Results for “piketty”
166 found

The working rich are driving income inequality, not the rentiers


Have passive rentiers replaced the working rich at the top of the U.S. income distribution? Using administrative data linking 10 million firms to their owners, this paper shows that private business owners who actively manage their firms are key for top income inequality. Private business income accounts for most of the rise of top incomes since 2000 and the majority of top earners receive private business income—most of which accrues to active owner-managers of mid-market firms in relatively skill-intensive and unconcentrated industries. Profit falls substantially after premature owner deaths. Top-owned firms are twice as profitable per worker as other firms despite similar risk, and rising profitability without rising scale explains most of their profit growth. Together, these facts indicate that the working rich remain central to rising top incomes in the twenty-first century.

That is from a new paper by Matthew Smith, Danny Yagan, Owen Zidar, and Eric Zwick, via the excellent Kevin Lewis.

My short essay on opportunity concepts for South Africa

Here is the piece (pdf), here is the broader symposium, with other notable contributors, including Bill Easterly, Charles Kenny, and Brandon Fuller.  Here is one excerpt from my essay:

…we should keep in mind the strictures of Dani Rodrik that every country, or sometimes every region, is different. Nonetheless this reorientation of measures of progress would have some implications for policy analysis. In particular, high levels of inequality, inequality of opportunity, and relative income mobility would not be seen as problems per se.

Furthermore, the frequent appearance of those concepts in political and also scholarly rhetoric would be seen as misleading and a distraction. The focus instead would be on expanding the absolute size of opportunities for the poor. To make this more concrete, consider a policy change which benefitted both the rich and the poor. Many of the equality metrics would have to struggle with such a policy, which might increase inequality in some manner, whereas the approach recommended in this paper could endorse it wholeheartedly.

It is interesting to note the recent visit of Thomas Piketty to South Africa. He called for a national minimum wage, greater worker participation in company boards, and land reform. Those are all attempts to provide equalizing measures across one dimension or another. Although some parts of those ideas may have merit, they do not seem overall focused on incentivizing wealth creation and opportunity. Piketty even stated: “I think it’s fair to say that black economic empowerment strategies, which were mostly based on voluntary market transactions […] were not that successful in spreading wealth.” It perhaps would have been more appropriate to note South Africa remains a highly regulated, highly legally privileged, and indeed mercantilist economy; the country ranked only number 72 on the 2015 Heritage Foundation Index of Economic Freedom. So perhaps empowerment based on voluntary market transactions has not yet really been tried.

The absolute opportunities approach also suggests a different emphasis for a topic such as land reform. Many arguments for land reform focus on the difference in the land holdings between the rich and the poor, yet perhaps those are not the relevant numbers. A better focus would be the following question: “by how much would receiving more land elevate the opportunities of the poor?” If indeed the answer to that question is optimistic, the case for land reform will be stronger.

Do read the whole thing.

What I’ve been reading

1. Michael J. Klarman, The Framers’ Coup: The Making of the United States Constitution.  Excellent author, the chapters on the time period before the Constitution are good enough to make the “best books of the year list,” the rest is a much above-average summary and distillation, but of more familiar material.  At 880 pp. of clear, limpid, and instructive prose, it is a winner in any case.

2. W.H. Auden and Louis MacNeice, Letters from Iceland.  More of a mutual travelogue, with alternating contributions, than a series of letters, one learns that even in 1936: “There is little stigma attached to illegitimacy.  Bastards are brought up on an equal footing with legitimate children of the family.”  Furthermore, “All chocolate or sweets should be bought in London.”  During the trip they run into Goering, yes the Goering.

3. Richard A. Posner, The Federal Judiciary: Strengths and Weaknesses.  This is a grumpy book, but I don’t mean that in a grumpy kind of way, as I like many grumpy books: “The dominant theme of this book has been judicial standpattism — more precisely, the stubborn refusal of the judiciary to adapt to modernity.”  By the end, Posner gives the federal judiciary a grade between B and B+, I was surprised it was so high.

