The wisdom of Larry Summers

Already there are more American men on disability insurance than doing production work in manufacturing.

There is also this:

The determinants of levels of consumer spending have been much studied by macroeconomists. The general conclusion of the research is that an increase of $1 in wealth leads to an additional $.05 in spending. This is just enough to offset the accumulation of returns that is central to Piketty’s analysis.

That is from this very good Summers review of Piketty.


'Already there are more American men on disability insurance than doing production work in manufacturing.'

America leading the way again. Or not, as the case may be - I doubt that German or Chinese figures are equivalent. But then, both nations are able to run trade surpluses.

'central to Piketty’s analysis'

Oops - anonther Piketty post.

"trade surpluses"

Oh... you mean capital account deficits? Too bad they can't get foreign investment into their awesome countries.

Wouldn't p_a count as a capital account deficit?

You can tell someone's really disrupted the status quo when Cowen devotes over a month to attacking him.

Disruption for the sake of disruption is also known as trolling =)

"Already there are more American men on disability insurance than doing production work in manufacturing."

That could mean a lot of things. There may not be many positions left in production work in manufacturing. Disability as a health problem has increased dramatically. Health care has improved so much that the would-be dead are now surviving but can't work. The definition of disabled has expanded. Disability insurance eligibility has also expanded. American men without jobs or who no longer care to work have figured out ways to become eligible for disability insurance.

+1. Especially the decline of these jobs in the US. What do you get on SSDI? $1,000/month? Unless the poor are very different from you and me, I think most of the (malingering) disabled would rather have a job on a Boeing assembly line.

The average benefit for SSD is higher than that and you should also include the kids/wife who are also eligible once the wage earner receives disability. I work for SSA and the number of people who are filing for disability in their 20's,30's and 40's is staggering. The jig is up- people are all claiming mental illness and/or back problems; two conditions that cannot be medically proven and therefore hard to deny.
Plus, did you know that people on Disability can work and earn up to 1070.00/month AND continue to collect SSD?
Also an interesting fact: many of the claimants file for SSD once their unemployment ends.

Citations. This seems hard to believe but I suppose it could be the case. How many people per receive how much cash and for how long?

See my citation below. Also google for other studies.

To keep it simple we'll use 1000.00 as the benefit amount for the disabled wage earner. There is a family maximum on each person's record that limits the total amount that can be paid out. Generally you can fit 3 auxillaries in that amount. In this scenario family max would be around 2500.00. So suppose you have disabled wage earner who has 2 kids and a non-working spouse. We can pay each aux 50% of wage earner's primary insurance amount, in this case 1000.00. Each child, age 18 and under would receive 500.00 and the non- working spouse who helps take care of children (as long as they are under 16) would also be eligible for 500.00. Total family benefit equals 2500.00. Spouse can go to work and if they stay under 15000/ year in wages, benefits would continue. Wage earner can work and earn under 1070.00 month gross and benefits would continue. All of this information is public, you can find it in any book about SSA benefits. Also, benefits continue as long as the wage earner continues to be found disabled. If they work and earn over the 1070.00 for a long enough time, benefits would eventually cease. If they are found to be medically improved during a medical review, benefits will cease then as well.

+1 ^2

'Disability as a health problem has increased dramatically.'

If this web site is to be believed (admittedly, I'm a disloyal reader), chronic pain now affects one in three of all Americans, whcih would seem to buttress this assertion.

Yeah, but how many people only said that to justify their medical marijuana prescriptions?

Or, it could reflect the 3.7 million Americans in the gag welfare program called VA "disability." A number that may rise by 400,000 soon.

In his review of Piketty, Larry Summers writes: "I suspect we will soon see the rise of educator superstars who command audiences of hundreds of thousands for their Internet courses and earn sums way above the traditional dreams of academics." I immediately thought not of academic lecturers but of my favorite academic bloggers--especially Tyler Cowen. This man should be a billionaire! (But I think Summers is actually too optimistic about the wealth prospects for even a few star academics.)

Another good sentence from Summers' review: "With respect to taxation, as so much else in life, the real scandal is not the illegal things people do—it is the things that are legal." Surely the tax code is Exhibit A for Government Failure.

Perhaps the best review I've read on Piketty so far.

