Results for “concentration”
182 found

Does it matter that to some extent banks are commonly owned?

There is now a paper on this topic by Azar, Raina, and Schmalz, the main result is this:

We document a secular increase of deposit account maintenance fees and fee thresholds with a new branch-level dataset, as well as substantial cross-sectional variation in these prices and in deposit rate spreads. We then examine whether variation in bank concentration helps explain the variation in prices. The standard measure of concentration, the HHI, is not correlated with any of the outcome variables. A generalized HHI (GHHI) that captures both common ownership (the degree to which banks are commonly owned by the same investors) and cross-ownership (the extent to which banks own shares in each other) is strongly correlated with higher maintenance fees, fee thresholds, and deposit rate spreads. We use the growth of index funds as a source of exogenous variation to establish a causal link from GHHI to higher prices for banking products.

In other words, if companies are owned by the same pension and mutual funds, why should they compete against each other?  Imagine managers given financial incentives for greater stability rather than greater risk-taking, so this does not require a publicly traceable conspiracy.

The first paper on this general question was in fact written by me and Ami Glazer about twenty-five years ago, although we never managed to get it published.  Our biggest problem was perhaps the lack of clear evidence at the time.  This is the best evidence I have seen so far, although I still file this under “speculative”…

For the pointer I thank Uri Bram.

The political economy of Kansas fiscal policy (from the comments)

MR commentator Patrick L. has a go at it:

OK I’ll bite.

In nominal terms, between 2002 and 2012 state receipts grew 50%. Inflation in this period was 28%, and probably significantly lower for Kansas, while population growth has only been about 10% since 2000. Even the “low” 2014 receipts are $1.5 billion more in revenue from when Sebelius first took office and the government started rapidly growing. In the past 15 years expenditures have grown over 50%, exceeding $6 billion today. The shortfall is $300 million, or about 5%. While the growth of the Kansas government in the past 15 years is smaller than other governments in the country, it still explains the shortfall. We can justify this increase by saying that education and health are rising faster than everything else, but that is not a revenue problem. Tax rates have to rise because education and health costs are growing faster than our economies. That says nothing at all about the optimum size of taxation for state governments with regard to growth, jobs, or even revenue. The tax and spending levels Brownback choose would have been adequate ten, maybe even five years ago. With a bit of luck, he could have ignored the shortfall because of variance, which for receipts can be a few hundred million a year.

Republicans should be wise enough to not depend on luck, and they should be wiser predicting how trend lines go. Cutting the size of government was never a serious option.

I haven’t looked at the votes in depth, but it looks like a classic case of urban // rural split that typically troubles the state’s politics. Just under half the state’s population lives around Kansas City or Wichita, which are both five times than the next largest city. These places have as many votes as the rest of Kansas combined, but their needs are radically different.

Rural Kansas has two unique problems. First, there’s the problem of population collapse, which all farm states are seeing. What few children are born move out when they come of age and new people are not moving in. Fixed costs like “We need at least one school building” or “We need at least one teacher per grade” start to add up for small towns of 1000 or less. Those are the obvious problems, not to mention any number of federal or state concerns dealing with food, medical, or disability services that have to be met. As a matter of geography, 98% of the state is rural, and I think I heard 25% of the state is in towns less than 2500 – with over 400 municipal governments servicing less than 1000 people it’s probably the highest per capita in the country (This is FIVE times the national average).

This is a non-trivial growing problem related to scale government services that has been an issue of intense legal debate in the state. Wichita School District’s scale is such it can use its buses to deliver free or low cost lunches to children in the summer. Small cities don’t have buses. Is that fair? How should taxes be structured to compensate? The only political viable solution to this problem has been to spend more money. If all the small towns could magically consolidate into a super smallville, taxes would (back of the envelope) be 10-15% lower.

