Accounting for U.S. Earnings and Wealth Inequality

Believe it or not, there is an article on wealth and inequality in the United States, with a reasonably good and accurately calibrated model.  It is authored by Ana Castaneda, Javier Dıaz-Gimenez and Jose-Vıctor Rıos-Rull, and it was published in the Journal of Political Economy in 2003.

I find the conclusion a good place to start:

…we provide a theory of earnings and wealth inequality, based on the optimal choices of households with identical and standard preferences, that accounts for the U.S. earnings and wealth inequality almost exactly. We show that uninsured idiosyncratic earnings risk, retirement, altruism, and government transfers to retired households are essential ingredients of our theory, since they allow us to replicate the observed earnings to wealth ratios of both the rich and the poor households simultaneously. We also show that calibrating the earnings process directly is a must if we want our model economies to replicate the observed distributions of earnings and wealth in sufficient detail.

Here is the abstract:

We show that a theory of earnings and wealth inequality based on the optimal choices of ex-ante identical households who face uninsured idiosyncratic shocks to their endowments of efficiency labor units accounts for the U.S. earnings and wealth inequality almost exactly. Relative to previous work, we make three major changes to the way in which this basic theory is implemented:

(i) we mix the main features of the dynastic and the life-cycle abstractions, that is, we assume that our households are altruistic, and that they go through the life-cycle stages of working-age and of retirement;

(ii) we model explicitly some of the quantitative properties of the U.S. social security system; and

(iii) we calibrate our model economies to the Lorenz curves of U.S. earnings and wealth as reported by the 1992 Survey of Consumer Finances. Furthermore, our theory succeeds in accounting for the observed earnings and wealth inequality in spite of the disincentives created by the mildly progressive U.S. income and estate tax systems, that are additional explicit features of our model economies.

In other words we already have a theory which does quite well in explaining U.S. wealth inequality, and it isn’t based on the total centrality of a comparison of r and g, as you find in Piketty.  And no one in the current debates is citing this piece, Piketty included.  From the main results, note this:

We find that abolishing estate taxation brings about an increase in steady-state output of 0.35 percent and an increase in the steady-state stock of capital of 0.87 percent. Along every other dimension, the differences between the benchmark and the No EstateTax model economies are negligible. If anything, we find that abolishing estate taxation brings about a very small increase in wealth inequality [emphasis added]. Specifically, the Gini index of wealth increases from 0.79 to 0.80, and the share of total wealth owned by the top quintile increases from 81.97 percent to 82.33 percent.

We conjecture that the main reason that justifies these findings is that, given the demographics of our model economy, the role played by the estate tax rate in determining the after-tax rate of return of the economy is quantitatively very small.

I don’t hear this point brought up very much these days.

An ungated pdf is here, and for the pointer I thank Tony Smith.  You should by the way also read the Krusell and Smith paper, which deals with similar topics.  See this survey too.

So much of the current Piketty debate is simply forgetting that…science exists and has already offered a wide range of insights on these topics, as well as having rendered some of the more extreme claims unlikely.  In addition to what I offered Sunday, via Tony Smith here are a few additional links:

1. Huggett:

2. Aiyagari:

3. Heathcote et al:

Update: Piketty did cite the main piece discussed here in 2010.


What a wonderful assumption from the abstract - ' Furthermore, our theory succeeds in accounting for the observed earnings and wealth inequality in spite of the disincentives created by the mildly progressive U.S. income and estate tax systems'

What 'disincentives' are there in the 'mildly progressive U.S. income and estate tax systems' that have kept the rich from getting richer?

Again, a link to how the Walton family and others have handled the 'disincentives' of that system -

'According to his autobiography, “Made in America,” Sam Walton started arranging his affairs to avoid a potential estate tax bill in 1953. His five-and-dime-store business was still in its infancy and his oldest child was 9.

That year, he gave a 20 percent stake in the family business to each of his children, keeping 20 percent for himself and his wife.

“The best way to reduce paying estate taxes is to give your assets away before they appreciate,” he wrote in the book.

Rockefeller Riches

Sam’s retailing success made his family the richest since the Rockefellers, who themselves were pioneers in estate-tax avoidance. As soon as the tax was enacted in 1916, John D. Rockefeller, then the world’s richest man, circumvented it by simply giving much of his fortune to his son. Congress closed that loophole eight years later by adding a parallel tax on living gifts to heirs.'

Gift tax today is 50%.

Can't give your business to your kids before you die any more.

Er 40% not 50%.

Don't you have some lifetime gift tax exemption. Unless it's changed it used to be around $1m.

I was wrong, it's $5.34m.

So you *can* pass along your business, if it's less than $5.3 million in assessed value (where assessment, even if done legally, has quite a bit of wriggle room). I should think it's also possible to sell off nonvoting shares in the business to pay the tax bill beyond $5.3 million and retain complete control, whether you organize it as a corporation, an LLC, or a partnership.

I just thought of another angle, tho it probably won't work. Suppose your business is worth $100 million, in the sense that the market would pay that based on yearly profits. You could simultaneously give 90 shares to your heirs and sell 10 shares to a stranger for $300,000. If the IRS lets you value the company at $3 million, using the latest genuine transaction, then you don't owe any gift tax. Would that work?

@ eric -

Of course not.

You really should read the article, sourced as it is from a media property owned by a billionaire -

'Alice Walton’s mother and brother poured more than $9 billion into trusts since 2003 that fund charitable projects like Crystal Bridges and are also designed to protect gifts to heirs from taxation. Another Walton pioneered a tax-avoidance maneuver that is now widely used by U.S. billionaires.