4. Duff McDonald, The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite. “In the early 1920s, HBS was still without its own buildings at Harvard, faculty were crammed together in cramped offices, and classrooms were scattered around Harvard Yard.”  This is a remarkably clear and engaging survey of its subject matter, the main drawback being it never explains the rise of HBS in terms of…management, as HBS itself might do so.  There is thus an odd cipher at the book’s core, plus from the discussion of Michael Jensen onward, the book descends increasingly into ad hominem attacks and unfair moralizing.  This volume is an odd mix, but still worth reading for its contributions.

Stephen Ellis, This Present Darkness: A History of Nigerian Organized Crime, is one of the better books on that country: “…there are even private colleges in Lagos offering courses in credit card fraud and advance-fee fraud.”

Hugh Nibley, Approaching Zion, is a series of essays on society and theology from one of the Mormon “grandmasters.”

After Piketty: The Agenda for Economics and Inequality, edited by Heather Boushey, J. Bradford DeLong, and Marshall Steinbaum, collects many essays on the Piketty book and also on the topic more generally.

Shahab Ahmed, Before Orthodoxy: The Satanic Verses of Early Islam, “…the early Muslim community believed almost universally that the Satanic verses incident was a true historical fact.”  Ahmed, a brilliant scholar at Harvard, passed away in 2015, here is a short appreciation.  If they wrote books for me, someone would be working on “Islam and Strauss” right now.

What I’ve been reading

1. Ian McEwan. The Children Act.  The main story line pretends to revolve around a Jehovah’s Witness who won’t take a blood transfusion, but I think it was meant as a book about Islam and he was afraid to say so.  The resulting mix doesn’t quite work.

2. Arundhati Roy and John Cusack, Things That Can and Cannot Be Said, Daniel Ellsberg and Edward Snowden are part of the book too.  The two main authors conversing with Snowden is in fact the strongest argument against Snowden I’ve seen.  Maybe he is just being polite, but it’s the only time I’ve heard him sound like an idiot.

3. Helen Hardacre, Shinto: A History.  I’ve read only about a fifth of this 720 pp. book, but it seems to be a highly useful history on a topic hardly anyone knows anything about.

4. Daniel Ellsberg, Secrets: A Memoir of Vietnam and the Pentagon Papers.  Compelling throughout, and worthwhile reading for anyone interested in media and media policy.  Ellsberg, of course, was closely connected to Thomas Schelling and made significant contributions to the theory of choice under uncertainty.

There is also:

After Piketty: The Agenda for Economics and Inequality, edited by Heather Boushey, J. Bradford DeLong, and Marshall Steinbaum, is a very useful collection of writings on Piketty-related themes, including Solow and Krugman.

Nathan B. Oman, The Dignity of Commerce: Markets and the Foundations of Contract Law.  An interesting blend of “moral foundations of capitalism” and analysis of Shakespeare’s Merchant of Venice.

Shahab Ahmed, Before Orthodoxy: The Satanic Verses in Early Islam, “…the early Muslim community believed almost universally that the Satanic verses incident was a true historical fact.”

Tuesday assorted links

1. Esther Duflo’s Ely lecture, “The economist as plumber.”

2. Disappearing markets in everything: the last disco ball maker (there is noisy sound at the link).  And how bad is authoritarianism really?  And David Brooks on Bannon vs. Trump, I am always happy to see actual analysis of the Trump administration.

3. The best economic history works in the last decade? (pt. I)

4. AI now wins in heads-up, no-limit Texas hold’em poker.  That is a game of asymmetric information.

5. The books some Australian guy is looking forward to.

6. If they had served this up as parody, I would have thought it too exaggerated.  Did Darwinian processes really produce this?  I guess so.

7. Long Piketty blog post on productivity in Germany and France.  It does seem he is now blogging in English (and French) for Le Monde.

