Month: April 2014

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: http://www9.georgetown.edu/faculty/mh5/research/jedc1993.pdf

2. Aiyagari: http://www.minneapolisfed.org/research/WP/WP502.pdf

3. Heathcote et al: http://www.jonathanheathcote.com/HSV_AR.pdf

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

*Ancient Religions, Modern Politics*

That is the new Princeton University Press book by Michael Cook and the subtitle is The Islamic Case in Comparative Perspective.  It is a very good comparative look at why Islam has evolved to have a special influence on politics, relative to the other major religions:

…Muslim solidarity has not displaced nationalism, but it has established itself as an alternative to it.  It has done remarkably well in shifting the moral terms of trade in favor of Islam as a political identity and against the various nationalisms of the Muslim world, thereby putting them on the defensive…These qualitative observations find some support from a survey of 2005 that asked Muslims in six mainly Muslim countries whether they saw themselves as citizens of their countries first or as Muslims first,  In all but Lebanon more respondents identified primarily as Muslims than as national citizens…

The findings of a survey carried out in 2006 shed an interesting light on this.  In Pakistan 87 percent of Muslims identified as Muslims first, rather than citizens of their country; in India only 10 percent of Hindus identified in this way.

I found this book consistently interesting.  The book’s home page is here.

Updated Priors (Ryan Decker) reviews Piketty

Here is one good part of a consistently good and interesting review:

Most of the analysis in the book is more about accounting than economics. Piketty takes nearly everything as exogenous then divides things arithmetically. His ubiquitous r > g heuristic takes both sides of the inequality as given for almost the entire book. Lines like “the richest 10 percent appropriate three-quarters of the growth” (297) enable lazy readers to avoid thinking about what actually determines income. Language about “appropriation” suggests that we live in an endowment economy, as does the claim that post-World War I wealth inequality fell “so low that nearly half the population were able to acquire some measure of wealth” (350). Endogeneity, anyone? Taking income as exogenous leads to other large problems with inference, such as the claim that “meritocratic extremism can thus lead to a race between supermanagers and rentiers, to the detriment of those who are neither” (417). Piketty does not consider the possibility that this race results in more income than otherwise, nor does he consider the notion that an increase in the bargaining power of elite executives could actually come at the expense of capital owners rather than workers. I’m not making an argument for either here; I’m simply suggesting that Piketty’s ideological quips don’t deserve the certainty with which he delivers them. Models with endowment economies have their purposes, but a 600-page book should be able to relax such strict assumptions. His criticisms of mathematical economics (32, 574) are not surprising given that he relies so heavily on assumptions and mechanisms that would be highly vulnerable to criticism if they were forced into the transparency of a formal model.

Hat tip goes to Angus.

Assorted links

1. A dialogue on negative natural rates of interest.

2. Berlin from space.

3. The Walmart fortune is supporting charter schools.

4. Facts about sloths.

5. Early Stiglitz as a precursor of Piketty, and the Stiglitz dissertation here (pdf).  The associated Econometrica piece is here (pdf).  Here is a JEL paper surveying the literature on growth and inequality (pdf).  Most useful yet, there is Bertola’s survey on distribution and growth (pdf).  You also should go back and read Pasinetti’s old papers from the 1960s.  These are old issues people, and there are no simple answers.  A lot of the current discussion is in fact moving the debate backwards from where it had been decades ago.

More of Surrey is now devoted to golf courses than housing

More of Surrey is now devoted to golf courses than housing, according to provocative new research that claims to dispel many of the myths associated with Britain’s housing boom.

A study by the Centre for Economic Performance at LSE suggests soaring house prices are not caused by an influx of foreign buyers but are down to restrictive planning policies that have ensured the country’s green belt is a form of “discriminatory zoning, keeping the urban unwashed out of the home counties”.