Government services to low population areas are subsidized by high population areas, and it costs much more to deliver the same services to small towns. The US Postal Service paid for delivery to small towns across the country by charging monopolistic prices on first class letter mail in cities (Which cost almost nothing to deliver). NPR’s national budget mostly goes to setup stations in small towns. The small towns in Kansas are both relatively and in many cases actually getting smaller, older, and poorer. They are costing more and delivering less.

The other problem is that some rural areas are *growing*, but they’re growing because of immigration attracted to the agriculture and food packaging industries. Which is not the same as growing from a resource boom which can be taxed heavily to compensate. Liberal, KS is the largest per capita immigrant community in the United States. While this influx of people is necessary for the health of these places, the new population has more expensive demands on government services and pays less in taxes. Some of these small towns are the same ones that a decade ago were collapsing. Services and infrastructure might have been allowed to lapse or removed, and now rapidly needs to be replaced. That’s expensive! In the long run this problem might replace the first problem, but for now it’s the worst of both worlds.

The economy of the small cities is based largely around food production, which mostly can’t move, and food packaging, which probably can’t for logistical reasons. These places are poorer, getting relatively poorer per capita, and demanding more in services both directly (immigration / aging) and through scale issues. Their populations are either getting very old or very Hispanic, or both.

In contrast, Kansas City is a stable metropolis whose economy depends on manufacturing is built around a national centralized hub for trains. It also has some finance and telecom sprinkled in, though those guys can probably go anywhere. Wichita, is a moderately growing city based around aircraft manufacturing. When state taxes can’t provide enough government services, local taxes for these areas easily rise to compensate. Their economic concerns are how to stop businesses from going across the border to Omaha, Oklahoma City, Tulsa, Springfield, or Kansas City, Mo – places which are functionally identical and just as close. Given their dependence on manufacturing, they also have to consider movement across international borders to China and Mexico. Their demography is much closer to the national averages rather than the extremes. They are large enough that they can take advantage of scaling for government services, without being so large that there is decreasing actual returns. I don’t have figures, but I’d guess income rates in the urban areas to be between 150 and 200% those of the rural areas, which are themselves typically around 2/3rds the national average. This is an industry effect, a farmer in Kansas City and an aeronautical engineer in Greensburg, KS would not make much money. The cities are richer, but they’re richer because they have industries that are becoming increasingly easier to move.

On a political level, normally cities become more liberal, and poorer as you go deeper into the city – a leftover of 19th century industrialization competing against 20th century transportation. Deep urban cores produce these deep blue constituencies that act as checks on conservative suburban rings. In some states this manifests itself as a coalition between the poor rural areas and the poor urban areas against richer suburban areas allowing normal American class politics to balance itself. Cities produce political equilibrium: The richer and denser it becomes, the more liberal, which pushes more money and voters to suburbia, diluting the power. In short, declining rural power (D) and rising urban power (D) offset each other, but rising urban power (D) enhances suburban power (R), and so at a state level you get a balance.

The problem is that the inner core of Kansas City is in Missouri, so Kansas only gets the rich (Republican) suburban ring and a tiny blue part. Typical democratic concerns like maintaining a progressive tax structure can’t really find a foundation. While Wichita also has an urban core that does provide a Democratic representation, the city isn’t constrained geographically by anything (No ocean, mountain, lake, and transportation goes around, not through, the city) means concentration, an ingredient for populist politics, is lessened. The city spreads, and the poor can easily move up the class structure by moving further and further out. Wichita has half the population density of Syracuse and two thirds that of Madison, two close sized metropolitan areas. I haven’t done a county level comparison, but I suspect that Sedgwick has half the density of the ‘average American county with half a million people’ in it. There are other places in America like that, but guess how they vote.

Nor are either cities big university cities, like Madison or Boston. The two big universities in the state are in the small towns of Lawrence and Manhattan, which are quite separate from the rest of the state. Urban centers are places of “Commanding Heights” industries, like health and education that can’t easily move, but Wichita and Kansas City are based around manufacturing.

