Category: Data Source

The paper is by Bakija, Cole, and Heim, find it here.

There is much to say about this paper, but first of all the Kaplan and Rauh work, which I have cited several times, seems to offer incorrect estimates of the professions of the higher earners.  Here is the authors' corrective chart:  

Here is a summary of their broader results:

Our findings suggest that the incomes of executives, managers, supervisors, and financial professionals can account for 60 percent of the increase in the share of national income going to the top percentile of the income distribution between 1979 and 2005. We also demonstrate significant heterogeneity in income growth across and within occupations among people in the top percentile of the income distribution, suggesting that factors that changed in the same way over time for all high income people are probably not the main cause of increasing inequality at the top. The incomes of executives, managers, financial professionals, and technology professionals who are in the top 0.1 percent of the income distribution are found to be very sensitive to stock market fluctuations. Most of our evidence suggests that financial market asset prices, corporate governance, entrepreneurship, and income shifting across corporate and personal tax bases may be especially important in explaining the dramatic rise in top income shares.

I would reword this as a) "it's complicated," and b) "a lot of them made the money in capital markets."  It does remain the case that top incomes in finance rose by far most rapidly.

In this very careful and rigorous paper, here is a "scream it from the rooftops" result:

…we find that a one percent increase in the net of tax share is associated with an 0.7 percent reduction in incomes earned by people in the top 0.1 percent of the income distribution, which would imply that if we were to raise top marginal tax rates further on these taxpayers, the increase in deadweight loss would be substantially larger than the increase in revenue raised [emphasis added]. However, we find essentially no evidence at all of any responsiveness of people below the top 0.1 percent…

Better stock up on those cough drops.

For the pointer I thank Adam Looney.

Here's a claim, with concrete numbers, that:

"a one-parent family of three making $14,500 a year (minimum wage) has more disposable income than a family making $60,000 a year."

That's after various government benefits and taxes, but the calculation seems incorrect to me.  For instance, should the Medicaid and CHIP benefits of the poorer household actually be valued — to the user — at $16,500 a year?  (Is that number coming from some kind of cost basis?  If so, is it adjusted for the age of the Medicaid recipients to rule out nursing home expenditures?)  Is the $60,000 per year family receiving employer-supplied health insurance?  The assumption seems to be that they do not.

Still, even if you make adjustments this is a scary comparison.  I'd like to see a more exact calculation of the implicit marginal tax rates of the poor, as they climb from say 15k a year through the 60k range.  Does anyone know of such a table?

For the pointer I thank CC.

Addendum: Andrew Gelman comments.

The public really hates inflation, probably due to money illusion, which is one of the reasons we are in the current situation. Circa 1996 Robert Shiller asked a group of 113 randomly chosen responders the following questions:

Imagine that you faced a choice for the United States between the following two extreme possibilities, which would you choose?

1) The US would have in the next 10 years an inflation rate of only 2% a year, but an unemployment rate of 9%, thus about 12 million unemployed.

2) The US would have in the next ten years an inflation rate of 10% a month, but an unemployment rate of only 3%, thus about 4 million unemployed.

The results: 75% chose option 1, the low inflation, high unemployment option.

Similar results were found in Germany.

Addendum: The Brazilians, who have the most experience with high inflation, were the most likely to choose 2 (46%).

I am surprised this has not really hit the U.S. headlines yet:

The biggest cumulative borrower from the Term Auction Facility was Barclays of the UK, which bought the US broker-dealer unit of Lehman Brothers out of bankruptcy in September 2008.

Barclays borrowed a cumulative $232bn from the TAF through various subsidiaries. The TAF provided one or three-month loans to banks from December 2007 until it closed this year.

…Bank of Scotland and RBS of the UK, Societe Generale of France, Dresdner Bank and Bayerische Landesbank of Germany, and Dexia of Belgium were all amongst the top 10 users of TAF. The second largest user was Bank of America, which bought Merrill Lynch during the financial crisis, and borrowed a cumulative $212bn.

The biggest seller of commercial paper to the Fed’s Commercial Paper Funding Facility, which bought up illiquid paper, was UBS of Switzerland followed by the insurer AIG. Five of the top 10 CPFF users were European banks.

2013 will mark the 100th anniversary of the Fed.  What have we got for our money? Surprisingly little.  Inflation is clearly higher in the post-Fed era as is price variability. Deflation is lower, although there is nothing to fear from secular deflation. Barsky, Miron, Mankiw and Weil did find that the Fed dramatically reduced seasonal interest rate variability. I have always found this result puzzling–money is easy to store and seasons are predictable so why aren't interest rates smoothed without a very elastic money supply? In anycase, it's not obvious that smoother rates are better, although there could be small gains.

The big question, of course, is the variability of output. It used to be thought that output variability had decreased post-WW II but, as I pointed out in an earlier post, Romer's work (see also Miron) has shown that when measured on a consistent basis there is no substantial decline in volatility comparing pre-WW 1 to post-WW II. (Note that is generously giving the Fed a pass on the Great Depression!) 

Selgin, Lastrapes and White have an excellent review of the empirical literature on inflation, output and other variables and conclude:

The Federal Reserve System has not lived up to its original promise. Early in its career, it presided over both the most severe inflation and the most severe (demand-induced) deflations in post-Civil War U.S. history. Since then, it has tended to err on the side of inflation, allowing the purchasing power of the U.S.dollar to deteriorate considerably. That deterioration has not been compensated for, to any substantial degree, by enhanced stability of real output. Although some early studies suggested otherwise, recent work suggests that there has been no substantial overall improvement in the volatility of real output since the end of World War II compared to before World War I. A genuine improvement did occur during the sub-period known as the "Great Moderation." But that improvement, besides having been temporary, appears to have been due mainly to factors other than improved monetary policy. Finally, the Fed cannot be credited with having reduced the frequency of banking panics or with having wielded its last-resort lending powers responsibly.

The Fed has surely been among the better of the central banks which would make it interesting to run a similiar analysis in other countries.