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The Piketty-Saez-Zucman response to Auten and Splinter

A number of you have asked me what I think of their response.  The first thing I noticed is that Auten and Splinter make several major criticisms of PSZ, and yet PSZ respond to only one of them.  On the others they are mysteriously silent.

The second thing I noticed is that PSZ have been trying to deploy the slur of “inequality deniers” against Auten and Splinter.  I take that as a bad epistemic sign.

I was in the midst of writing a longer post, but then I received the following from Splinter, and I cannot come close to his efforts or authority:

Here is a short response to yesterday’s comments by Piketty, Saez, and Zucman (PSZ) on Auten and Splinter (forthcoming in JPE). These are variations on prior comments that Jerry and I addressed in 2019 and 2020. 

First, PSZ say audit data suggest adding underreported income implies little change in top 1% shares. We agree. But their approach increases recent top 1% shares about 1.5 percentage points, with about 50% of underreported business income going to the top 1% by reported income. However, Johns and Slemrod (2012) found only 5% of underreporting went to the top 1% by reported income. This discrepancy is because PSZ allocate underreported income proportional to reported positive income, which ignores that a substantial share of business underreporting (about 40%) goes to individuals with reported negative total income, where misreporting rates are the highest (Table B3 here). The concentration of underreporting at the bottom of the reported distribution causes substantial upward re-ranking when adding underreported income, but that’s mostly ignored in the PSZ approach. The PSZ approach also implies that someone who decreases their underreporting rate by increasing their reported income is allocated more underreporting. That’s backwards. 

In contrast, our approach fits prior estimates from audit data, makes use of many years of audit data, and improves upon prior approaches. We find that underreported income slightly lowers top 1% pre-tax income shares and slightly increases after-tax income shares (Figure B6 here), which is consistent with the audit data. For example, 16% of underreporting is in our top 1% ranked by true income, far less than PSZ’s near 50%-allocation and a bit under the 27% in Johns and Slemrod because we improve upon prior approaches that misallocate undetected underreporting (discussion here). Contrary to the assertions and approach of PSZ, our Figure B5 (bottom panel, here) shows­ that re-ranking between reported and true (reported plus underreported) income matters substantially. PSZ appear confused about the difference between ranking by reported versus true income. Our underreporting allocations (as are theirs) must be based on reported income because that is all one observes with the primary tax data we both use. But, unlike their method, our allocations are done such that we match the re-ranking implied by audit data. Therefore, we match both the distributions by reported and true income after re-ranking (top two panels of Figure B5, here). 

Second, income missing from individual tax returns has shifted from the top to outside the top. The shift from the top was from movements out of closely-held C corporations, whose income is missing from individual tax returns, to passthrough businesses, whose income is on individual tax returns. This created growth in the top share of taxed business income. The growth in PSZ’s top share of untaxed business income, however, is due to their skewed allocation of underreported income that re-allocates underreported income to the top of the distribution. Outside the top, the growth of missing income is from increasing tax-exempt employee compensation, especially from health insurance (see Figure B16 here).

Third, PSZ suggest that top wealth and capital income shares should run parallel over the long run. This is a problematic assumption. Economic changes can push down capital income shares relative to wealth shares. For example, interest rates fell dramatically between 1989 and 2019—the federal funds effective rate fell from 9 to 2 percent. This tends to decrease the ratio of interest-income to bond-wealth and therefore falling interest rates likely increased the gap between top income and wealth shares. Also, much of top wealth patterns are driven by passthrough business, but this is fully or two-thirds excluded from PSZ’s definition of “capital” income here. When fully including passthrough business, the Auten–Splinter top 1% non-housing “capital” income share increased by 5 percentage points between 1989 to 2019, about two-thirds the Federal Reserve’s estimated increase in top 1% wealth shares. Therefore, the Auten-Splinter estimates are broadly consistent with increasing top wealth shares.

 The Auten–Splinter approach is fundamentally a data-driven approach (Table B2 here). Based on Saez and Zucman’s (2020) suggestions and conversations, our more recent work adds new uses of data to account for high-income non-filers, flexible spending accounts, and depreciation issues from expensing. Where we rely on assumptions, alternative ones suggest top 1% shares change little, see Table 5. Our headline finding of relatively flat long-run top 1% after-tax income shares is robust.

Auten and Splinter had presented versions of those points previously, as they note.  Yet PSZ present them as naive fools who somehow forgot to think about these issues at all, and PSZ do not, in their reply, consider these more detailed presentations of the point and defenses of the  Auten-Splinter estimates.  So I don’t think of the PSZ response as especially strong.

Here are relevant Auten and Splinter points from back in 2020.  Phil Magness offers commentary.