Friday assorted links

1. India moves to a GST.

2. How to boost your medal count in seven easy steps, redux of my 2012 Grantland piece with Kevin Grier.

3. The culture that is French: “French town flooded with wine after protesters crack open vats.

4. “Using a sample of 19 advanced economies spanning over 30 years, I find no empirical evidence that dynamics move in the way Piketty suggests.

5. The couture culture that is Singapore.  And a German perspective on guns and violence in the United States.

6. Trump’s new economic advisory council.  And John Holbo on Johnson/Weld.

Clive Crook is mostly right

Here is one bit:

Trump’s critics complain about his relentless invoking of crisis — despite agreeing with him that the system is collapsing. Conservatives keep telling us that the American project is in mortal danger, that liberty itself is at stake. Liberals keep telling us that global capitalism is wrecking everything that’s decent in society, that the U.S. is institutionally racist, and America’s traditional values are so much hypocrisy. I think back to the rapturous reception accorded by the left in 2014 to Thomas Piketty’s “Capital,” which argued, you may recall, that capitalism is an engine of injustice, headed for self-destruction; progressives everywhere nodded wisely in agreement. Here’s what puzzles many of them today: Why does Trump have to be so negative?

Trump has the advantage of a fairly simple message, namely “Something has gone fundamentally wrong.”  No, I do not think he will win, but “something has gone wrong and you will make it worse” is not as effective a rebuttal as you might think.  Alternatively, the opposition could and will try “things aren’t as bad as you might think,” and also “yes something has gone wrong but we can fix it for you,” but those are also less compelling even when correct.  And while the former of those two is correct the latter probably is not.

I am reminded of a 2007 post I once wrote which I formerly considered my worst prediction ever.  I grimace again, but here goes:

I apply what I call The Angry Ape Test to the candidates.  Imagine each mimicking an angry ape, and ask how pretty or appealing the resulting picture is.  Most swing voters perceive America as being at war and so they demand toughness.  They demand An Angry Ape, if not at every moment in time, at least in principle.  Most Americans don’t find an angry Hillary to be a pleasant Hillary, whereas an angry, raging Giuliani fits his basic image.  Americans claim not to be biased, but at their core they don’t much like angry women; being female remains Hillary’s biggest barrier, even when explicit prejudice is absent.  Related prejudicial forces will keep Barack Obama from the presidency.  Being black, he is supposed to sound reasonable and intelligent all the time.  He is not allowed to mimic An Angry Ape.  Americans want their first women President to be like Margaret Thatcher — firm, no-nonsense schoolmarmish strength without much radiation of anger — and they want their first black President to be like Colin Powell.  We will allow “Magisterial” — I’m too strong to need to throw a tantrum — to trump Angry Ape, but Hillary can’t play that card.  Barack is too young, too inexperienced, and doesn’t have the military record.

Mitt Romney also can’t do The Angry Ape.  This same hypothesis suggests McCain still has some chance, though obviously his path to the top is no longer clear, given his limited resources.  He can at least do The Ape.  This is the main reason why I still think Giuliani will win.

Obviously I was quite wrong, but I no longer think it was one of my worst posts ever.  Still, timing is everything…

Sunday assorted links

1. “Another bizarre feature of our early prototype was its propensity to respond with “I love you” to seemingly anything.

2. More details on rising white mortality.

3. “At this point, it takes a lot for Star Wars-branded crap to surprise us.”  And there is no great stagnation: Chinese smart phone doubles as a chopping board.

4. Ramanujan: still better than you think.  And India may move to a national sales tax, lower barriers to interstate commerce.

5. Benhabib, Bisin, and Luo (pdf): in the Piketty tradition, but a more useful disaggregation of the data, slides here (also pdf).  For most of you the slides are more useful than the paper.  On p.58 of the slides: “Estimate of inter-generational correlation on returns on wealth is about zero”.