The political outcomes are not that surprising at all. There is nothing ‘the matter with Kansas’. The power structure easily shifts between slim majorities formed from predominately suburban populations who are wealthier, and whose jobs are most likely to move, and slim majorities formed from the small urban cores and rural parts of the state.

There’s no possible political coalition that you could form that would pass a constitutional amendment allowing a floating balanced budget over a 10 year period. Nor are the populist pressure strong enough to push against regressive taxation. You have ‘fiscal hawks’ in the rural areas who never vote for cuts, and suburban conservatives who never vote for taxes. When the storm gets too bad, they vote a nice moderate democrat in to raise taxes and crack down hard on whatever (Non manufacturing / agricultural) big business they can put pressure on. Obviously something that can’t move easily like Health Insurance.

In summery, this really is an issue of Urban vs Rural politics. Unlike other cities, the kind of industries around Kansas City and Wichita can move. The jobs in the rural areas can’t. The rural areas require more per capita government services, and the urban areas have more money. They both have half the vote. Solve for equilibrium.

== As for the deal:

It’s mostly a .4% sales tax increase, which is less than some of the more fanciful projects done by local governments in the past 15 years, which have included sports arenas, loans to movie theaters, and waterfront improvement. A half cent increase in sales tax does move the state into the top 10 for the country, but the overall tax burden is still quite low. The real problem is that city/county sales taxes are a function of distance from Wichita, and the inverse of population. The smaller your city, and the farther you are from Wichita, the more the county depends on sales taxes. In places like Junction City, this could put the sales tax close to 10%! The real disparity is going to be at the border towns: After the change there will be a .7% difference between KC, KS and KC, MO, though I bet the Missouri side will raise taxes to compensate. After the increase, there’s a 1.5% difference between Pittsburg, KS and Joplin, MO – big enough that I could see some people consider driving for purchases more than $300 (Biweekly grocery shopping for a large family?), especially if retailers on the Missouri side are not dumb. As a general rule, the money and the shopping is on the Kansas side of the border, so stuff isn’t going to transition immediately, but I expect some Laffer curve effects here for local governments, and I would hope they’ll respond by dropping taxes to compensate.

This is probably WHY such a deal was able to pass. Most of the damage goes on the poor and rural parts of Kansas, which is where most of the balance budget hawks are. The rich living near Kansas City will have the easiest time dodging the increase and avoid it more often. A regressive tax, but an efficient one.

As for the other parts of the deal, $90 million in itemized deductions are being removed. I don’t actually think this will amount to much, since there aren’t many itemized state deductions left. What remains are things like adoption, historical preservation, or disabled access. I don’t see much money coming in this way, and the state will almost certainly reverse itself the first chance it gets (As it did the last time it got rid of the adoption credit).

Whew!

Bad optics, bad PR, the culture that is Germany

a public outcry has arisen over a town council plan to house refugees in a building that once served as a Nazi command post at the Buchenwald concentration camp.

Schwerte, a community of 50,000 south of Dortmund, has decided to move 21 refugees into the camp’s only remaining building on the outskirts of the town.

The move comes, town officials say, because all the refugee housing in the town’s jurisdiction is already filled with 200 asylum seekers, and the town doesn’t have the money to purchase temporary structures. According to the town council’s spokeswoman, “The solution is a practical one.”

The full story is here, via the excellent Mark Thorson.

How are Americans portrayed in North Korean films?

There is a good interview with Paul Fischer, who has studied this and related topics, here is one bit:

The way Americans are shown is equally counterfactual. There’s a long-running film franchise in North Korea that Kim Jong-il started called — depending on how you translate — Unknown Heroes or Unsung Heroes. It’s all about undercover spies, and the villains in every single one of them are dastardly Americans with bad hair and plans to kill children or poison people with AIDS. So there’s a sense in which the anger about The Interview being offensive to North Koreans is a little bit of the pot calling the kettle black. One of the weird things about The Interview situation is that in real life Kim Jong-un is this short, fat young guy who’s running a failed, bankrupt irrelevant state. I haven’t seen The Interview, of course, but from the trailers they make Kim Jong-un look like this broad-shouldered, badass cigar-smoking leader of an awesomely dangerous state. It’s actually a flattering portrayal. But it’s like with any kind of bully: They don’t get the joke. The fact that the joke exists is threatening.