“I hate to say it, but the very rich pay very little in gift and estate tax,” said Jerome Hesch, a lawyer at Berger Singerman LLP in Miami who reviewed some of the Walton family’s trust filings for Bloomberg. “At the Waltons’ numbers, the savings are unbelievable.”

A family spokesman, Lance Morgan, said in a statement that “any charitable or estate planning practices employed by the Walton family are broadly available and commonly used.”'

This is a demonstration of how it works, involving just one method - ' According to IRS data, the Waltons are by far the biggest users of Jackie O. trusts in the U.S.

The money put into these trusts is ostensibly for charity. If the assets appreciate substantially over the years, though, the trusts have another desirable feature: they can pass money tax free to heirs.

A donor locks up assets in these trusts, formally known as charitable lead annuity trusts, or CLATs, for a period of time, say 20 or 30 years. An amount set by the donor is given away each year to charity. Whatever is left at the end goes to a beneficiary, usually the donor’s heirs, without any tax bill.'

The Waltons aren't paying 40% tax on anything.

The authors of the article TC linked to used 17% as the effective estate tax rate, extrapolated from actual tax receipts and the tax regime in effect in 1987-1997 (600K exemption).

Walton trust money went to the construction of the Crystal Bridges art facility in cultural Mecca Bentonville, Arkansas instead of buying gray paint to cover CVN-70 USS Carl Vinson. Good.

Sam Walton sets up trusts for his descendents, tries in a perhaps misguided way to make they lives better. They get to use the money for projects they favor.
Is that really any different, except in scale, than what the US is trying to do collectively for its own citizens? All this infrastructure that's been built with money confiscated from the present and the future is going to make things copacetic for the children, not just for the current crop of adults. Unlike the Walton heirs, who get to decide on how grandpa's money is going to be spent, the heirs of Joe Schmo can watch while their birthright is squandered on functionally obsolete aircraft carriers, dept. of Education bureaucracies, and zillion dollar trips around the world for the closest relatives of the POTUS. I vote for the Waltons.

Chuck, dead right.

Furthermore given what Sam Walton did to improve the lives of the poor I don't begrudge his decendents one penny. WalMart has done more to improve living standards than the entire Western world government social expenditure combined in my view. In fact WalMart is the real driver of reduced equality, forcing down constantly the price of basic goods and services so that the capitalists have to constantly work to stay competitive.

'The authors of the article TC linked to used 17% as the effective estate tax rate'

The Waltons aren't paying 17% either. And read a bit more closely about CLATs - why do you think that art is being donated? The museum built? Or do you think that the museum property and its content will depreciate over time?

'I vote for the Waltons.'

Except you didn't vote for them at all. And it is quite doubtful that Sam Walton shared your opinion about the worth of America's military strength, being a retired Army captain and defense industry worker who was proud to buy American.

I know your overall sentiment is correct ChrisA, however I must warn you that I can see about of mood affiliation in your tone, you should check yourself.
You say that you don't begrudge the Walmat heirs one penny GIVEN that Sam Walton improved millions of lives. However whether or not you begrudge someone their rightful fortune should have absolutely nothing to do with whether that fortune is the result of some imrpovement or not. The fortune was earned through market mechanisms and that should be enough not simply accept it is rightful.

'WalMart has done more to improve living standards than the entire Western world government social expenditure combined in my view.'

Interesting - any explanation for why Walmart failed so miserably in Germany, with its soziale Marktwirtschaft? Apart from the fact that Walmart wasn't actually cheaper than a truly efficient company like Aldi, that German law forbids Walmart from treating its employees like serfs (the attempt by Walmart to forbids its employees from having relationships with each other was laughed at by German citizens and courts), and that Walmart's philosophy of selling the lowest quality products as a way to convince its customers they are saving money was the sort of thing that Germans scorn.

I vote for the Waltons with my checkbook, like millions of others, in the true democracy of the marketplace, not the sham one of the political realm. You can't know how Sam Walton felt about US military procurement and that doesn't matter anyway. What may have been a good idea at one time isn't necessarily a good idea forever. Property rights seem to be a good idea all the time, however.

"Interesting – any explanation for why Walmart failed so miserably in Germany" UMMMMMMMMMMMMM here you go You answer the question right here

" that German law forbids Walmart from treating its employees like serfs "

The German Government intervened and put its thumb on the scale and prevented Walmart from acting freely in the market place. It denied Walmart the freedom of contract.

The issue isn't Walmart as it exists now. It's the fortunes bequeathed to Sam's descendents and the pathological envy with which it's infected the left. The idea that Alice Walton can use the profits of a merchandising empire to erect a building in the Ozarks is sacrilege to the statists that want every monetary decision to be made by bureaucratic priests according to regulatory scriptures. It's doubtful if you'd recognize Alice Walton on the street if she walked up and asked you for a cigarette but it would be pretty easy to identify the POTUS, if you could get within ten blocks of him.

Re Walmart in Germany: I don't recall details, but an antitrust suit was brought against WalMart for selling at prices lower than small businesses, even tho it was admitted that WalMart was selling above its own cost. European law cares less about consumers than American law, so it's tough for WalMart to make headway there.

And why isn't "truly efficient" Aldi succeeding in the U.S.?

So prior_approval are you saying that the Governments (fed, state, local) in the USA do a very poor job of deciding what is charitable giving and what is not and that we need reform in that area? I could agree with. In general our government seems to be very bad at prosecuting fraud whether in charity or in diet stuff.