Will Rinehart on YIMBY and Sure (from my email)

I won’t double indent, everything that follows is from Will and not from me:

“…you put up the post “MR commentator ‘Sure’ on YIMBY” and I wanted to send an email because I’m not sure I agree with the comment, given Rosen-Roback and some recent research in urban economics.

Sure writes that “what people want from their housing is overwhelmingly a short commute and low density,” which is only half right. People want amenities, including a short commute and space, but more importantly, they want good schools and a mix of local consumption goods.

One of the most important amenities for a school is its school district. Basically, any survey of home buyers ranks school districts at the very top of demands, and they show a willingness to give up space in order to be in better schools.

Then, there’s the broad notion of local consumption. Sparked by Miyauchi, Nakajima, and Redding (2021), urban economics is shifting to include smartphone data in order to understand the consumption side of agglomeration better. It is an area we know little about because data was so hard to collect.

Combining smartphone data with economic census data, the authors show that non-commuting trips are frequent, more localized than commuting trips, and are strongly related to the availability of nontraded services. From here, the authors augmented a standard model to incorporate travel to work and this hyper local travel. Their findings are powerful. Consumption access makes a sizable contribution relative to workplace access in explaining the observed variation in residents and land prices across locations.

So when Sure asks,

Suppose they do [liberalize housing], who is going to move in [to Arlington and Alexandria]? The guys who are buying in Chantilly because they want space? Or the guys crowded into a apartment building in NE DC who work in Foggy Bottom?I submit it will be the latter.

I think that’s probably wrong. The people moving into those homes in the suburbs will not want space but good schools first and foremost. So it very well could be people from Chantilly move to Arlington, but I would suspect that Arlington will get more people because they generally have better schools than Alexandria and others. Thus, the amenity of interest would be education not space.

Sure is right that “If we liberalize zoning everywhere (i.e. the YIMBY dream) then we should expect a net movement from the areas where people say they don’t want to live to the areas where they say they want to live.” But they misstep in thinking that “on net that means out of the urban core and into something less dense.” In the open-city Rosen-Roback model, generally speaking, liberalization of housing would mean people head into the urban core and into the suburbs.

In total, Sure seriously overweights commuting time and housing space, and underweights education as an amenity and local consumption.”

Thursday assorted links

1. Where is San Francisco housing policy headed?

2. Whole genome sequencing for embryos advances.

3. The Indian siblings taking the chess world by storm.

4. Catherine Project classics courses for next year.

5. Why is religious attendance linked to more anxiety in U.S. South Asians?

6. “We introduce a new approach to decode and interpret statutes and administrative documents employing Large Language Models (LLMs) for data collection and analysis that we call generative regulatory measurement. We use this tool to construct a detailed assessment of U.S. zoning regulations. We estimate the correlation of these housing regulations with housing costs and construction. Our work highlights the efficacy and reliability of LLMs in measuring and interpreting complex regulatory datasets.”  Link here.

MR commentator “Sure” on YIMBY

People talk about YIMBY as though it will mean more high rise apartments. And maybe it would in New York or San Francisco, though I have my doubts.

But what people want from their housing is overwhelmingly a short commute and low density.

Currently, the neighborhoods that offer the best tradeoff for these are the priciest in most metropolitan areas. Georgetown, Arlington, Falls Church, Chevy Chase, Great Falls, McLean … all of them offer shorter commutes into DC (or other key job locations like the Pentagon).

And what have YIMBY’s won? Well in Arlington and Alexandria they can now build multifamily housing in places that were once reserved for SFH.

Suppose they do, who is going to move in? The guys who are buying in Chantilly because they want space? Or the guys crowded into a apartment building in NE DC who work in Foggy Bottom?

I submit it will be the latter.

End of the day, Americans want to live in the burbs and the country. If we liberalize zoning everywhere (i.e. the YIMBY dream) then we should expect a net movement from the areas where people say they don’t want to live to the areas where they say they want to live.

And on net that means out of the urban core and into something less dense. Most likely that means leaving the high rises and moving into low rises or multiplexes. End of the day, it will be moving from high density to lower density.

And this will create tensions between maintaining SFH in burbs as opposed to multiplexing them or building low rises.

I have no idea if the price will be the thing that gives – it may rise because the land has suddenly gotten more valuable for a teardown to low rise conversion. This would bring down “housing” prices, but quite possibly increase the cost of detached single family homes as the supply of that specific housing class diminishes. Possibly, the low rises will reduce demand for SFH more than teardowns and foregone SFH developments.

But if that does happen, it means that a lot of suburban areas are going to have a bunch of new residents and voters who are not keen to live the SFH lifestyle. And that is all but certainly going to mean disamenity for the SFH lifers. That may be new local politics, investment in public transportation at the expense of road maintenance, or declining school quality.