There is a video example  of Americans in North Korean film at the link.  This is interesting too:

The country found The Interview‘s portrayal of Kim Jong-un to be hugely offensive. Are the Kims ever portrayed by actors in North Korea?
I believe there’s one film biography of Kim Il-sung — called either The Sun of Korea or The Star of Korea — where he’s played by an actor. Allegedly, this was a guy who they brought in and gave plastic surgery to so that he looked like Kim Il-sung and then, when they were done with him, they sent him off to the concentration camps. That’s the only time, because the thinking was, How do you have a guy play god? How do you paint god? So, with the Interview, the idea that there was an American playing the great leader, and playing him for laughs, and getting killed at the end — that just couldn’t be allowed.

The drunk utilitarian

Here is a new paper by Aaron A. Duke and Laurent Bègue:

The hypothetical moral dilemma known as the trolley problem has become a methodological cornerstone in the psychological study of moral reasoning and yet, there remains considerable debate as to the meaning of utilitarian responding in these scenarios. It is unclear whether utilitarian responding results primarily from increased deliberative reasoning capacity or from decreased aversion to harming others. In order to clarify this question, we conducted two field studies to examine the effects of alcohol intoxication on utilitarian responding. Alcohol holds promise in clarifying the above debate because it impairs both social cognition (i.e., empathy) and higher-order executive functioning. Hence, the direction of the association between alcohol and utilitarian vs. non-utilitarian responding should inform the relative importance of both deliberative and social processing systems in influencing utilitarian preference. In two field studies with a combined sample of 103 men and women recruited at two bars in Grenoble, France, participants were presented with a moral dilemma assessing their willingness to sacrifice one life to save five others. Participants’ blood alcohol concentrations were found to positively correlate with utilitarian preferences [emphasis added] (r = .31, p < .001) suggesting a stronger role for impaired social cognition than intact deliberative reasoning in predicting utilitarian responses in the trolley dilemma. Implications for Greene’s dual-process model of moral reasoning are discussed.

The gated version is here.  The original pointer is from SteveStuartWilliams.

What is the welfare cost of Amazon supply restrictions on books?

Maybe that welfare cost is not very high at all.   After all, if Amazon does not carry a book you can sign up at the Barnes & Noble website and that takes a few minutes at most.

There is a tension in most criticisms of Amazon.  On one hand, the critic wishes to argue that a “not carry” decision by Amazon has a big impact on how a book does.  On the other hand, the critic wishes to argue that the loss of access to particular titles is a big deal.  You cannot easily have it both ways.  If readers won’t switch to B&N.com, they must not care very much about particular titles, in which case the Amazon refusal to carry (or delay in shipping) is small even relative to the size of the (small) trade in books.

Krugman’s column today, which covers Amazon vs. Hachette, appears terrible at first glance, but in fact he presents a new and original argument.  Get past the mood affiliation and you come to this:

…what Amazon possesses is the power to kill the buzz. It’s definitely possible, with some extra effort, to buy a book you’ve heard about even if Amazon doesn’t carry it — but if Amazon doesn’t carry that book, you’re much less likely to hear about it in the first place.

If I may fill in some blanks, one possible version of the hypothesis — to pull an idea from Gary Becker and Steve Erfle — is that readers consume both “books” and “buzz around books” as complements.  The marginal gains from books can be low but the marginal gains from the bundled package may be much higher and those higher gains will not be measured by the (high) price elasticity of book purchases.

In the early stages of this war, Amazon boycotts have often increased the buzz for a book, such as with Beth Macy’s Factory Man.  But if these practices continue, they will cease to be news stories and an Amazon refusal to carry or promote plausibly will damage how books will do, without much potential for upside.