"the true democracy of the marketplace"

Of course the marketplace is not a democracy at all, and this would be blindingly obvious to you if you weren't a foaming-at-the-mouth far-right ideologue.

When an individual goes to the marketplace and votes for a Ford with his money he doesn't end up with a Chevrolet because 50%+1 of car buyers prefer the Chevy. In fact, he has many choices. Of course there are government mandated seat belts, fuel consumption, and other requirements that make one car very much like another but there's more difference between a Lincoln Navigator and a Toyota Prius than there is between a Republican and a Democrat.

Again, the only real cure for world inequaliy is Open Borders The Left and Piketty NEVER mention this solution even though it would do more for the average person than any other possible policy. A society with no income tax, no estate tax, no capital gains tax, no SS, no ObamaCare, open borders and unlimited immigration would be more fair and equal than anything in the progressive imagination. Thankfully BitCoin is about to abolish all the taxes but we must still continue the fight for Open Borders.

@ JAMRC - can't tell if you are trolling sometimes, but +1 on Open Borders. I have found people are the same all over the world, thanks to McDonalds and American TV, and OB would go a long way to resolving all kinds of worldwide ills. You will get some blowback / collateral damage however, as has happened already in DC with MS-13 gangs from south of the border.

As for TC's article, these authors could simply be 'back fitting' data to fit their model. This is very common with multi-parameter models (Matlab will do it for free, with an n-order polynomial) but it 'proves' nothing, as it has no predictive power. This is the biggest failing with economic models: they are great at predicting the past sometimes, but not the future (same for stock picking models as well). Economics is non-linear.

JAMRC is trolling 100% of the time, but sometimes it is hard to troll when the viewpoint you are trying to parody is actually correct.

Yes, its funny, JAMRC is trying to do a Colbert, basically take an extreme view of his opponents position, to show how ridiculous it is. But, in a kind of meta joke, he actually makes good sense about half the time. Like this statement;
"A society with no income tax, no estate tax, no capital gains tax, no SS, no ObamaCare, open borders and unlimited immigration would be more fair and equal than anything in the progressive imagination." Is actually true when you think about the world population rather than just the privileged subset in the US.

On equality I thought the recent piece in the NYT on world incomes was really telling about the attitude of the equalists, they had a fit of the vapors due to the fact that some other countries (basically Canada and Norway) had caught with US GDP per head, and this was a bad thing according to them. I thought, what an awful sentiment, basically other people doing well is considered a bad thing. That to me is the definition of misanthropy.

You are indisputably right, but we can't leave the rest of the world locked up behind their national borders. The U.S. must also annex all foreign countries. That way there will never be any more international war, just rebellious provinces that will be pacified in due course.

No need for a war just change US immigration policy.

Clearly, there is nothing that fights inequality in America more than letting in tens of millions of poor peasants. Look how California has become a paradise for the common man. For example, from today's New York Times:

"[Donald] Sterling worked as a lawyer and began buying properties in the 1960s, when immigration took off in California and land prices followed."

Xenophobia - keeping land prices and regulations low.

When all you have is a hammer, everything looks like a nail.

Especially a racist hammer. Then everything that's brown looks like a nail.

Yeah, but high immigration Houston has dirt cheap housing, and zero immigration Tokyo has insane housing costs. I haven't seen any strong evidence that immigration strongly affects the cost of living. On the one hand immigrants bid up rents, but on the other a not insignificant number of construction workers tend to be from South of the Border.

That's what Angelo Mozilo and Henry Cisneros kept telling us!

Countrywide sets $1 trillion goal for real estate loan program
Funding aims to help minority, low-income borrowers


Countrywide Home Loans today announced an expansion of its We House America initiative to fund $1 trillion in home loans to minorities and lower-income borrowers and communities through 2010.

"The $1 Trillion We House America Challenge, expanded from $600 billion announced in 2003, embodies Countrywide's long-standing commitment to lead the mortgage industry in closing the home-ownership gap for minority and lower-income families and communities," said Angelo Mozilo, Countrywide Financial Corp. chairman and CEO, who announced the initiative at the International Builders' Show in Orlando.

"For several years now, Countrywide has been a leading lender to minorities and lower-income households," Mozilo said. "I am proud of our lending record and pleased to announce the expansion of our lending commitment to $1 trillion." The We House America program has already placed 2.4 million families into homes, Mozilo said that number should nearly triple by 2010.

The company will continue to develop innovative programs emphasizing non-traditional lending criteria, according to the announcement, such as calling for improved underwriting systems that eliminate the over-reliance on traditional credit scores that can mask a borrower's true credit-worthiness. ...

Henry Cisneros, a Countrywide director and a former secretary of Housing and Urban Development, said, "This company is leading the industry in closing the homeownership gap through ambitious lending commitments, innovative programs, and a strong corporate culture that constantly looks for ways to improve."

... The previous commitment covered the years of 2001-10 and has provided $341 billion of home loans as of Dec. 31, 2004. The company is now extending the goal to $1 trillion by 2010.

One good thing about immigration is at high levels it helps to bring down wages and by this mechanism reduce demand for housing. This is actual a key feature and the reason why Sailer is, as usual, mistaken about the supposedly ill-effects of immigration.

Between Sailer and the other moron/troll, it's like a perfect storm of stupidity.

I, for one, welcome our leguminous future!

Yeah, but my point is that immigration alone doesn't explain living costs. Most likely the appropriate model is immigration+building restriction leads to high housing costs. One the one hand you could blame immigration, but on the other hand you could blame zoning and housing regulation.

"the role played by the estate tax rate in determining the after-tax rate of return of the economy is quantitatively very small."