But end of the day, if YIMBYism allows people to live as they want because the market can better match demand, then the net flow has to be out of the oversubscribed cities. And the big reason people say they live urban when they would prefer otherwise is to be close to the jobs. This strongly suggests that YIMBY will end up resulting less in skyscrapering the cities and more in multiplexing the burbs.

Outside of a handful of cities with extremely harsh geographic constraints (e.g. NYC, SF), upzoning the burbs will likely eat into the city cores more than new folks will move to the city cores.

Of course there is always the immigration question. With enough immigration, even the cities will fill (i.e. both NYC and SF are already more than a third foreign born), but if we confine ourselves to current residents they want out and they want a short commute.

Here is the link, via Naveen K.

Gun Buybacks and the Elasticity of Supply

Can gun buybacks work? Some simple economics suggests, no! The first of our videos on the elasticity of supply, Why Housing is Unaffordable, illustrated inelastic supply. Today’s video on gun buybacks illustrates elastic supply. Our gun buyback video hits the sweet spot for MRU videossolid economics leading to surprising conclusions illustrated in an entertaining and accurate way.

Of course, both of these videos draw upon and pair great with our textbook, Modern Principles of Economics.

Monday assorted links

1. Will 48 volts end up the standard for cars?

2. Is “Mom dread” a cultural problem?

3. Joshua Gans model on whether social governance can control harms from AGI.  And economists model optimal liability for AI.  Whether or not you agree with these particular arguments, it is amazing how the economists suddenly are cleaning up in this field.

4. “We also present new estimates that show that assortative mating was much stronger than previously estimated for the US.” (pre-1940)

5. “South Korea’s high-rise housing and low birthrates are closely related.”  True or not?

6. A Nicaraguan beauty queen coup?

YIMBY for commercial real estate

That is the topic of my latest Bloomberg column, here are some bottom line results:

What would “Yes in My Backyard” even mean in the context of commercial real estate?

A new economic research paper offers a hint of an answer: Most likely, there would be taller buildings, more mixed-use neighborhoods and considerably more wealth.

One way to approach this question is to look at less regulated cities. According to one widely used index, the least regulated metro area in the US is Midland, Texas. Midland isn’t particularly large or well-known, with a population of about 132,000, yet one of its nicknames is the “Tall City” because of its downtown skyline. When there is freedom to build, going vertical often is most cost-effective…

The research paper estimates the total social gains if every US city deregulated to the level of Midland, including the evening out of regulations within each city. The gains are strikingly large (though with some caveats): National output would rise by between 3% and 6%, and the gains in well-being would be in the range of 3% to 9% of lifetime consumption. Think of it as Americans getting a lifetime raise of at least 3%.

And:

Another caveat is that the data behind these estimates is based on 2018 numbers, when a little more than 5% of the work force worked from home. Under one more recent estimate, 12.7% of all full-time employees work fully from home. (Hybrid work is more common yet, but that typically still requires office space.)

So the researchers ran their model again, this time assuming that 40% of workers were at home full-time. They still found a 1.5% output gain. Of course, given that the US is not currently close to 40% work from home, the actual gains from commercial real estate deregulation, circa 2023, lie somewhere between 1.5% and the larger numbers — the 3% to 6% output boost — I cited earlier. The researchers suggest that the gains from deregulation are almost linear in the share of workers who need offices, so the larger measured gains should be closer to the truth.

Here is the underlying research by Fil Babalievsky, Kyle F. Herkenhoff, Lee E. Ohanian, and Edward C. Prescott.

Thursday assorted links

1. Alexandria, Virginia ends single family only residential zoning.

2. Predictions about Seoul yikes.

3. Profile of Tamara Winter.

4. Background on the pending Guyana conflict.

5. Camera obscura, AI, and art.

6. Is AI easy to control? Speculative, but a good example of how the discourse runs, this time from the optimist side. And claims about Chinese open source AI, speculative too but important if true.  And more.

Ken Opalo is more optimistic about Africa (from my email)

Just a quick note that the story isn’t a straightforward “lost decade.”

Human development indicators (health, education, housing) are up. Lots of infrastructure is being built all over the place. The real challenges behind the growth slowdown are:

1) productivity increases have stalled since about 2014 (and was higher than India’s for a while
2) delayed fertility transition continues to depress the per capita income measure.

More on this here: https://kenopalo.substack.com/p/there-is-an-urgent-need-to-unlock

Best,

Ken

Evan Soltas on the job market from MIT

Here is his home page, the job market paper is “Tax incentives and the supply of low income housing”:

Subsidies to developers are a core instrument of housing policy. How do they affect housing markets, and who benefits? I assess their impacts and incidence with a dynamic model of housing markets and new data on developers competing for Low-Income Housing Tax Credits. I estimate the model using three sources of variation: quasi-random assignment of subsidies, shocks to subsidy generosity, and nonlinearities in scoring rules for subsidy applications. I find that, due to displacement of unsubsidized housing, subsidies add few net units to the housing stock and instead reallocate units progressively. Households benefit from developer competition for subsidies, but competition also results in high entry costs, and developers still capture nearly half of the welfare gains. In counterfactuals, a stylized voucher program can generate the same household benefits at less fiscal cost.

