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October 16, 2014

Latest Posts from Economist's View

Latest Posts from Economist's View

'Understanding Economic Inequality and Growth at the Top of the Income Ladder'

Posted: 15 Oct 2014 10:38 AM PDT

A nice collection of essays on inequality and what can be done about it by Heather Boushey, Emmanuel Saez, Michael Ettlinger, and Fiona Chin:

Understanding economic inequality and growth at the top of the income ladder

For example, from Saez:

... Zucman and I show in our new working paper that the surge in wealth concentration and the erosion of middle class wealth can be explained by two factors. First, differences in the ability to save by the middle class and the wealthy means that more income inequality will translate into more inequality in savings. Upper earners will naturally save relatively more and accumulate more wealth as income inequality widens.
Second, the saving rate among the middle class has plummeted since the 1980s, in large part due to a surge in debt, in particular mortgage debt and student loans. With such low savings rates, middle class wealth formation is bound to stall. In contrast, the savings rate of the rich has remained substantial.
If such trends of growing income inequality and growing disparity in savings rates between the middle class and rich persist, then U.S. wealth inequality will continue to increase. The rich will be able to leave large estates to their heirs and the United States could find itself becoming a patrimonial society where inheritors dominate the top of the income and wealth distribution as famously pointed out by Piketty in his new book "Capital in the 21st Century."
What should be done about the rise of income and wealth concentration in the United States? More progressive taxation would help on several fronts. Increasing the tax rate as incomes rise helps curb excessive and wasteful compensation of top income earners. Progressive taxation of capital income also reduces the rate of return on wealth, making it more difficult for large family fortunes to perpetuate themselves over generations. Progressive estate taxation is the most natural tool to prevent self-made wealth from becoming inherited wealth. At the same time, complementary policies are needed to encourage middle class wealth formation. Recent work in behavioral economics by Richard Thaler at the University of Chicago and Cass Sunstein at Harvard University shows that it is possible to encourage savings and wealth formation through well-designed programs that nudge people into savings.

Maybe if they had more income to save??? Another part of the essay gets at this (what I've called the mal-distribution of income, i.e. workers receiving less than the value of what they produce, and those at the top receiving more through rent-seeking and other means):

...while standard economic models assume that pay reflects productivity, there are strong reasons to be skeptical, especially at the top of the income ladder where the actual economic contribution of managers working in complex organizations is particularly difficult to measure. In this scenario, top earners might be able partly to set their own pay by bargaining harder or influencing executive compensation com­mittees. Naturally, the incentives for such "rent-seeking" are much stronger when top tax rates are low.

In this scenario, cuts in top tax rates can still increase the share of total household income going to the top 1 percent at the expense of the remaining 99 percent. In other words, tax cuts for the wealthiest stimulate rent-seeking at the top but not overall economic growth—the key difference from the supply-side scenario that justified tax cuts for high income earners in the first place.

[I talked what I think should be done to curb rising inequality here and tried to make the point that one of the first things we can do is to claw back some of the income from high income earners and return it to those who actually deserve it. In the short-run, this can be done through progressive taxation and the redistribution of income to where it belongs, but in the longer run I'd like to see the distribution mechanism fixed, at least in part, through measures that increase the bargaining power of workers so that the playing filed is a bit more level. In addition, I'd also like to see measures/policies that will produce better jobs for working class households.]

''The Long-Term Unemployment Rate is NOT 'Sticky' or 'Stubborn'''

Posted: 15 Oct 2014 10:02 AM PDT

Josh Bivens has an adjective quibble:

Adjective Quibble: The Long-Term Unemployment Rate is NOT "Sticky" or "Stubborn": A Wall Street Journal blog post this morning describes an Obama administration initiative to combat long-term unemployment. In the opening sentence, the author follows a too-common convention in describing the long-term unemployment rate as "sticky." Sometimes the adjective is "stubborn."
I know that this will sound like quibbling, but in this case adjectives really matter for understanding the problem. As a paper I co-wrote shows pretty clearly, the long-term unemployment rate (LTUR) has not been sticky or stubborn for years. In fact, the LTUR has fallen faster than one would expect given the overall pace of labor market improvement. It is true that the LTUR remains too high, but that is because it skyrocketed during the Great Recession and in the six months after its official end. But the LTUR has since then not become resistant to wider labor market improvement.
The concrete policy implication of recognizing this is that by far the most important thing that can be done to lower the still too-high LTUR is to maintain support for economic recovery more broadly. In today's far too narrow macroeconomic policy debate, this simply means the Fed should not boost short-term interest rates until the labor market is much, much healthier (including a much lower LTUR). ...