" make it easier to raise middle-class incomes and to make it more difficult to accumulate great fortunes without requiring great social contributions in return. Examples include more vigorous enforcement of antimonopoly laws, reductions in excessive protection for intellectual property in cases where incentive effects are small and monopoly rents are high, greater encouragement of profit-sharing schemes that benefit workers and give them a stake in wealth accumulation, increased investment of government pension resources in riskier high-return assets, strengthening of collective bargaining arrangements, and improvements in corporate governance. Probably the two most important steps that public policy can take with respect to wealth inequality are the strengthening of financial regulation to more fully eliminate implicit and explicit subsidies to financial activity, and an easing of land-use restrictions that cause the real estate of the rich in major metropolitan areas to keep rising in value."
<< These recommendations are much better than what Piketty is recommending.
But Summers makes a huge assumption: that it is NOT envy, but is a desire to help the middle class.
I am convinced that the Dems are, secretly or honestly, more filled with envy -- the desire to destroy the good fortune of others.

And Summers should have been more specific about financial regulation, since most TBTF firms were in compliance with the terrible / inadequate / expensive SOX regulations, so we get Dodd-Frank. But what about faster bankruptcy for irresponsible big insolvent banks? And higher (50%) capital requirement ratios.

Summers tries very hard to say nice things about Piketty's book at the same time as he demolishes virtually every one of its main points and dismisses its policy recommendations as politically "unimaginable" or beside the point.

Summers fully endorses Rognlie's critique, but (unlike DeLong, for example) he doesn't cite Rognlie.

Seems Summers is overreaching when he states the following, unless you can get a Nobel Prize in Economics for essentially trivial observations: "Even in terms of income ratios, the gaps that have opened up between, say, the top .1 percent and the remainder of the top 10 percent are far larger than those that have opened up between the top 10 percent and average income earners. Even if none of Piketty’s theories stands up, the establishment of this fact has transformed political discourse and is a Nobel Prize-worthy contribution."

"Correspondingly, while Eastman’s innovations and their dissemination through the Eastman Kodak Co. provided a foundation for a prosperous middle class in Rochester for generations, no comparable impact has been created by Jobs’s innovations."

Foxconn employs over 1 million people in China, many or most making Apple products. There is broadly shared prosperity happening in the world, just not in the U.S. It would be nice if someone expanded Piketty's analysis to be global - probably impossible to get similar amounts of data for other regions as he has for Europe and U.S. but it would be fascinating.

Foxconn laborers are not paid enough to be considered members of a "prosperous middle class."

Anyway, it's a moot point - they are only a couple of years away from losing their jobs to the robots.

They probably won't care that much either way, since Foxconn and their ilk are having a harder time finding workers to work at the wages they're paying. The real losers from that type of automation will be even poorer people in other poor countries, who might not get those labor-intensive factory jobs that pay better than the ultra-low-wage agricultural work they're currently doing.

One million people won't care if they lose their jobs?

SS disability replaced "welfare as we know it" beginning with welfare reform under Clinton.

Guess what...we shifted welfare away from the wealthy, and towards the middle and lower class....AFDC was paid out of general revenue, SS disability is paid out of SS. And, guess what, state and local governments also don't pay for it either...take them off the welfare rolls and onto SS disability.

I for one am pleased that Piketty has bothered Tyler as much as he has. Really enjoying the ongoing weaksauce attempts to discredit him. Keep working at it Tyler. Maybe you'll gain some traction if you keep repeating yourself enough.

Global GINI. Piketty is factually incorrect about inequality. Next.

IOW, you can't defend Picketty but at least you've changed the subject! Moral victory!

I predict this book will have less impact than OWS did

>less impact than OWS

I guarantee that. OWS at least gave us a catch-phrase for rich people.

This book was never going to have impact. It was always about making statist economists feel good. If there is one thing those guys adore, it is seeing their long-held and long-discredited biases written down in book form.

When you've given up on ever seeing your policies succeed, the next best thing is seeing them praised. In an actual, real-life, honest-to-God book. Woo-hoo!

I agree with Summers that, although it fits well with the current zeitgeist, history will not look kindly on this book. To Summers' Paul Kennedy example I would add Fukuyama's "End of History".

The only value of the book, Piketty's time series data, has already been produced by him and colleagues in other academic work. In addition to the datasets, Capital contributes: (1) a "theory of capitalism" that is theoretically implausible and not supported by the data; and (2) an outlandish policy proposal, which also does not follow from the data and is as unhelpful as it is provocative.