Paul Cheshire, professor emeritus of economic geography at LSE and a researcher at the Spatial Economics Research Centre, has produced data showing that restrictive planning laws have turned houses in the south-east into valuable assets in an almost equivalent way to artworks. He points out that twice as many houses were built in Doncaster and Barnsley in the five years to 2013 than in Oxford and Cambridge.

As a result of the policy that specifically safeguards green belts, Cheshire claims houses have not been built where they are most needed or most wanted – “in the leafier and prosperous bits of ex-urban England”.

There is more here, with the pointer from Graham Farmelo.  And here is Cheshire’s home page.  Can any of you find the original paper online?

Garett Jones reviews Piketty

Here is one bit:

Market-oriented economies that learn to live with inequality will reap the rewards: More domestic capital for workers to use on their jobs, more foreign capital flowing in to a country perceived as a safe investment, and a political and cultural system that can spend its time on topics other than the 1 percent. Market-oriented economies that instead follow Piketty’s preferred path—taxing capital heavily, preferably through international consortiums so the taxes are harder to evade—will end up with less domestic and foreign capital, fewer lenders willing to fund new housing projects, fewer new office buildings, and a cultural system focused on who has more and who has less.

…The Boston University economist Christophe Chamley and the Stanford economist Kenneth Judd came up independently with what we might call the Chamley-Judd Redistribution Impossibility Theorem: Any tax on capital is a bad idea in the long run, and that the overwhelming effect of a capital tax is to lower wages. A capital tax is such a bad idea that even if workers and capitalists really were two entirely separate groups of people—if workers could only eat their wages and capitalists just lived off of their interest like a bunch of trust-funders—it would still be impossible to permanently tax capitalists, hand the tax revenues to workers, and make the workers better off.

And:

…One lesson of this story is that it’s good to be patient. So let’s start training ourselves and our children to delay gratification, to forego that great sound system on the new car, to eat at home a little more often.

The full review is here.

Deer nationalism and status quo bias

The Iron Curtain fell 25 years ago, but it seems that nobody told the deer.

A new study has found that a quarter of a century on, red deer on the border between the Czech Republic and old West Germany still do not cross the divide.

After tracking 300 deer, researchers said the animals are intent on maintaining the old boundaries.

One of the scientists involved told the BBC the deer are not ideological, “they are just very conservative in their habits.”

During the Cold War, electric fences made the Czech-German boundary impossible to pass.

The story is here, hat tip goes to Yana.

What I’ve been reading

1. Andrew Hussey, The French Intifada: The Long War Between France and its Arabs.  Probably you should read a book on this topic, and this book is it.

2. Dan Fagin, Toms River: A Story of Science and Salvation.  An excellent study of one episode in the history of environmental catastrophe.  Overall, the environment remains understudied in economic history or for that matter public choice.

3. Elliot A. Rosen, Roosevelt, the Great Depression, and the Economics of Recovery.  Chapter twelve is a fascinating look at the debates over Alvin Hansen’s “secular stagnation” thesis.  It is uncanny how much the exact same debates are being replayed today.

4. Dominic Couzens and Mark Sisson, The Secret Lives of Puffins.  Unlike many sea birds, puffins are quiet, and their divorce rate is in the range of seven to nine percent.  Excellent photos in this one.

5. John Keay, Midnight’s Descendants: A History of South Asia since Partition.  A very good treatment of how much work remains to be done in the “nation building” enterprise in South Asia.  Recommended.

A simple observation on the proposed the Comcast-Time Warner merger

Though combining the nation’s No. 1 and No. 2 largest cable providers sounds like the kind of transaction that would raise the eyebrows of regulators, the cable market is still so fragmented that even after the merger, Comcast will control less than 30 percent of total subscriptions. That number is significant. On two earlier occasions, most recently in 2009, federal courts rejected efforts by the FCC to cap cable ownership at 30 percent. Even if the rule had been upheld, the combined Comcast-Time Warner Cable wouldn’t violate it.