And it's still far from too late for fiscal policy -- infrastructure spending for example -- to make a difference. But don't get your hopes up...

'Urgent Need to Boost Demand in the Eurozone'

Posted: 15 Oct 2014 10:01 AM PDT

Biagio Bossone and Richard Wood

To G-20 Leaders: Urgent Need to Boost Demand in the Eurozone: The economies in the Eurozone are continuing to slide into recession and depression.  Senior officials of G-20 countries (including those in Australia, the host government) have not understood, or anticipated, that the Eurozone crisis is a major threat to global recovery. The officials have provided sub-standard advice to their leaders.  The deepening crisis must be addressed.  This article identifies a strong monetary/fiscal policy combination that could boost consumer and aggregate demand, and simultaneously address high public debt burdens and deflation.

Paul Krugman:

1937: From the beginning, economists who had studied the Great Depression warned that policy makers needed, above all, to be careful not to pull another 1937 — a reference to the fateful year when FDR prematurely tried to balance the budget and the Fed prematurely tried to normalize monetary policy, aborting the recovery of the previous four years and sending the economy on another big downward slope.
Unfortunately, these warnings were ignored. ... And now things are sliding everywhere. Actually, Europe already had one 1937, with its slide into a double-dip recession; but now it's very much looking like another. And the world economy as a whole is weakening fast. ...
I hope that the Fed will stop talking about exit strategies for a while. We are by no means out of the Lesser Depression.

Update: See also The Depressing Signals the Markets Are Sending About the Global Economy -

'Three Hours of Life per Euro'

Posted: 15 Oct 2014 10:00 AM PDT

Public spending increased life expectancy in eastern Germany:

Three hours of life per euro, EurekAlert: Public spending appears to have contributed substantially to the fact that life expectancy in eastern Germany has not only increased, but is now almost equivalent to life expectancy in the west. While the possible connection of public spending and life expectancy has been a matter of debate, scientists at the Max Planck Institute for Demographic Research (MPIDR) have now for the first time quantified the effect. They found that for each additional euro the eastern Germans received in benefits from pensions and public health insurance after reunification, they gained on average three hours of life expectancy per person per year.
These are the conclusions of an analysis based on a newly developed set of age-specific data on public expenditures through the year 2000. MPIDR demographer Tobias Vogt published the results of the analysis recently in the scientific journal Journal of the Economics of Ageing. ...
"What has often been called an explosion in social spending in the wake of reunification has, however, led to a gratifying jump in life expectancy," says Tobias Vogt. ...
Additional expenditures by the health care system were found to have had a greater impact on life expectancy than higher pensions... However, Vogt observed, "without the pension payments of citizens in east and west converging to equivalent levels, the gap in life expectancy could not have been closed." This is because when there are no differences in the quality and level of medical care, the standard of living becomes the decisive factor in life expectancy. And the standard of living of older people is determined to a large extent by the size of their pensions. ...

'No, Mainstream Economists Did Not Just Reject Thomas Piketty’s Big Theory'

Posted: 15 Oct 2014 09:54 AM PDT

Jordan Weissmann asks Piketty about the IGM poll:

No, Mainstream Economists Did Not Just Reject Thomas Piketty's Big Theory, by Jordan Weissmann: ...the University of Chicago's Initiative on Global Markets ... asked economists whether they agreed or disagreed with the following statement: "The most powerful force pushing towards greater wealth inequality in the US since the 1970s is the gap between the after-tax return on capital and the economic growth rate." ... Overwhelmingly, the panel's answer was no, with only one out 36 panelists agreeing with the statement.
Afterwards, a number of journalists, economists, and other wags took to Twitter and blogs to talk about how Piketty had just gotten a black eye. ... Except ... Piketty ... never suggests r>g is the main reason behind the recent rise of inequality. Rather, [he] theorizes that, in the absence of government intervention, r>g ensures the future concentration of income and wealth. ... Ultimately,... IGM was asking economists to opine on an argument that nobody was making in the first place.
I found myself wondering: How would Piketty himself weigh in? "Well," he told me in an email this morning, "I think the book makes pretty clear that the powerful force behind rising income and wealth inequality in the US since the 1970s is the rise of the inequality of labor earnings, itself due to a mixture of rising inequality in access to skills and higher education, and of exploding top managerial compensation (itself probably stimulated by large cuts in top tax rates), So this indeed has little to do with r>g."
In short, you can add Piketty to the "Disagree" column, too.

The caption under the picture of Piketty in the article says it well:

He's probably thinking how it would be nice if people read his book before arguing with it.

See also Brad DeLong, Nick Bunker, and Matt O'Brien.

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