Month: May 2014

The EU parliamentary elections

One headline is this:

The far right anti-EU National Front was forecast to win a European Parliament election in France on Sunday, topping a nationwide ballot for the first time in a stunning advance for opponents of European integration.

I’ve long maintained two points:

1. The eurozone crisis, in purely economic terms, was always salvageable.  Monetary policy hasn’t much been used actively, the latent OMT semi-commitment more or less worked, and debt to gdp levels for the eurozone as a whole have never been worse than those of the United States, to cite a few simple facts.

2. Saving the eurozone requires a lot of political coordination, and a lot of intra-zone wealth redistribution, in a manner which I thought was unlikely to be initiated or maintained.

Since I’ve never been convinced that #2 is workable, I’ve not yet had a “I guess I’m wrong about the implosion of the eurozone” moment.  You may recall my earlier prediction: “”Enter democracy, stage right” is the next act in the play.”

“We all know that wealth inequality has gone up”

That is a response to the Piketty criticisms from Paul Krugman, and also mentioned by Matt Yglesias.  Phiip Pilkington also has a useful treatment.  This point however doesn’t do the trick as a defense.  Keep in mind that the “new and improved numbers,” as produced by Chris Giles, are showing doubts about the course of measured wealth inequality in the UK.  Maybe wealth inequality hasn’t gone up.

Now maybe that does “have to be wrong.”  But if the “new and improved” numbers are wrong, it is hard to then argue Piketty’s wealth inequality numbers can be trusted.  In which case we are back to knowing that income inequality has gone up, but not knowing so much concrete about wealth inequality.  (That is one reason why my own Average is Over focuses on income, and on labor income in particular, because that is where the main action has been.)  The data section of Piketty’s book, which has gathered so much praise, then is not so useful, though by no fault of Piketty’s.  We might think it likely that wealth inequality has gone up, but if we are going to do these selective overrides of the best available data, we cannot trust the data so much period or otherwise cite it with authority.  We also could not map wealth inequality into particular measures of the r vs. g gap at various periods of time.

If there is one big lesson of the FT/Piketty dust-up, it is that we don’t have reliable numbers on wealth inequality.

Now do we in fact “know” that wealth inequality has gone up?  See this piece by Allison Schrager.  Intuitions about wealth vs. income inequality are trickier than you might think.   And on what we actually do and do not know, here is a very good comment on Mian and Sufi’s blog (for U.S. data):

I very much appreciate that you did this, and it’s an interesting and important fact that you document here, but this does not directly respond to most of the discussion. As the extreme ratios seen here (on the order of ~20) indicate, the middle 20% has very little wealth compared to the top 20%, and this has always been true. I don’t think many conservative critics are trying to argue one way or another on this front.

The current discussion is more about the concentration of wealth at the very top, particularly the 1%. And there the SCF shows little to no evidence to support increased wealth inequality – only a minimal rise in the share of wealth held by the top 1%. This is what Kopczuk and Schrager’s article is referencing, and this is the most relevant question for the debate about Piketty’s (and Saez and Zucman’s) findings of higher wealth inequality at the top.

You really need to look at *that* issue, and if you think this is impossible because “the SCF is not a huge sample” (though it does oversample at the top), you need to say so, rather than passing off an interesting but essentially distinct point as being a decisive response to critics – which, frankly, is what you’re doing in this post.

I could not have said it better myself.

How much have white Americans benefited from slavery and its legacy?

Many people are talking about the Ta-Nehisi Coates essay on reparations.  Ezra Klein has a summary of the argument, which runs as follows:

What Coates shows is that white America has, for hundreds of years, used deadly force, racist laws, biased courts and housing segregation to wrest the power of compound interest for itself. The word he keeps coming back to is “plunder.” White America built its wealth by stealing the work of African-Americans and then, when that became illegal, it added to its wealth by plundering from the work and young assets of African-Americans. And then, crucially, it let compound interest work its magic.

I would suggest that most living white Americans would be wealthier had this nation not enslaved African-Americans and thus most whites have lost from slavery too, albeit much much less than blacks have lost.  For instance it is generally recognized that freer and fairer polities tend to be wealthier for most of their citizens.  (We may disagree about what “fair” means for many issues, but slavery and its legacy are obviously unfair.)

