Must-Read: Gene Smolensky says Bob Reich’s latest book is truly excellent:
: Saving Capitalism: For the Many, Not the Few: “The New Property…
The New Monopoly… The New Contracts… The New Bankruptcy… The Enforcement Mechanism… The Meritocratic Myth… The Hidden Mechanisms of CEO Pay… The Subterfuge of Wall Street Pay… The Declining Bargaining Power of the Middle… The Rise of the Working Poor… The Rise of the Non-Working Rich…
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:
: 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: The distribution of wealth; the distribution of income; the distribution of utility–and, possibly, the distribution of eudaimonia, of lives worth living if we reject the hardline Benthamite pushpin-as-good-as-poetry position. For example, Milanovic, Lindert, and Williamson (2010) convincingly paint a picture in which (a) pre-industrial inequality in wealth is very large, (b) pre-industrial inequality in income is moderate, and (c) pre-industrial inequality in utility is very large indeed. I think that this is a large part of what Willem Buiter is groping towards:
: Transferring Robot Incomes to the People: “I’m more an optimist on technological change than some…
…who argue that the low-hanging fruit on the Tree of Knowledge has all been plucked. That we’ve done fire, we’ve done the wheel, we’ve done horsepower, and, you know, coal, electricity, chemicals, and all we have now is the tail-end of the boring ICT revolution, robotics, artificial intelligence and biotechnology, that is just a big yawn. I think this is completely wrong….
We haven’t begun to scratch the surface yet of many of the applications of ICT, robotics, artificial intelligence, and everything that goes with it, is going to create huge social, political problems. But in terms of wealth creation, you know, it’s the ultimate thing if you do this right. If you get the distributional aspects right, and don’t turn the world into an economy where the owners of capital and a few winner-take-all entrepreneurs are with all the money and the rest starve, I think technical progress is not the issue….
It’s always true that existing jobs are wiped out in a hundred years, but it’s going to go much faster now, in twenty years time, maybe half the existing jobs in the service sector, the white collar jobs, are going to be gone. Because the scope for automation is actually greater, probably, in cerebral work than in physical work. It’s very hard to get robots to walk properly. It’s much easier to make them think really fast. So I think this is going to be the real challenge. You know, unless we blow ourselves up in religious extremism…. This is going to be the real challenge we have to face, avoid the Piketty nightmare, although he got his analysis wrong…
Must-Read: Huh. It now looks like the huge benefits that got us excited back in the “moving to opportunity” policy days may have been an underestimate:
: Moved to Opportunity: The Long-Run Effect of Public Housing Demolition on Labor Market Outcomes of Children: “This paper provides new evidence on the effects of moving out of disadvantaged neighborhoods…
…on the long-run economic outcomes of children…. Public housing demolitions in Chicago… forced households to relocate to private market housing using vouchers…. Compar[ing] adult outcomes of children displaced by demolition to their peers who lived in nearby public housing that was not demolished[,] displaced children are 9 percent more likely to be employed and earn 16 percent more as adults…
Must-Read: It is genuinely surprising to me that Kevin Murphy thinks that Katz and Murphy (1992) is still close to the last word on inequality. And it is beyond genuinely surprising that Steve Durlauf thinks that Bill Gates’s wealth was acquired by merit and John D. Rockefeller’s by monopoly when they are both winners in gigantic winner-take-all natural-monopoly markets–a natural-monopoly created by economies of scale in refining and distribution in the case of oil, and by write-once run-everywhere protected by patent and copyright in the case of operating systems:
: Free-Market Dogmatism Still Going Strong at the University of Chicago: “A discussion between Piketty and… Kevin Murphy and Steven Durlauf…
…with Jim Heckman acting as moderator…. [Murphy] thinks that his 1992 paper with Lawrence Katz, which tried to explain the dynamics of the college wage premium in the 1970s and 1980s with reference to the supply and demand for skilled labor in the form of workers with a college degree, constitutes the final word… [even though] its model fails at explaining… labor market outcomes… since… [and relies on the residual of] skills-biased technical change: the Ghost in the Free Market Economics Machine….
Piketty started things off by claiming that… globalization and skill-biased technical change… don’t explain the phenomena… closed with what I consider a profound restatement of why Capital in the 21st Century is such an important book:
The gap between [the] official discourse and what’s actually going on is enormous. The tendency is for the winner to justify inequality with meritocracy. It’s important to put these claims up for public discussion.