I'm dubious. The GOP wouldn't be so dead set against "death taxes" if their rich donors didn't fear them so much.

Most studies of wealth inequalities based on samples exclude as outliers the Forbes 400 rich, who are actually really important.

The rich today derive their income primarily from productive economic activity, perhaps some of the wealthy GOP donors are mistaken to believe themselves in the 19th Century. Unlike do-nothing layabouts like Andrew Carnegie and Thomas Edison today's wealthy are innovators like Mark Zuckerburg or the various MDs of Goldman Sachs providing true and unambigious value to all of humanity. We need to change the conversation to find solutions that really benefit people.

If the conversation can't be changed, it must be controlled. Comments sections, for example, are a locus for inappropriate views and should be abolished.

Lately you've been focused on the fact that virtually all billionaires are in support of increasing H1B immigration. This translates into virtually zero support from either party for reducing H1Bs. Your own model of politics would suggest that when an issue is truly important to the billionaire class that every major American politician will get behind it.

The fact that estate taxes are specifically a partisan issue should lead you to conclude that they really aren't important to very wealthy Americans. Partisan issues are sideshows, when something's really important to billionaires they'll pony up to get both sides of the aisle behind it. (Again this is simply an application of your prior reasoning on similar issues).

The estate tax exclusion in 2014 is $5,340,000 (and $10,680,000 for couples). That's literally only a problem for one percent or so of Americans. For the other 99%, it's a benefit. Yet, you have one party that wants to abolish the inheritance tax and the other party wants to maybe decrease the exclusion a little. That's a good example of where the balance point is in American politics.

When did a policy that literally destroys huge amounts of wealth become a benefit to anyone?

In what sense does a tax on wealth "destroy" it. It transfers it to other uses which might be better or worse.

Transfers it to the gov't = significant deadweight loss. Maybe net negative. (self admitted mood affiliation alert)

Quite a lot of estate planning is the intentional destruction of value: imposing restrictions on assets, eliminating voting rights, etc to depress the value.

" The key concept is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply. "

Just because only the top 1% pay the tax, doesn't mean that the tax only affect the top 1%. Inheritance tax is basically a (highly inefficient tax) on capital. And capital tax incidence affects nearly all workers and consumers. I know you think economists are the running dogs of billionaire plutocrats, but what you're saying is basically disputed by very basic and foundational microecon.

How much did Steve Jobs make for running Apple so well from 1997 to 2011? Surprisingly little -- a few billion maybe. (The bulk of his estate came from Pixar.) Nothing like what, say, Sheldon Adelson or Carlos Slim made for doing whatever it is they do. And yet, a billion here, a billion there seemed to be enough incentive to persuade Jobs to get up in the morning and go to work.

I thought we were talking about a $5 million exclusion? That's a far cry from "poor" Steve Jobs. So I can assume you assume raising the exclusion to "a few billion"?

We already have massive property taxes, which people seem quite comfortable with. Does that destroy the housing stock? Is it inefficient?

The basic rule of taxation is that you need a bunch of different taxes of moderate size because any one tax can be gamed.

"The basic rule of taxation is that you need a bunch of different taxes of moderate size because any one tax can be gamed."

I think the opposite of this is true. Simple tax codes are less likely to be gamed. The massively complex US tax code is basically a collection of tons of different moderate taxes. Almost assuredly revenue would be collected much more efficiently through a simple flat income+VAT+corporate+property tax system.

Simple tax codes are easy to game. A lot of the complexity of our code is anti-abuse rules.

And here is a sequence 4 decade long sequence -

1970 0.394
1980 0.403
1990 0.428
2000 0.462
2005 0.469
2006 0.470
2007 0.463
2008 0.467
2009 0.468
2010 0.469
2011 0.477

Since the commenters at this web site are so well informed, certainly they are all familiar with what that sequence represents in terms of the debate about American income inequality?

But why bring data into such a discussion - it just distracts from the fact that average is over, and we all need to adjust to it.

Wait, let me guess, it's NOT a measure of consumption inequality

U.S. Gini coefficient by year, if I'm not mistaken

I'd love to see Tyler actually take this seriously. I'm more than a little disappointed by his unwillingness to to do anything more than nitpick Thomas Pikkety and not really address this topic with the seriousness I would expect from him.

C'mon how could you miss the chance to coin the term 'nitpiketty'?

Well, it looks like income inequality has spiraled out of control under President Obama. Or were you going for a different message?


First of all, this research does not appear to even attempt to explain the changes in wealth or factor shares we have seen over time, which appears to be the primary concern and contribution of Piketty's research. Also it makes no attempt to explain the patterns in the developed world outside the USA.

Second, in trying to describe inequality, I'm inclined to doubt the empirical relevance of a model that assumes "ex-ante identical households" (although it could be useful as a benchmark).

This book as cultural phenomenon is more interesting than the book itself. The sides have lined up as expected. Everyone does their duty and praises the rigour of data collection and the historical analysis. Then they get back in their camps. Those already worried by inequality find issues with Piketty's work (so they seem credible) but basically support the conclusions. Those intrinsically hostile to any discussion of inequality as a worrisome phenomenon look to pick holes in Piketty's argumentation. I doubt a single one of them believes their judgement is impaired by their priors.

Tyler, interestingly, has gone from posting a range of positive and negative reviews, to posting entirely negative comments and claims. This has happened as the Piketty steamroller has gathered pace and it seems as though it might provide an intellectual galvanising force to the inequality folks. In other words, it might be dangerous. In response he has Krugmanised. He has decided the danger of people taking Piketty seriously is too great, and has abandoned the facade of balance and impartiality in order to pick up arms and fight the good fight. He's just on the opposite side to Krugman.