More specifically, many American whites benefited from hiring African-American labor at discrimination-laden discounted market prices, but many others lost out because it was more costly to trade with African-Americans.  That meant fewer good customers, fewer eligible employees, fewer possible business partners, fewer innovators, and so on, all because of slavery and subsequent discrimination.  The wealth-destroying effects are surely much larger here, even counting whites alone.  And the longer the time horizon, the more likely the dynamic benefits from trade will outweigh the short-run benefits from discriminating against some class of others.

Empirically, I do not think whites in slavery-heavy regions have had especially impressive per capita incomes.  And a lot of the economic catch-up of the American South came only when the region abandoned Jim Crow.

We also can look at how many white Americans have had ancestors who, at least for a while, had zero or near-zero net wealth.  The returns from slavery may have been compounding for some heirs of Mississippi plantation owners, but not for most of us.  My father, when he was thirty, had just gone bankrupt from an unsuccessful attempt to manage a New Jersey pet store.  In what sense was he, or later I, reaping compound returns from a legacy of slavery?  We go back to the point that overall he probably would have had a better chance in the wealthier and fairer non-discriminating society, even if you can pinpoint some mechanisms through which he might have benefited, such as facing less competition from potential African-American pet store entrepreneurs.

The economic incidence of slavery is a tricky matter (most of what Squarely Rooted argues here is wrong).  A lot of whites in the slave trade bought slaves at the going market price and earned the going market rate of return.  Of course these same whites were reluctant to free the slaves they had bought and that meant terrible lives for the victims.  But the gains of those whites are not mirror images of the losses of the slaves.  Thus in some regards slavery was a massive collective action problem with a relatively small number of beneficiaries.  Those benefiting would include individuals who first saw the gains from seizing slaves from Africa, and individuals who were good at spotting undervalued slaves and buying them up and exploiting them.  That’s a fair number of people but it is far from comprising the overwhelming majority of society in 1840, much less 1940 or 2014, once we consider possible wealth transmission to their heirs.

There is still a moral case for reparations even if most American whites have lost from slavery rather than benefited.  (Although I doubt if the America public would see the matter that way, which is one reason why the reparations movement probably isn’t going anywhere.)  Nonetheless on the economics of the issue I would suggest a very different analysis than what I am seeing from many of the commentators.  And this analysis makes slavery out to be all the more destructive, and reparations to be all the more unlikely.

Addendum: It is amazing how many of you cannot read and digest a simple sentence such as “There is still a moral case for reparations even if most American whites have lost from slavery rather than benefited.”  Which by the way is far to the “left” of where the current debate stands in American politics and indeed in most other parts of the world.

What do the Piketty data problems really mean?

In some ways the new FT criticisms may not matter much, although I think not in a way which is reassuring for Piketty.  There were already several major problems with Piketty’s analysis and also empirics, including what Alex has called the asset price problem.  He wrote:

According to four French economists, Piketty’s measure of the capital stock is greatly influenced by the Europe-US housing bubble that preceded the financial crisis.

Adjusting for that factor seems to make the main results go away, and that is a purely empirical problem which has not been answered, at least not yet.

Another pre-existing empirical problem is that 19th century data seem to indicate that a “Piketty world,” even if we take it on its own terms, far from being a disaster, would likely be accompanied by rising real wages and declining consumption inequality, albeit rising wealth inequality.

That hasn’t been answered either, although a few people have suggested (without serious back-up) that if wealth inequality is going up that has to lead to political problems, or problems of some kind or another, and thus it can’t be something we can approve of or accept with equanimity, because inequality is really really bad, and therefore Piketty is somehow right anyway.  That’s a weak response to begin with and furthermore it doesn’t fit the available data.

Empirically, inheritances aren’t nearly as important as Piketty seems to suggest.

On Twitter Clive Crook wrote of the:

…distance between treacherous data and super-bold conclusions an issue at the outset. This underlines the point.

Now, when you cut through the small stuff, the new empirical problem seems to be that UK revisions, combined with a population-weighted series for Europe, contradicts Piketty’s claim of rising wealth inequality for Europe.   I would call that a serious problem.  I am not impressed by the “downplaying” responses which focus on coding errors, Swedish data points, and the other small stuff.  Let’s face up to the real (new) problem, namely that robustness suddenly seems much weaker.  You can’t argue that population-weighting is “the right way to do it,” but it is an entirely plausible way to estimate the wealth inequality trend.  If Piketty’s results don’t survive population weighting (and what are apparently the superior UK numbers), that suggests the overall rise in European wealth inequality is not very robust to how the pie is carved up and also that it is not backed by dominant, “rule the roost” sorts of forces.

