seem like a disaster to you. You’ll devote a lot of time and energy to trying to tear it down. Sometimes this criticism will be useful…. Sometimes it will be a form of denialism. Equally, if you are someone who believes that inequality is a real problem, Piketty’s work not only helps to validate your beliefs, but it gives you a new set of tools….

Finally, it helps explain Piketty’s policy prescriptions, some of which are proposed not so much to solve the problem of inequality, as to help generate the kinds of politics that might solve the problem…. For example, his self-admittedly utopian proposal for a global tax on capital is in part motivated by the desire to reduce financial opacity, and to make it clearer just how well the truly rich are doing…. If we (as a democratic society, in the US, France, Ireland or some congeries of these national societies) truly understood how rich the rich were, we could do something about it…. Obviously, this bet is an uncertain one. Piketty has little to say about the politics through which knowledge generates political action…. What more we might need than knowledge is difficult to say…