Despite the motivation on both sides seeming from the outside less than ideal, Tyler is working hard to dig up a lot of research and make the best argument he can. A debate is being had. And that is surely a good thing.

I suspect it will be futile. Piketty has tapped into resentment that was already there. People support Piketty because they like what he has to say, not because they agree with it. It is a stronger force in humanity and society that is uneasy at too high levels of inequality and no equation is going to make a difference either way.

What a loud of mood affiliation garbage. Tyler Cowen is in noway Paul Krugman. Krugman's entire career is based off supporting left-wing talking points and if he ever EVER even hinted at changing his opinion he would be fired from the New York Times, lose his tenured professorship, have his fake-Nobel revoked and basically be on the streets. Tyler Cowen, by contrast is in his position as a respectable, but humble, professor of economics based on scholarly research. I would believe Tyler Cowen is in a much better position to be credible and evenhanded than Paul Krugman. As your hero Paul Krugman is fond of saying this is a "Shape of the Earth: Views Differ" debate: Tyler's side simply has the correct facts, why should they make crap up just for the purpose of fake-balance?

BitCoin is up, stocks are surgining, real estate is up, the economy is doing fantastic and all we have here are a bunch of Krugman-Delong whiners.

Well said, Jonathon Martin. I think the more intriguing current economic historian's book on inequality is Gregory Clark's on surnames, which shows there is remarkably little social mobility. Piketty has always been on the left, but Clark says his research has inclined him to move from the right to the economic left. Now, that's interesting.

Something I've noticed is that it's very hard for people to say, "I was right in the past to be in favor of policy X, which turned out to be highly successful. But policy X is now running into diminishing returns, so I'm not enthusiastic about policy X anymore."

But everybody wants to fight past battles so they can regain bragging rights. Piketty's people want to say, "This book proves the Reagan-Thatcher era tax cuts were bad, just like we said way back when!" And the anti-Piketty people say, "No, and we need more tax cuts now!"

Very few people say, "You know, I can recall the egalitarian 1970s, and they were kind of cruddy. Stuff got better as inequality grew in the 1980s. But that was all a long time ago and I'm not sure I want inequality to grow forever in the future."

To take an example that won't mean anything to 95% of people because they can't imagine there is an art form called golf course architecture, but the general cruddiness of new 1970s golf courses was depressing when I was a kid. I can remember around 1973 playing the new, boring Woodley muny in Van Nuys, then opening a coffee table golf course architecture book and seeing for the first time a picture of the 1911 course built for robber barons, the great National Golf Links of America, and realizing how much this part of our culture was regressing.

Golf courses built after the 1970s have gotten consistently better. We're back to about the 1920s now. And that has a lot to do with the rich getting richer.

But there were also good things about the 1970s.

So for example like closed borders might have been alright in the past but today we need a new solution such as open borders. HMMM I wonder who keeps advocating the same old, tried and tired policies around here rather than doing something new?

That's a very anti-Copernican attitude. Thinking that you lived through the inflection point. In almost all of history the sign of the marginal impact of major social policies is persistent on the order of centuries. There's no reason to think your lifetime is special.

"Anti-Copernican" -- that's a new one ... I've been called all sorts of names over the years, but anti-Copernican is admirably novel.

And you're an anti-dentite to boot.

Doug, you are analogizing scientific progress to social progress. To me, there is much more ebb and flow to the latter. Sailer's comment here is profoundly moderate, IMO.

Seriously, I am an extreme moderate in the sense that I recognize the diminishing marginal returns to so many policies that have been triumphant for so long, whereas the dominant impulse is to keep pushing endlessly whatever worked in the past.

Agreed, Brian (fellow moderate (I think)).

Steve: it's not always diminishing returns though. Some things have absolute levels of benefit, more (or less) is always better...but those things are indeed rare. At least, rarely fought over. Those things tend to be obvious and not in dispute.


I had always supported, for the most part, the republican line on taxes. The lower the rates the better. Over the last decade I have changed my mind on the issue and my conservative friends are horrified. My liberal friends assume I'm about to join their camp until I explain my reasoning. Then they go back to thinking I'm a nut.

it is hard to be a loner for most people the default position is to stick with herd, despite your misgivings.

You are still correct if you are thinking about corporate income taxes. Even with no differential treatment of different sectors, we cannot know the incidence and the chances of eliminating differential treatment is, in my judgement, lower than in abolishing it. Personal income taxes do still distort the present/future consumption decision, but I think that margin is far less sensitive and we have the option to shift more toward progressive consumption taxes which would still distort the leisure/work decision.

Don't leave us hanging, what's your reasoning?

"I had always supported, for the most part, the republican line on taxes. The lower the rates the better."

Unfortunately the meme starve the beast has utterly failed. Washington will merely borrow whatever it needs to make up the difference. However, the upcoming SS/Medicare deficits should solve the issue once and for all. What's the current projection? -$250 billion by the end of the decade and getting worse every year there after for the next 20 years.

Well said, Steve. A nice, moderate position, which I share.

Some reviewers of Piketty state that for estates under $5 mil, there is essentially no estate tax.

That's about 100 years of median income ($50k), and seems like a good number pivot for various changes in tax policies and rates.

I'm not sure how true it is, but I'm far more sympathetic to a progressive estate tax that starts after $5 mill. Also for higher tax rates on corporations who pay wages & bonuses after that level, especially any who have had lay-offs. (yep, anti-Libertarian micro meddling in legal corporate persons paying superstar execs so much for cutting out excess workers.)