Durlauf… said, quite reasonably, that the key mechanism of inequality is segregation, because it translates individual inequality into entrenched deprivation, and that its policy implications are therefore to foster integration in a variety of contexts….
Murphy’s presentation was where the wheels came off, intellectually speaking. He declared… by regurgitating his 1992 paper… [saying] “that theory has done an amazing job,” including a cryptic statement about how it explains the rise of tail inequality “if you extrapolate,” whatever that means…. Murphy stepped forward once again to declare that the economy’s “natural supply response of supplying capital” will help workers by reducing the capital share and increasing their productivity…. Durlauf asserted in his JPE review of C21 that no one thinks like Clark anymore, with his quasi-moralistic view of the efficient functioning of capital formation and the adjustment of its rate of return. Unfortunately, Durlauf’s empirical prediction was falsified by Murphy right there on that stage…. Murphy added that in the absence of better education, “The march of technology over time means there’s little for someone with no human capital to do.”… Then things got weird. Durlauf… [said] what mattered was [Americans’] perception of [inequality’s] source: whether justified by merit, as in the case of Bill Gates, or extracted through monopolization, as with John D. Rockefeller. At that, Piketty quipped that Bill Gates certainly agrees….
Murphy[‘s]… idea seems to be that the poor, benighted though they are, will adopt the morally correct position of looking out for their own interest by acquiring an education, so long as the incentive to do so is preserved by avoiding progressive taxation. Usually the fallacy in the moral philosophy of economics… is to argue that whatever reality exists is for the best…. In this case, though, the “ought” is a priori: people should be selfish. For that reason, they probably will be, so long as the status quo is maintained as an instructive lesson in the disaster befalling anyone not born rich…. Durlauf made a final, inscrutable point… saying that we should directly address the harms caused by inequality, by which he was referring to capture of the political system by the wealthy…
Must-Read: : Restarting the Global Economy: “The global economy is not working properly…
…aggregate demand must be expanded, the gap between excessively large pools of capital and huge unmet infrastructure needs must be bridged, and… the distributional downside of rapid technological advances and global integration must be addressed. Change will come only when a global vision is put forth, coupled with political will…. The challenges represented by these mismatches intersect and interact, and play out differently in the short, medium and long term. One normally thinks of aggregate demand deficiency as a short-term challenge of the business cycle, but the current mismatch at the global level has lasted more than seven years…. Deficient labour demand, as the result of weak aggregate demand overall, either lowers wages or causes unemployment if wages are rigid–worsening the distribution of income in either case. This trend towards greater inequality will only worsen as the consequence of long-run trends in labour-displacing technologies….
These three self-reinforcing mismatches are an indication not only of market failure, but also of the failure of governments to address the challenges they pose…. Three areas of concerted public action–boosting global demand (with an emphasis on investment and essential services), unblocking the flow of surplus funds towards unmet investment needs, and mitigating rising inequality–are mutually reinforcing. The analytical arguments behind them are strong. Public policy solutions are possible to deal with many economic challenges if political consensus can be achieved on tackling them, both nationally and globally. What is needed is global vision and political will that can make them a reality and thus restart the global economy so it can meet its potential on growth and on distribution.
John Quiggin: Wealth: earned or inherited?: “The efforts of the right to discredit Piketty’s Capital…
…have so far ranged from unconvincing to risible…. One point raised in this four-para summary by the Economist is that ‘today’s super-rich mostly come by their wealth through work, rather than via inheritance.’… For those who haven’t… got around to reading [the book]….
Wealth inequality is also high, though it has not increased as much as income inequality…. Rattner [says]… ‘those at the top were more likely to earn than inherit their riches’. Since I’m already noticing that point popping up in the places you might expect… let me point out that Rattner’s explanation… is wrong, and that there is every reason to expect a boom in inherited wealth. The fact that currently wealthy Americans have not, in general, inherited their wealth follows logically from the fact that, in their parents’ generation, there weren’t comparable accumulations of wealth to be bequeathed… growing inequality of income must precede growing inequality of wealth, since wealth is simply the cumulative excess of income over consumption…. So, given highly unequal incomes, and social immobility, we can expect inheritance to play a much bigger role in explaining inequality for the generations now entering adulthood than for the current recipients of high incomes…