6. Surge pricing for parking meters.

Assorted Thursday links

1. Data on refugee and asylum admissions (pdf); by the way America admitted many more people in 1990 than now.

2. The economics of organized crime in Italy (pdf).

3. Greg Mankiw on the Jeb Bush tax plan.  And Krugman on the same.  And the Tax Policy Center.

4. Further Scott Sumner bullishness on China.  And Thomas Piketty on immigration to Europe.

5. A list with Israel Kirzner on it.  And a list with Veronique de Rugy on it — fifty most influential, from Politico.

6. Was it degrading for the Chinese to hire “programming cheerleaders”?

7. Ireland growing at six to seven percent.

Singapore as financial corporation

Over the last quarter Singapore’s gdp fell at an annualized rate of 4.6%, in large part because of China problems (that’s your “China fact of the day”).  And household debt is about 75% of gdp.  Yet the nation’s finances are much sounder than that may sound, and it is worth thinking through why.

I think of the government of Singapore as having three main fiscal arms.  One is a tax collection authority, one is like a life insurance company, and the other is like a hedge fund.  In fact it is a hedge fund.

The tax collection angle is pretty straightforward.  Singapore does an excellent job of both collecting taxes and keeping the overall (direct) tax burden low.  As the population ages, however, we can expect these taxes to rise somewhat, but in a predictable and manageable way.

Now consider the financial side, in particular the question of what the government earns on the investment of people’s retirement funds.  Here it gets more interesting.

Singapore’s social security and welfare system relies on forced saving.  Overall this policy has served Singapore well, and has kept down government as a share of gdp, but in an era of low rates of return it may stumble.  Imagine for instance that the retirement fund were to earn zero percent or so (real) over a period of ten years.

There is already a perception that people put in a lot of forced savings for what they get back for retirement.  I’ve heard Singaporeans claim that they “save for forty years and get paid for twenty,” and similar such assessments.  By no means is everyone happy with the system.

Here is a good survey of criticisms (pdf), including this one:

Those dissatisfied with CPF [Central Provident Fund, the forced savings body] interest rates argued that, given the comparatively higher returns from investment bodies like the GIC and Temasek Holdings who invested government funds, the government should rightfully offer a higher rate of return to CPF holders. The failure to do so was thus perceived as proof that the current government was miserly and profit-seeking at the expense of CPF holders’ welfare. Some also highlighted that annual dividends provided under Malaysia’s Employment Provident Fund (EPF) 83 were higher than the 2.5-3.5% annual interest provided on the OA and the 4-5% on the Special, Medisave, Retirement Accounts (SMRA), as proof that CPF rates could be higher.

Here is a useful ADB history of the Central Provident Fund (pdf, and I’ll use the shorter CPF).  In its early years the fund did well by investing in the low-hanging fruit of Singapore’s housing stock.  That option will not be as socially or financially potent looking forward.  Here are concerns about the sustainability of CPF investment plans (pdf).

The CPF balance sheet states that funds are invested in high-quality government securities, but in fact there is a sizable surplus and a lot of the money is invested abroad, basically as part of sovereign wealth fund activities (see pp.13-15 in this pdf, the link is interesting more generally too).

In essence, one part of this system has the financial structure of a life insurance company, and another part has the financial structure of a hedge fund.

Singapore as a financial corporation has amassed an enormous amount of wealth, due to the earth-shattering performance of its fund managers.  You can think of modern Singapore as in part built on the phenomenal “hedge fund” returns of the 1990s.

I read in the Business Times that Temasek, one of the two major Singaporean funds, has averaged a 16 percent rate of return since its inception in 1974.  That is impressive, and even if you think that exact number is somehow cherry-picking, everyone agrees the returns have been high.  The problem of course is that we do not expect the next few decades to be anywhere near that performance, especially as Asian growth has been slowing down and China is no longer an easy path to riches.  Singapore runs the risk of being the next Warren Buffett, so to speak.  That said, Buffett is still a pretty rich guy, as is Singapore; imagine shouting to a bum on the street “Hey, buddy — you’re going to be the next Warren Buffett!”  He wouldn’t feel so distressed.