Finally, end "Intellectual Property" monopoly selling protection for songs and movies after the artists have gotten $5 mill in pay+royalties. (And always allow free sharing of digitally unprotected sharable work.) The making music business is fine, the business model of selling overpriced CDs based on gov't monopoly protection is in trouble. And should be.

Fantasy: a Not Eminem album which is a modified copy (thus Not) and is sharable (in FLAC, not wav format). In fact, all digital works in a Not-X format, available for download.

If the "value" of music CD is some $10, so somebody who downloads 100 CDs has just increased his wealth by $1000, I'm pretty sure Piketty doesn't include this wealth in his calculations. But it would be a really really inexpensive way to add $thousands of "wealth" to the poor.

Open Borders would also add thousands of dollars of wealth to the world's poor AND enhance our productivity.

It should be a ban-able offense to make satirical comments like this that have nothing to do with the comment they are responding to. It provides no benefit and pollutes the comment section.

Tyler posted this a little over four hours ago and the Legion to Stamp Out Incorrect Thoughts has been yammering away, with their usual measured comments.

Well I guess so if you consider Steve Sailer and Prior Approval a Legion.

Judge Smails: You know, you should play with Dr. Beeper and myself. I mean, he's been club champion for three years running and I'm no slouch myself.
Ty Webb: Don't sell yourself short Judge, you're a tremendous slouch.

Don't sell yourself short. Every legion needs humble foot soldiers.

We should call the two of them "Piketty's Army"

Well so far you have 16 comments out of 85, or about 20%. Looks like you are an army all by yourself.

Did you count that all by yourself?

You could add Chatterjee '93 or Caselli&Ventura 2000.

At the end, Piketty did not discover the wheel, he just put it on the table again :)

Putting a wheel on a table? No I'm sorry this is wrong, Piketty did not invent the Lazy Susan ( Piketty is nothing but an intellectual huckster don't give him credit for things he didn't do.

Hahaha omg amazing! Thank you !!

I see everyone is still running around trying to solve inequality. But has anyone actually identified why inequality is a problem outside of buying politicians?

1) inequality correlates with economic expansion and market liberalization

2) no evidence that the rise in inequality results from rich taking from poor

3) it becomes a problem when the wealthy buy access and regulations from politicians to protect their interests

So the solution isn't to "fix" inequality and probably strangle the economy. It's to ensure politicians can't be used to strangle the rest of us

I refer you t a solution called the US Constitution. US Citizens have the right to elect politicans. If they are corruped by money then the voters will vote them out of office. Money does not cause the reality or the APPEARANCE of corruption. Hence there is absolutely no cause for alarm.

But has anyone actually identified why inequality is a problem outside of buying politicians?

Good question. Inequality per se is _not_ a problem. Especially since outside of a few areas (real estate, health care, education), it's getting really hard for the rich to differentiate themselves from the middle class.

Buying politicians is a big problem. Shrinking of the middle class is a big problem. Economic instability and uncertainty is a big problem. But the left does not attempt to address these.

To liberals, inequality is the most important thing ever this week.

People who want to change the world don't want to be constrained by history. Thus, they will use it selectively, dismissing or ignoring whole swaths of it without a second thought.

Funny how this is brought up as a critique of Picketty even though Picket's argument is that typical methods of measuring wealth, such as in this paper, vastly understate the true wealth disparity.

One gets the feeling from reading this blog that Tyler reads a lot and understands very little. He probably just skimmed a few chapters from Picketty and didn't even grasp the main concepts of the book.

"One gets the feeling from reading this blog that Tyler reads a lot and understands very little. He probably just skimmed a few chapters from Picketty and didn’t even grasp the main concepts of the book."
Sounds like someone wins today's Mood Affiliation Comment Prize.

You are the best troll of this blog so far.

Agreed, hilarious to see him/her and Ray Lopez work the crowds together just now, with Sailer as the Straight Man.
Comments here went from intellectually stimulating a few years back, through annoyingly negative and angry just until recently. And then it turned into the best comedy on the web!

Not sure how well you're grokking, but, reading between the lines, here's what we know for sure about JaMRC:

1. He was probably created to parody ummm.
2. He thinks BitCoin is crazy.
3. He's anti-immigration

I'm pretty sure Sailer gets all this. They're allies.

I don't know what that means but Tyler has admitted that it is more or less how he reads, which explains so much, sadly.

"Science exists and has offered a wide range of insights on these topics." I believe Piketty's point is that the "science" that exists is narrow, one-dimensional, and ignores long-run dynamics in inequality. A static model "based on the optimal choices of ex-ante identical households" is hardly a definitive piece of knowledge in the sense that we usually think of science. This paper is worth at most a footnote.

Tyler, I think you're taking the wrong approach to Piketty. The work is highly imperfect and many of the criticisms ring true. Nevertheless there is significant value behind the long-run time series' on wealth and income inequality that Piketty has collected, and the work is an anchor of sorts to the growing zeitgeist around inequality. I haven't yet seen you write a post implying that you learned anything from Piketty - is there really no value here at all? An impartial host like yourself should be more honest.

Arguing about the details in Piketty's theory, is a sideshow to what the work represents: a growing public intolerance to extreme inequality. r-g is irrelevant; the substance of the issue is the amount of inequality society is willing to tolerate, and the Piketty phenomenon is a strong indication that the answer may be "less than we thought."