It should be noted that Piketty’s response to the new criticisms was quite weak.  Maybe he’s not to be blamed for what was surely a rapid and caught-off-guard response, and perhaps there is more to come, but it doesn’t reassure me either.  He also should have run it by a PR person first (for instance, don’t start your response with a sentence ending in an exclamation point.)

That said, don’t focus on Piketty.  When evaluating debates of this kind, never ever confuse a) is he right? with b) “how much should we raise/lower the relative status of the author as a result of the new exchange”?  So responses like “he made all his data freely available,” or “he admits all along how complicated this all is,” address b) but not the more important a).  And if you are seeing people focus on b) rather than a), they have a problem themselves.  On empirical grounds it does seem we have another reason for thinking Piketty’s central claim isn’t quite right, at least not for the reasons he sets out, and perhaps not quite right altogether.

Addendum: Ryan Avent has a good survey of some key issues and responses.

*The Supermodel and the Brillo Box*

The author is Don Thompson and the subtitle is Back Stories and Peculiar Economics from the World of Contemporary Art.  It is a very enjoyable book on the economics of the contemporary art world, here is one bit:

The size of his art empire allows Gagosian to take full advantage of the economic oddity that when an artist is hot, the relationship of supply and demand reverses.  If an artist creates enough work to show simultaneously in several galleries and at several art fairs, greater buzz produces higher prices.  Each show, each fair, each art magazine mention produces more critical appraisal, more buzz, and more collectors on the waiting list.  The reassurance of the dealer is reinforced by the behavior of the crowd.  Greater supply produces greater demand.

Andy Warhol was one of the artists who understood this best.

Piketty update

…according to a Financial Times investigation, the rock-star French economist appears to have got his sums wrong.

The data underpinning Professor Piketty’s 577-page tome, which has dominated best-seller lists in recent weeks, contain a series of errors that skew his findings. The FT found mistakes and unexplained entries in his spreadsheets, similar to those which last year undermined the work on public debt and growth of Carmen Reinhart and Kenneth Rogoff.

The central theme of Prof Piketty’s work is that wealth inequalities are heading back up to levels last seen before the first world war. The investigation undercuts this claim, indicating there is little evidence in Prof Piketty’s original sources to bear out the thesis that an increasing share of total wealth is held by the richest few.

Prof Piketty, 43, provides detailed sourcing for his estimates of wealth inequality in Europe and the US over the past 200 years. In his spreadsheets, however, there are transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source.

For example, once the FT cleaned up and simplified the data, the European numbers do not show any tendency towards rising wealth inequality after 1970. An independent specialist in measuring inequality shared the FT’s concerns.

The full FT story is here.

Addendum: Here is the in-depth discussion.  Here is Piketty’s response.

Assorted links

1. Rent-a-man (those new service sector jobs).  And let your drone take your dog for a walk.

2. Japan, hamsters, etc.

3. Darkcoin is booming.

4. What can economics learn from video games?

5. Turtles all the way down?  Well, some of the way down.

6. Caplan responds to Bauman in a classical Caplan post.  And Jeffrey Sachs responds to Bill Gates.

7. N.T. Wright (a former bishop), Ross Douthat, and Peter Thiel video on a bunch of things, including theology.

8. Getting a get.

The inequality that matters

Brenda Cronin reports:

Recent hand-wringing about income inequality has focused on the gap between the top 1% and everyone else. A new paper argues that the more telling inequities exist among the 99%, primarily driven by education.

“The single-minded focus on the top 1% can be counterproductive given that the changes to the other 99% have been more economically significant,” says David Autor, a Massachusetts Institute of Technology economist and author of the study.

His paper, “Skills, Education and the Rise of Earnings Inequality Among the ‘Other 99 Percent’,” comes as something of riposte to French economist Thomas Piketty, whose bestselling “Capital in the 21st Century” has ignited sales and conversation around the world with its historical look at the fortunes of the top 1%.

Mr. Autor estimates that since the early 1980s, the earnings gap between workers with a high school degree and those with a college education has become four times greater than the shift in income during the same period to the very top from the 99%.