How much of the value in a book/buzz package is due to the buzz?  65 percent?  That would explain the concentration of reading interest among bestsellers and books your peers are reading.  But if Amazon won’t carry or promote a book, does the total supply of buzz fall?  Or does the buzz simply transfer to other titles?  In the latter case we are again back to small welfare costs from an Amazon refusal to carry.  Krugman’s idea is fun, but I am still inclined to think the welfare cost of Amazon supply restrictions on individual books likely is small, again even relative to the size of the book sector, much less relative to gdp.

It is fine to argue that Amazon is being unfair to some authors and to object on ethical grounds.  The economist also should add that readers don’t seem to mind very much.  Most of the objections I am seeing are coming from authors and publishers, who of course in this sector are much less diversified in their interests than are readers.

Charles Murray on Ayn Rand

Charles Murray has a good piece on Ayn Rand, critical in parts but especially insightful about why Rand’s books continue to be so inspirational and influential:

Ayn RandRand expressed the glory of human achievement. She tapped into the delight a human being ought to feel at watching another member of our species doing things superbly well. The scenes in “The Fountainhead” in which the hero, Howard Roark, realizes his visions of architectural truth are brilliant evocations of human creativity at work. But I also loved scenes like the one in “Atlas Shrugged” when protagonist Dagny Taggart is in the cab of the locomotive on the first run on the John Galt line, going at record speed, and glances at the engineer:

He sat slumped forward a little, relaxed, one hand resting lightly on the throttle as if by chance; but his eyes were fixed on the track ahead. He had the ease of an expert, so confident that it seemed casual, but it was the ease of a tremendous concentration, the concentration on one’s task that has the ruthlessness of an absolute.

That’s a heroic vision of a blue-collar worker doing his job. There are many others. Critics often accuse Rand of portraying a few geniuses as the only people worth valuing. That’s not what I took away from her. I saw her celebrating people who did their work well and condemning people who settled for less, in great endeavors or small; celebrating those who took responsibility for their lives, and condemning those who did not. That sounded right to me in 1960 and still sounds right in 2010.

Second, Ayn Rand portrayed a world I wanted to live in, not because I would be rich or powerful in it, but because it consisted of people I wanted to be around. As conditions deteriorate in “Atlas Shrugged,” the first person to quit in disgust at Hank Rearden’s steel mill is Tom Colby, head of the company union:

For ten years, he had heard himself denounced throughout the country, because his was a ‘company union’ and because he had never engaged in a violent conflict with the management. This was true; no conflict had ever been necessary; Rearden paid a higher wage scale than any union scale in the country, for which he demanded—and got—the best labor force to be found anywhere.

That’s not a world of selfishness or greed. It’s a world of cooperation and mutual benefit through the pursuit of self-interest, enabling satisfying lives not only for the Hank Reardens of the world but for factory workers. I still want to live there.

…In scene after scene, Rand shows what such a community would be like, and it does not consist of isolated individualists holding one another at arm’s length. Individualists, yes, but ones who have fun in one another’s company, care about one another, and care for one another—not out of obligation, but out of mutual respect and spontaneous affection.

Ayn Rand never dwelt on her Russian childhood, preferring to think of herself as wholly American. Rightly so. The huge truths she apprehended and expressed were as American as apple pie. I suppose hardcore Objectivists will consider what I’m about to say heresy, but hardcore Objectivists are not competent to judge. The novels are what make Ayn Rand important. Better than any other American novelist, she captured the magic of what life in America is supposed to be. The utopia of her novels is not a utopia of greed. It is not a utopia of Nietzschean supermen. It is a utopia of human beings living together in Jeffersonian freedom.

Also worth reading is this superb piece by Robert Tracinsiki, All an Ayn Rand Hero Really Wants is Love.

Are IPOs collusive and value-destroying?