On the contrary society can, must, and WILL tolerate levels of inequality which will dwarf our current levels. If we want to push ourselves to higher levels of growth the middle class will have to accept the Average-is-Over lifestyle outlined to them by Professor Cowen. That means living in low quality housing somewhere in Texas or Oklahoma with a diet mostly of beans and rice. The bulk of the US population needs to accept that we aren't as rich as we thought and we have no resources to waste on the ZMP mass of the population. We need a wave of hardworking, smart, talented immigrants to come into this country and knock sense into the gluttinous bulk of the population. The highly talented will be the drivers of growth and they will rightly reap the rewards. Piketty and his supports have their heads in the sand.

Yeah, he's getting more aggravated. I wonder how the JaMRC character will develop?

Did you read his review?

Surely whether abolishing the estate tax (as has essentially been done) leads to greater or lesser inequality must have something to do with how the revenue is replaced or not replaced.

"In other words we already have a theory which does quite well in explaining U.S. wealth inequality, and it isn’t based on the total centrality of a comparison of r and g"

ahem, from your Rios-Rull et al excerpt: "We also show that calibrating the earnings process directly is a must if we want our model economies to replicate the observed distributions of earnings and wealth in sufficient detail." The values of r and g must be impacting those earnings processes too and they say this is central to their findings. Nonetheless this is great stuff connecting Piketty's work to the larger literature.

What a relief! I can stop worrying about inequality because someone can match inequality changes from the SCF in a calibrated model with identical household preferences!

Seriously, here are a few concerns:

1. The identical preferences assumption, while routine in GE models, is heroic and particularly ill-suited for the study of inequality. The whole point of r-g is that it's based on accounting identities that require no assumptions about preferences.

2. You can do anything with a calibrated model. Seriously, there's no time series you can't match with enough free parameters.

3. The SCF only permits you to take a short run view of wealth inequality, and it's quality is dubious Piketty's data is longer by over a century and a half and much more accurate. Additionally, the new Saez and Zucman paper shows that wealth inequality in the US since 1920 at the very top looks just like income inequality. The longer run view looks a lot more like Piketty's story than anything based on an unrealistic GE model.

4. Of course eliminating the estate tax would have a small impact on inequality, it's tiny and easily avoided via trusts and foundations.

So I'm inclined to conclude that Piketty spent little time discussing this paper because it's a prime example of overly fancy theory informed by very little data that no one outside economics understands or believes. Which he (and many other empirical researchers) thinks is a waste of time. (I'll bet he cites it in his academic work though.)

2. You can do anything with a calibrated model. Seriously, there’s no time series you can’t match with enough free parameters.

They only match one year 1992, not even a time series. Since the paper was written in 2002 Javier Dıaz-Gimenez and Jose-Vıctor Rıos-Rull has looked at other years. and found that Earnings increased by 12.9 % Income 17.5% wealth by 54% and non housing wealth by 46.8% in the decades between 1998 and 2007. To fit all of these years with the 1992 parameters you would need at least one other variable in the model

I'm beginning to think Tyler's problem with Piketty is that predicting future inequality based on boring, old fashioned concepts like the rate of return and growth directly competes with predicting future inequality based on buzzy futurism, a la Average is Over. You already sold your books, Tyler. Get back to telling people how grandly weird the future will be.

Anyway, r-g isn't a model of inequality so much as it is an innoculation against a Kuznetsian assumption of a stable distribution. At no point does Piketty ever offer a way of prediticing the level of inequality, just that low growth and a large capital/income ratio will tend toward more severe concentration, especially when capital is heavily tax advantaged.

Note footnote 10 in the paper:

"Note that throughout this article our definition of earnings both for the U.S. and for the model economies
includes only before-tax labor income. Consequently, it does not include either capital income or government
transfers. The sources for the data and the definitions of all the distributional variables used in this article
can be found in D´ıaz-Gim´enez, Quadrini, and R´ıos-Rull (1997)."

And how did the authors obtain their estimates of these earnings? Well, they don't like the estimates that are provided by the available sources. So they use the estimates that generate the results they are seeking to predict.:

"To get around these problems, instead of using direct estimates from earnings data, we use our own model economy to obtain a process on the endowment of efficiency labor units that delivers the U.S. distributions of earnings and wealth as measured by the SCF."

So you could call the results "science". But if I understand parts of the paper correctly correctly, then what this paper produces is similar to the result you could get if you attempted to model the muscle mass distribution of American adults by assuming a model in which there is no protein ingestion via meat consumption, but an adjustable parameter for protein ingestion via legume consumption. You might discover that if you then assume the right value for bean production, you can generate the observed muscle mass distribution. An interesting exercise, but one that would quickly be dismissed as an explanation of the actual phenomena, since its assumptions are clearly unempirical.

The comments for this post are very disappointing. I realize that I am not contributing much to their quality with this observation, but almost no one has anything interesting to say about the paper TC posted. If this paper has something interesting to tell us other than that one very specifically calibrated model successfully replicated one facet of one country's economy, let's discuss that instead of beating the usual horses into the ground. Otherwise, it is not an interesting paper and everyone can go back to Picketty.