Recommended!

Minimum wages and rents

This topic remains underdiscussed in the minimum wage debates, here are some recent results from Atsushi Yamagishi:

I analyze the effect of minimum wage hikes on housing rents using exogenous variation in minimum wages across local labor markets in Japan. I estimate that in low-quality rental housing market, a 10% minimum wage increase induces a 2.5%–4.5% increase in rents. Minimum wage hikes benefit workers in light of a spatial equilibrium model showing that changes in housing market rents work as a sufficient statistic for measuring utility changes arising from changes in minimum wages. The increase in housing rents also implies an unintended benefit for homeowners.

Atsushi Yamagishi is from Princeton economics, but that is not his job market paper, here is the whole portfolio, which looks quite interesting.

Denmark takes forceful measures to integrate immigrants

After they fled Iran decades ago, Nasrin Bahrampour and her husband settled in a bright public housing apartment overlooking the university city of Aarhus, Denmark. They filled it with potted plants, family photographs and Persian carpets, and raised two children there.

Now they are being forced to leave their home under a government program that effectively mandates integration in certain low-income neighborhoods where many “non-Western” immigrants live.

In practice, that means thousands of apartments will be demolished, sold to private investors or replaced with new housing catering to wealthier (and often nonimmigrant) residents, to increase the social mix.

The Danish news media has called the program “the biggest social experiment of this century.” Critics say it is “social policy with a bulldozer.”

The government says the plan is meant to dismantle “parallel societies” — which officials describe as segregated enclaves where immigrants do not participate in the wider society or learn Danish, even as they benefit from the country’s generous welfare system.

Here is more from the NYT, and do note that Singapore has its own version of this policy.  I would make a few observations:

1. Putting aside the normative, analyzing the effects of such policies will be increasingly important.  Economists are not especially well-suited to do this, nor is anyone else.  I am well aware of the Chetty “Moving to Opportunity” results.  That is good work, but a) it probably doesn’t apply to coercive Danish resettlements, and b) cultural context is likely important for the results.  At least for the countries that migrants wish to move to, most will have their own versions of this dilemma.

2. “Open Borders” as a sustainable political equilibrium is looking much weaker than it did a month ago.  The key question in immigration policy is not “how many migrants should we take in?” (a lot, I would say), but rather “how can we make continuing immigration a politically sustainable proposition?”  Many immigration advocates are in a fog about their inability to offer better answers to that question.

3. Will this Danish action, once the entire political economy is worked through, increase or decrease the allowed number of migrants to the country?  Looking at the demand side to migrate, will this policy end up attracting a higher or lower quality of migrants to Denmark?  Is Denmark even attractive enough as a destination to get away with this?  Or will it send a better signal to would-be migrants and thus raise quality?

I would not be too confident about my answers to those questions, nor should you be so confident.

What is it we do and do not know about macroeconomics?

That is the topic of my latest Bloomberg column, here is one excerpt:

Another episode frequently cited as evidence against economists is the Great Recession of 2007-2009. Economists did make some mistakes on that one — but they are not the ones you usually hear about.

When real estate prices started to slow down and then fall, many economists declared there was a real estate bubble. The theory quickly developed that the market crash was due to a real estate bubble bursting, followed by a sharp fall in aggregate demand, followed by a decline in employment and output.

The last part of that explanation is correct. In retrospect, however, it is not clear that the housing prices of 2006-2007 represented a bubble. By today’s metrics those prices appear prescient, if slightly premature. The market was suddenly realizing that a lot of real estate assets were going to be worth much more — and the recent evolution of real estate valuations seems to have confirmed that judgment.

In 2009, however — and following a lot of foreclosures and the emergence of troubled banks — the market was far from ready to accept that the high real estate prices had been justified. The market was too skeptical when it should have been less panicked. A lot of economists got this wrong too, along with many pundits. All of this made the resulting panic worse because the talk was so pessimistic about real estate valuations. Instead, the real problem was that the market had lost faith in a set of high real estate prices that has since been largely validated. Maybe not in Las Vegas and Orlando, but for the nation as a whole, most of all on the coasts.

Economists should have been less quick to judge what is or is not a bubble. The real-estate-bubble explanation appeared to be correct in the short run, but economists should have been more modest about their ability to second-guess the market. The good news is that, with hindsight, we can piece together what happened. Policymakers and market participants made a series of overlapping mistakes related to monetary policy, the shadow banking system and panic about real estate.

There is a good picture of trends in real estate prices at the link, or ungated here.