A new paper says yes, and then maybe sort of:

By modeling the market for IPOs as a repeated game with imperfect monitoring, we establish that collusion among underwriters explains the concentration of spreads at 7%, along with other characters of the data on spreads. Furthermore, the structure of optimal spreads in the model explains the existence and quantitative characteristics of underpricing in the market for IPO shares. We estimate the model by deriving moment conditions from both underpricing and spreads. Our estimates indicate that IPOs destroy value on average over the sample period 1985-2007. This result, however, is driven primarily by the dot-com era. Excluding this period, IPOs appear to increase value.

That is from Lowery and Kang at UT Austin, a few years old but I had not seen it before, the link is here.  For the pointer I thank Samir Varma.  He also points me to this paper on why the reputations of individual star employees may be eclipsing the reputations of institutions at the level of the investment bank.

“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.

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.

Paul Krugman on the political salience of inequality

Krugman wrote:

…it is notable that in a time of deeply depressed labor markets, our biggest thing is long-run inequality.

Or closer to home, I do of course track how my columns do on the most-emailed list; and there’s no question that inequality gets a bigger response than demand-side macro.

This doesn’t mean that we should (or that I will) stop trying to get the truth about depression economics across. But it’s an interesting observation, and I think it has implications for how politicians should go about doing the right thing.

This is a very interesting point (link here), but it differs from my view.  I see the inequality issue as having high salience for NYT readers, for Democratic Party donors, and for progressive activists.  It has very little salience for the American public, especially with say swing voters in southern Ohio or soccer moms.  Unlike in Singapore or South Korea, where the major concentrations of wealth are pretty hard to avoid for most people, American income inequalities are well hidden for the most part.

McLean is one of the wealthiest towns in Virginia, but if you drive through the downtown frankly it still feels a bit like a dump.  I’ve never wanted to live there, not even at lower real estate prices.  You don’t stumble upon the nicest homes unless you know where to look.  Middleburg is wealthier yet, but it has few homes, feels unreal, and most people don’t go there anyway.  If they do, they more likely admire well-groomed horses and still read Princess Diana biographies.  They are not choking with envy over the privileges of old money rentiers, and there is no Walmart in town to bring in the masses (who probably would not care anyway).

Perhaps ironically, to the extent that inequality as a phenomenon consists of the top 0.01% pulling away from the pack (not my prediction, by the way), general public resentment against the very wealthy will be especially hard to generate.  Out of sight, out of mind.

What swing voters really hate is inflation, probably irrationally so.  That does mean the aggregate demand argument won’t have much political salience, but as a result I see the Left as not quite knowing what to do next.  We’ll get pre-school in more cities, a $15 minimum wage in Seattle, and lots of action targeted at high cable bills, which for the intelligentsia will be tied to net neutrality and various mergers.  As the de Blasio reign indicates, blue cities may be the new laboratories for trying out bad ideas.  The states which won’t expand Medicaid may yet budge, but most of them are firmly in the “red” category.  The political influence of the local hospitals will matter more than intellectual discourse.

In short, you can expect a series of totally unsatisfying political debates, and they will further distort the discussions of economists, on both sides of the political ledger.

Krugman’s review of Piketty

You will find it here.  Excerpt:

Just about all economic models tell us that if g falls—which it has since 1970, a decline that is likely to continue due to slower growth in the working-age population and slower technological progress—r will fall too. But Piketty asserts that r will fall less than g. This doesn’t have to be true. However, if it’s sufficiently easy to replace workers with machines—if, to use the technical jargon, the elasticity of substitution between capital and labor is greater than one—slow growth, and the resulting rise in the ratio of capital to income, will indeed widen the gap between r and g. And Piketty argues that this is what the historical record shows will happen.

Krugman calls the book “awesome,” but here are his critical remarks:

I don’t think Capital in the Twenty-First Century adequately answers the most telling criticism of the executive power hypothesis: the concentration of very high incomes in finance, where performance actually can, after a fashion, be evaluated. I didn’t mention hedge fund managers idly: such people are paid based on their ability to attract clients and achieve investment returns. You can question the social value of modern finance, but the Gordon Gekkos out there are clearly good at something, and their rise can’t be attributed solely to power relations, although I guess you could argue that willingness to engage in morally dubious wheeling and dealing, like willingness to flout pay norms, is encouraged by low marginal tax rates.