Between 1979 and 2012, the gap in median annual earnings between households of high-school educated workers and households with college-educated ones expanded from $30,298 to $58,249, or by roughly $28,000, Mr. Autor says. During the same period, he argues, 99% of households would have gained about $7,000 each, had they realized the amount of income that shifted during that time to the top 1%.

There is more here, including good graphs.

George Terborgh’s *The Bogey of Economic Maturity*

Since the idea of secular stagnation has reemerged in economic discourse, I thought I would go back and reread this 1945 critique of Alvin Hansen.  It is uneven, overly polemic, but definitely interesting in places.  The author argues for instance that rates of population growth simply don’t predict spurts of economic growth very well.  It is also interesting to see how much commentators of that time blurred together demand-side and supply-side approaches to stagnation.  Is that insight or misunderstanding?  Perhaps we still don’t know.  Here is one excerpt from Terborgh:

There is thus no evidence that investment in major innovations as a class, including the young and old ones alike, has had any higher growth rate than investment in minor innovations as a class.  There is no evidence that one “great new industry” is any more dynamic in its impact on capital formation than ten small new industries.  The important thing is the total flow of technological development, not its degree of concentration.

And I enjoyed this rhetoric:

Capital formation is not a polite game in which replacements meekly and decorously await, like dutiful heirs, the natural death of existing assets.  It is a ruthless and cutthroat struggle in which new capital goods rob the function of the old.

You can buy the book here, and here is a Questia link to the text.  And here is his 1966 book The Automation Hysteria.  It seems he had the temperament of a debunker.  I don’t know much about Terborgh, but for a while he was a private sector economist and also a research economist at the Fed.

Marc Andreessen on net neutrality

So, I think the net neutrality issue is very difficult. I think it’s a lose-lose. It’s a good idea in theory because it basically appeals to this very powerful idea of permissionless innovation. But at the same time, I think that a pure net neutrality view is difficult to sustain if you also want to have continued investment in broadband networks. If you’re a large telco right now, you spend on the order of $20 billion a year on capex. You need to know how you’re going to get a return on that investment. If you have these pure net neutrality rules where you can never charge a company like Netflix anything, you’re not ever going to get a return on continued network investment — which means you’ll stop investing in the network. And I would not want to be sitting here 10 or 20 years from now with the same broadband speeds we’re getting today. So the challenge, I think, is to accommodate both of those goals, which is a very difficult thing to do. And I don’t envy the FCC and the complexity of what they’re trying to do.

The ultimate answer would be if you had three or four or five broadband providers to every house. And I think you actually have the potential for that depending on how things play out from here. You’ve got the cable companies; you’ve got the telcos. Google Fiber is expanding very fast, and I think it’s going to be a very serious nationwide and maybe ultimately worldwide effort. I think that’s going to be a much bigger scale in five years.

So, you can imagine a world in which there are five competitors to every home for broadband: telcos, cable, Google Fiber, mobile carriers and unlicensed spectrum. In that world, net neutrality is a much less central issue, because if you’ve got competition, if one of your providers started to screw with you, you’d just switch to another one of your providers.

The entire interview is interesting, including his discussion of the Obama administration and the possibility of a fragmented internet.  By the way here is Marc on EconTalk with Russ Roberts.

The early days of American Austrian economics

John Blundell has a captivating report (pdf), here is one bit:

When Hayek asked Bartley to do the biography he said: “There are only three things that sell books namely sex, money and violence. As to sex, well, I left my first wife for my first girlfriend. As to money, well, I never had any. And as to violence, let me tell you how I came to bayonet a man to death in World War One!”

For the pointer I thank Yana.

Is now the time to go long on Pakistan?

Maybe so.  Ian Bremmer reports that of 282 elected BJP representatives, not one is a Muslim, even though Muslims are about 15% of India’s population.  In some political models, that can make the electorate more willing to cut a deal with Pakistan, as fewer people will fear that the deal will neglect India’s interests.  In essence this kind of slanted government can become more Coasean, as it is more trusted by its core supporters.

You will find related mechanisms discussed in my paper with Daniel Sutter, “Why Only Nixon Could Go To China.”

Indeed Modi just invited the Pakistani Prime Minister to his inauguration, an unusual action which is being called “a bold step.”

I have been relatively bullish on Pakistan for some time now.  Relative to market prices, that is.