The paper is not well written. It is hard to figure out what is driving the results--- not because the driver is concealed, but because it is not flagged as it ought to be. The question is: What is the reason, in this paper, why Income is unequal?
Here is my guess as to the paper's answer: Income is unequal because talent and luck are unequal. Inheritance doesn't play much role, because 2/3 or so of income is labor income anyway, and luck (that is, risk) plays a big role in the return on capital.
I think this result would be especially easy to get if talent and luck are mean-reverting. Then in the first period, somebody is really talented and gets the biggest income. In the second period, his son is mediocre, but at least has his inheritance, and somebody else is really talented, so now there are two ways you can have high income---- more equality than if it's just labor income.
Piketty doesn't notice this effect, I expect, even though conventional wisdom is that it's especially strong in Europe, and might account for America being unequal. In America, to get rich you have to be smart-- dumb people have no chance. In Europe, the dummy does have a chance. If his father is a duke he has inherited some wealth, and despite his low salary at work, he earns a lot of dividends. Inheritance is an equalizer, though to the extent that IQ is inherited and smart men marry smart wives the effect diminishes or reverses.

I am not an economist, but understand enough about modeling to smell a rat when the authors of a study claim that some result changes from 0.79 to 0.80 depending upon some parameter, as that implies a degree of precision in their results that is not possible in a field such as income inequality.

The reason these responses (or alternatives) to Piketty aren't getting traction is they are not written in English that anyone can understand. I have no idea what this paper Prof. Cowen is citing is actually arguing. Nor has he or anyone else adequately explained the claim that rising concentrations of capital boost wages. This is the downside of economics blogging: it frequently degenerates into an intellectual show-off contest in which readers are complicit, because too many are afraid to admit they have no idea what is being said.

I want to get away from arguing about the Waltons, the estate tax, and immigration. Let's get back to the topic.

Marx once said something like philosophy used to try to understand the world, but the purpose of philosophy is to change it. Piketty is following Marxi's lead in many ways, and so are his cheerleaders. He wants to change the world; he gives some charts with historical data and concludes we need much higher income and estate taxes. He might as well be a speechwriter for Obama. And as all reviewers have pointed out, he has no true model to explain history, nor to forecast the future. He has conjectures, speculations, and assertions. He has no model to predict the impact of the policies he proposes in a positive sense, nor an normative model for welfare evaluation.

Just like George Gilder wrote up some claims in the 1980s that were used to justify the Kemp-Roth tax cuts and lower capital gains taxes, so Piketty is writing up some claims now to justify a "progressive" agenda. With a Piketty tax system and Janet Yellen at the Fed, we only need to bring back disco to repeat the 1970s. (And maybe Iran will give us another oil spike to preserve the symmetry.)

There were real scholars building models to account for earnings and wealth inequality. But a key paper was published in the JPE, which is edited out of U of Chicago. Maybe no progressive wanted to be associated with Chicago research. It is easy to condemn a social situation than to understand it. "Is" does not imply "ought." Fair enough. We can understand inequality but still want to reduce it. Maybe if inequality is produced by uninsurable idiosyncretic shocks, we should have a progressive income with a welfare system to complete the markets. Maybe not. But what a joy to have models in which we can ask and answer questions, and formulate the tradeoffs involved.

I welcome economic debate. But the fawning over Piketty seems like an attempt to end debate, in economics and politics. Same thing is happening with Michael Mann's hockey stick in climatology.

"I welcome economic debate. But the fawning over Piketty seems like an attempt to end debate, in economics and politics. Same thing is happening with Michael Mann’s hockey stick in climatology."

If you're really trying to convince people Piketty is on to something and that his critics are ignorant, keep comparing his work to climate science.

Maybe I'm missing something, but it seems to me that people are assuming that, if you consider yourself a free market advocate, you must need to dispute or refute Piketty's findings. On the contrary, I can look at Piketty's findings and conclude that something very much not free market is going on. As a free market advocate, I do not concede that a free market market system leads to more inequality than less. Rather, I think it will and should lead to less inequality, and I certainly don't feel the need to defend the wealthy as special beings. Even Von Mises in "Socialism" states that we do not advocate a free market society for the benefit of only the owners, we believe that it should outperform other arrangements for every level of society, otherwise why would people support a free market society?

My teachers, figuratively, Frank Knight and Henry Simons, would, I believe, question why a segment of society is getting so rich while others aren't. You see, it might just have something to do with interfering with a free market as opposed to being a direct result of a free market. In any case, most of us agree that the wealthy should pay more in taxes, and they do. Asking if the wealthy should pay more taxes is not outside a free market system's basic issues. It merely a question of justification, and such taxes as wealth taxes do need to be justified, not just morally but pragmatically.

This was really well said. I wish more commenters could write this clearly.

Thank you, Benny. I think this might be the first time I've been complimented for my writing. Cheers, Don

It's worth noting that this is also, basically, Piketty's POV as well.

On the other hand, Friedman said that he would prefer a free market system to a socialist one even if it were more inefficient. I would add to that that I would also prefer a free market system to a socialist one even if it were more inefficient and more unequal. Why - because I value freedom as a good in its own right. Yes even to the point of having the right to make wrong decisions. I will take the consequences of those decisions and believe that others should also take the consequences of their decisions.

By the way, the evidence is that a free market system is more efficient and likely leads to less inequality than a socialist one, but that is not my point.

"[T]he percentage of population born in the 1970-1980s that receives inheritance equal to the capitalized lifetime earnings of a worker in the bottom half of the wage distribution is about 12%." From Piketty.

How could this not lead to massive inequality of wealth/income as well as opportunity?

You lost me at "calibrating"...

These calibrated models don't mean anything- all these macro papers are written by ideologues on one side or the other. This is far from "science". Inequality exists, it has always existed, and it will always exist in the future. You can tax more successful people and redistribute goods and services to less successful, or non-contributing people. However, that is not the same as making unsuccessful people real contributors. That should be the real goal. A society based in large part on redistribution is not a healthy society. You don't need models for that insight.

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