My own review is still due out in about a week’s time.

John Roemer changes his mind on a bunch of things, including socialism

He has a new published paper, in Analyse & Kritik, entitled “Thoughts on Arrangements of Property Rights in Productive Assets,” here is the abstract:

State ownership, worker ownership, and household ownership are the three main forms in which productive assets (firms) can be held.  I argue that worker ownership is not wise in economies with high capital-labor rations, for it forces the worker to concentrate all her assets in one firm.  I review the coupon economy that I proposed in 1994, and express reservations that it could work: greedy people would be able to circumvent its purpose of preventing the concentration of corporate wealth.  Although extremely high corporate salaries are the norm today, I argue these are competitive and market determined, a consequence of the gargantuan size of firms.  It would, however, be possible to tax such salaries at high rates, because the labor-supply response would be small.  The social-democratic model remains the best one, to date, for producing a relatively egalitarian outcome, and it relies on solidarity, redistribution, and private ownership of firms.  Whether such a solidaristic social ethos can develop without a conflagration, such as the second world war, which not only united populations in the war effort, but also wiped out substantial middle-class wealth in Europe — thus engendering the post-war movement toward social insurance — is an open question.

There are some probably gated versions here.  He also explains later in the paper that socialism cannot work because a generally solidaristic social ethos will be undermined by a selfish minority, driven by greed, which will turn social institutions to their favor and evolve into a new ruling class.  In other words, Hayek’s The Road to Serfdom is not yet obsolete and still holds the power to sway men’s minds.

For the pointer I thank Kevin Vallier.   

Notes on Israeli inequality

Inequality in Israel has been rising rapidly, but it is neither from trade with China nor because of robots.  In part more of the Israeli economy has shifted — for technological reasons — into inequality-inducing sectors, such as information technology.  The greater size and openness of the Israeli economy also mean that preexisting educational disparities, many of them rooted in religious and ethnic differences, now map into greater income differentials.  For instance a growing role for exports in the economy boosts income inequality because not all workers have access to the international customers, whether directly or indirectly.

Many of the ultra-Orthodox here have characteristics of “threshold earners,” as I have discussed that concept in the past.  Their wages have stagnated in real terms or even fallen over the last decade.

Russian-born Israelis have enjoyed strong income gains, whereas the non-Haredi Israeli-born middle class Jews have lost a small amount of ground.

The price of housing remains inefficiently high.

I sometimes say that Israel is where “Average is Over” happens first:

“…the income gap between the 90th percentile and the median worker in Israel is the highest of all the developed countries, as is the income gap between the median (50th percentile) and the 10th percentile. And if that is not enough, the income gap between the 75th percentile and the 25th percentile, in other words the income gap within the middle class − between the upper and lower middle class − is also the highest in the developed world.”  The link is here.

The bottom decile actually has done quite well in terms of rates of change, but the 6th through 8th deciles have done especially poorly (same link).  That source serves up the intriguing hypothesis that the disappearance of middle class-earning middlemen in the Israeli economy is due to the disintermediation of the internet, although without citing any data.  In any case, it is the non-substitutable, non-automatable, manual labor jobs which have seen rising pay at the very bottom.

(As an aside, a number of recent studies of rising income inequality caricature the technology hypothesis in a variety of non-useful ways, and thus (incorrectly) reject it.  I hope to consider those arguments in more detail, in the meantime I will note that the Israel case study is a useful corrective to those views, by showing the broad spectra of ways in which technology influences income distribution.  It’s not just or even mainly about “robots.”)

The Israeli economy has a high degree of economic and financial concentration.  How much that problem would be alleviated if Israel could have normal trade and investment relations with its immediate neighbors?

A higher employment to population ratio would yield a good deal of low-hanging fruit.  It is hard for me to judge across what time horizon that might happen here.