That is from Larry Downes.  Geoffrey Manne  has produced a lengthy study of the proposed merger.  His conclusion?:

As Manne summarizes his paper, there is no “plausible theory” of anticompetitive harm under current antitrust standards. “Instead,” Manne writes, “arguments against the merger amount to little more than the usual ‘big-is-bad’ naysaying.”

Here is an earlier post on this proposed merger.  When you get past all the mood affiliation here (corporate, “big,” “merger,” “cable company screws me over,” “inequality,” etc.) this merger just isn’t that big a deal and the case against it isn’t that strong.

What was Aragorn’s Tax Policy?

Excellent interview with George R. R. Martin at Rolling Stone:

How did you come up with the Wall?
The Wall predates anything else. I can trace back the inspiration for that to 1981. I was in England visiting a friend, and as we approached the border of England and Scotland, we stopped to see Hadrian’s Wall. I stood up there and I tried to imagine what it was like to be a Roman legionary, standing on this wall, looking at these distant hills. It was a very profound feeling. For the Romans at that time, this was the end of civilization; it was the end of the world. We know that there were Scots beyond the hills, but they didn’t know that. It could have been any kind of monster. It was the sense of this barrier against dark forces – it planted something in me. But when you write fantasy, everything is bigger and more colorful, so I took the Wall and made it three times as long and 700 feet high, and made it out of ice.

and some political economy:

A major concern in A Song of Ice and Fire and Game of Thrones is power. Almost everybody – except maybe Daenerys, across the waters with her dragons – wields power badly.
Ruling is hard. This was maybe my answer to Tolkien, whom, as much as I admire him, I do quibble with. Lord of the Rings had a very medieval philosophy: that if the king was a good man, the land would prosper. We look at real history and it’s not that simple. Tolkien can say that Aragorn became king and reigned for a hundred years, and he was wise and good. But Tolkien doesn’t ask the question: What was Aragorn’s tax policy? Did he maintain a standing army? What did he do in times of flood and famine? And what about all these orcs? By the end of the war, Sauron is gone but all of the orcs aren’t gone – they’re in the mountains. Did Aragorn pursue a policy of systematic genocide and kill them? Even the little baby orcs, in their little orc cradles?

In real life, real-life kings had real-life problems to deal with. Just being a good guy was not the answer. You had to make hard, hard decisions. Sometimes what seemed to be a good decision turned around and bit you in the ass; it was the law of unintended consequences. I’ve tried to get at some of these in my books. My people who are trying to rule don’t have an easy time of it. Just having good intentions doesn’t make you a wise king.

Assorted links

Communism, Capitalism and Copyright

Over at Crooked Timber Scott Mclemee is upset that a copyright action is removing Marx from Marxists.org:

The Marxist Internet Archive (marxists.org) is a vast and growing resource, run entirely by donated labor, and as polylingual as circumstances permit. (Do they have Trotsky in Tagalog? Indeed they do.) Yesterday, a notice appeared in the Archive’s Facebook group, and also on its homepage, saying that Lawrence & Wishart’s lawyers demand removal of material from the Marx-Engels Collected Works: “Accordingly, from 30th April 2014, no material from MECW is available from marxists.org. English translations of Marx and Engels from other sources will continue to be available.”

…Chances are the archive volunteers never contacted the press before putting the material up because they assumed, reasonably enough, that an edition prepared largely if not entirely with the support of old-fashioned, Soviet-era Moscow gold was not anybody’s private intellectual property—that the works of Marx and Engels now belong to the commons.

As you know, I have some sympathy with this complaint if not with the motivating example. What really burns Mclemee, however, fills me with glee. At the same time as Marx and Lenin were being pulled from Marxists.org he and Corey Robin received:

…radically under-priced materials from the enemy’s publishing apparatus. He’d received an order containing dirt-cheap copies of Bastiat from the Liberty Fund, while a day earlier I had downloaded free digital editions of the major Austrian School books on theory of value and the socialist-calculation debate from the Mises Institute website. There’s more to neoliberal hegemony than loss-leader pricing, but as ideological combatants those people know what they’re doing.