For all the talk of forced savings, you can understand the current CPF as (partially) a pay-as-you-go system, where some of the CPF funds are transferred to government holding companies and then the higher returns are kept within the state.  I cannot ascertain the size of that transfer, but I believe it to be large.  As a public choice issue, the market-oriented defenders of forced savings programs need to come to terms with the fact that there is far less than full pass-through.  That said, the private savers mostly would not have earned those high rates of return on their own.

Singapore built up a strong state rather rapidly, but partially at the expense of retirees, and those who must save along the way for retirement, and you can think of that as Singapore’s major hidden tax.  “State capacity,” when turned to beneficial ends such as infrastructure and wise decision-making, benefits the young most of all.  In my view it is good policy to be investing so much in the more distant future, rather than in the elderly, but of course opinions here will differ.

One implication, by the way, is that if you measure wealth rather than income, Singapore’s government is much larger than it may at first appear.  On the flow side, Singapore is small government — about eighteen percent of gdp by many measures — but on the stock or wealth side it is big government.  That is one reason why the country has fans on both sides of the political spectrum.

Of course as retirees ask for more, as is the political trend, Singapore will have to increase payments. That will be a massive de facto privatization of the wealth held within the Singaporean state apparatus.  But of course the privatized flows will, to a large extent, be soaked up by household debt and recycled to the financial sector.

It will be tricky to maintain the balance between having a strong state and meeting voter demands.  Such is the tension of living at r> g, and in a funny way the Singapore scenario has, at least until now, fit Piketty’s model fairly well, albeit with a much larger role for the state.  The problems will come when those rates of return on capital start to fall as indeed I believe they are about to.

But don’t worry just yet — Temasek a few weeks ago announced that they pulled in a return of over nineteen percent during this last year.

I continue in my belief that Singapore is one of the most fascinating places in the entire world.  If you have not yet been, I envy you for the experience of visiting the first time.

Monday assorted links

1. Krugman reviews the “new” Piketty book.

2. The economics of microbial trade (speculative).

3. When a company experiments with a yearly minimum wage of 70k.

4. Will self-driving cars benefit Los Angeles the most?  And an architectural review of the new 405 freeway improvements.

5. The great sushi craze of 1905.

6. Perry Anderson on Russia, lots of stuff.  And Hernando de Soto on Piketty’s political economy.

7. Chinese textile production is returning to the United States, but please be careful not to overinterpret this story.

What Is “Price Theory”? (A Guest Post by Glen Weyl)

When I was last living in Chicago, in the spring 2014, a regular visitor to the department of the University of Chicago and the editor of the Journal of Economic Literature, Steven Durlauf, asked me if I would be interested in writing something for the journal. For many years I had promised Gary Becker that I would write something to help clarify the meaning and role of price theory to my generation of economists, especially those with limited exposure to the Chicago environment, which did so much to shape my approach to economics. With Gary’s passing later that spring, I decided to use this opportunity to follow through on that promise. More than a year later I have posted on SSRN the result.

I have an unusual relationship to “price theory”. As far as I know I am the only economist under 40, with the possible exception of my students, who openly identifies myself as focusing my research on price theory. As a result I am constantly asked what the phrase means. Usually colleagues will follow up with their own proposed definitions. My wife even remembers finding me at our wedding reception in a heated debate not about the meaning of marriage, but of price theory.

The most common definition, which emphasizes the connection to Chicago and to models of price-taking in partial equilibrium, doesn’t describe the work of the many prominent economists today who are closely identified with price theory but who are not at Chicago and study a range of different models. It also falls short of describing work by those like Paul Samuelson who were thought of as working on price theory in their time even by rivals like Milton Friedman. Worst of all it consigns price theory to a particular historical period in economic thought and place, making it less relevant to the future of economics.