Also, as has been pointed out, the presentation of the data itself is misleading for both of the centuries studied because: (a) in the 19th century, consumption inequality decreased and the landed gentry 'rentiers' were displaced by a new class of industrial bourgeoisie; (b) non-housing wealth inequality has not increased in advanced economies during the past 30 years.

Fukuyama was right!

"Already there are more American men on disability insurance than doing production work in manufacturing."

Yes, because of the free trade policies implemented by people like Larry Summers.

If Summers cares so much about U.S. manufacturing (he doesn't) he would have done something about lowering the non-tariff trade barriers Japan, Korea, and China have used to become exporting powerhouses.

"there are more American men ...": yeah, men, in spite of their being better at maths, eh?

That's totally internally consistent. The logic is that even with the same mean, the top men are better at maths because the male distribution has longer tails. That would mean that the most dysfunctional humans will be males as well.

Oh quite; I was just hoping that the sarcasm might attract a bit of vituperation for Summers (who seems to me roundly to deserve it).

IIRC Disability use isn't beyond the expected trends due to population growth and aging, so I don't see it as a huge problem. Plus, picking manufacturing is rather arbitrary - I could just as easily point out that there are far more people receiving just about any kind of social spending than working in agriculture, but it wouldn't mean anything either.

No, that is not true. Here is a SSA bulletin that documents how people moved off of AFDC to SS disability with welfare reform:

¨The determinants of levels of consumer spending have been much studied by macroeconomists. The general conclusion of the research is that an increase of $1 in wealth leads to an additional $.05 in spending. This is just enough to offset the accumulation of returns that is central to Piketty’s analysis.¨

This also under cuts the reason most often given for lower taxes on capital gains

Summers mentions this bit of evidence to call into question the idea that wealth has been accumulating in the hands of the same people from one generation to the next:

"When Forbes compared its list of the wealthiest Americans in 1982 and 2012, it found that less than one tenth of the 1982 list was still on the list in 2012, despite the fact that a significant majority of members of the 1982 list would have qualified for the 2012 list if they had accumulated wealth at a real rate of even 4 percent a year. They did not, given pressures to spend, donate, or misinvest their wealth. In a similar vein, the data also indicate, contra Piketty, that the share of the Forbes 400 who inherited their wealth is in sharp decline."

I wonder if we don't have an extremetly powerful mechanism for redistributing wealth already: misinvestment. To dampen the tendency toward inequality, it seems that an alternative to increasing taxes on the wealthy would be to simply get every American a job in the financial industry.

What roles do foundations play in this? Person holds wealth and or stock in year 1 and Foundation in year 25.

Dunno, but a foundation is giving the money away so I see nothing wrong with it

One man's "misinvestment" is another's "declining marginal returns to capital" (as explained by Summers in his review).

We live in a world awash in investment capital seeking returns. Arguably, it is cash from export oriented developing nations that has been driving this trend. Total refruitiation of Piketty.

People seem to forget the title of the blog they're reading. Tyler isn't on a Piketty crusade, nor is he a naive contrarian. Rather, he likes to highlight under-appreciated points, with a recognition that there's a marginal rate of substitution between praise and scorn.

imo, LS says something silly when he says much current wealth comes from work
B Gates, M Zuckerberg, Hedge fund guys did
get their money from work, but from weird lottery returns + rule changes that favor the wealthy (eg, why on earth are cap gains taxed lower then ordinary income ? just crazy)

What's really crazy is working when one form or another of government is grabbing a huge portion of your income.

I enjoyed this snippet:

Look at Kennedy airport. It is an embarrassment as an entry point to the leading city in the leading country in the world. The wealthiest, by flying privately, largely escape its depredations.

Poor Larry, he is doing well but the private jet is just out of his reach.

Agreed. JFK is a joke, but if flying in and out of it on a regular basis is a major hassle in your life, you're doing OK. Also, unless you're flying on a state-owned airline, aren't most of us "flying privately"?

I'm having trouble reconciling the following three stylized facts: (1) levels of capital vs income have risen in recent years, (2) capital share of income has risen in recent years, (3) elasticity of substitution as found in recent studies is less than 1. Does this just mean that we're in a bubble, or is there something wrong with the elasticity studies?

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