I therefore have spent many years searching for a definition that I believe works and in the process have drawn on many sources, especially many conversations with Gary Becker and Kevin Murphy on the topic as well as the philosophy of physics and the methodological ideas of Raj Chetty, Peter Diamond and Jim Heckman among others. This process eventually brought me to my own definition of price theory as analysis that reduces rich (e.g. high-dimensional heterogeneity, many individuals) and often incompletely specified models into ‘prices’ sufficient to characterize approximate solutions to simple (e.g. one-dimensional policy) allocative problems. This approach contrasts both with work that tries to completely solve simple models (e.g. game theory) and empirical work that takes measurement of facts as prior to theory. Unlike other definitions, I argue that mine does a good job connecting the use of price theory across a range of fields of microeconomics from international trade to market design, being consistent across history and suggesting productive directions for future research on the topic.

To illustrate my definition I highlight four distinctive characteristics of price theory that follow from this basic philosophy. First, diagrams in price theory are usually used to illustrate simple solutions to rich models, such as the supply and demand diagram, rather than primitives such as indifference curves or statistical relationships. Second, problem sets in price theory tend to ask students to address some allocative or policy question in a loosely-defined model (does the minimum wage always raise employment under monopsony?), rather than solving out completely a simple model or investigating data. Third, measurement in price theory focuses on simple statistics sufficient to answer allocative questions of interest rather than estimating a complete structural model or building inductively from data. Raj Chetty has described these metrics, often prices or elasticities of some sort, as “sufficient statistics”. Finally, price theory tends to have close connections to thermodynamics and sociology, fields that seek simple summaries of complex systems, rather than more deductive (mathematics), individual-focused (psychology) or inductive (clinical epidemiology and history) fields.

I trace the history of price theory from the early nineteenth to the late twentieth when price theory became segregated at Chicago and against the dominant currents in the rest of the profession. For a quarter century following 1980, most of the profession either focused on more complete and fully-solved models (game theory, general equilibrium theory, mechanism design, etc.) or on causal identification. Price theory therefore survived almost exclusively at Chicago, which prided itself on its distinctive approach, even as the rest of the profession migrated away from it.

This situation could not last, however, because price theory is powerfully complementary with the other traditions. One example is work on optimal redistributive taxation. During the 1980’s and 1990’s large empirical literatures developed on the efficiency losses created by income taxation (the elasticity of labor supply) and on wage inequality. At the same time a rich theory literature developed on very simple models of optimal redistributive income taxation. Yet these two literatures were largely disconnected until the work of Emmanuel Saez and other price theorists showed how measurements by empiricists were closely related to the sufficient statistics that characterize some basic properties of optimal income taxation, such as the best linear income tax or the optimal tax rate on top earners.

Yet this was not the end of the story; these price theoretic stimulated empiricists to measure quantities (such as top income inequality and the elasticity of taxable income) more closely connected to the theory and theorists to propose new mechanisms through which taxes impact efficiency which are not summarized correctly by these formulas. This has created a rich and highly productive dialog between price theoretic summaries, empirical measurement of these summaries and more simplistic models that suggest new mechanisms left out of these summaries.

A similar process has occurred in many other fields of microeconomics in the last decade, through the work of, among others, five of the last seven winners of the John Bates Clark medal. Liran Einav and Amy Finkelstein have led this process for the economics of asymmetric information and insurance markets; Raj Chetty for behavioral economics and optimal social insurance; Matt Gentzkow for strategic communication; Costas Arkolakis, Arnaud Costinot and Andrés Rodriguez-Clare in international trade; and Jeremy Bulow and Jon Levin for auction and market design. This important work has shown what a central and complementary tool price theory is in tying together work throughout microeconomics.

Yet the formal tools underlying these price theoretic approximations and summaries have been much less fully developed than have been analytic tools in other areas of economics. When does adding up “consumer surplus” across individuals lead to accurate measurements of social welfare? How much error is created by assumptions of price-taking in the new contexts, like college admissions or voting, to which they are being applied? I highlight some exciting areas for further development of such approximation tools complementary to the burgeoning price theory literature.

Given the broad sweep of this piece, it will likely touch on the interests of many readers of this blog, especially those with a Chicago connection. Your comments are therefore very welcome. If you have any, please email me at [email protected].