Results for “piketty”
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Two Surefire Solutions to Inequality

Here is a surefire solution to inequality–Increase fertility among the rich. If the rich had more children, capital would grow more slowly across the generations and perhaps not at all.  If r=4 and g=2 then capital doubles as a share of the economy in 35 years (using the rule of 70). That figure is actually too low as it assumes that the wealthy save all of their capital income but let’s stick with 35 years and call that a generation. Wealth per rich person, however, only doubles if every wealthy family has just 2 children. If every wealthy family has 4 children, wealth per person doesn’t increase and so inequality does not increase even when r>g. If the wealthy consume about 20% of their capital income (still a very high savings rate) and have just 3 children then again we have approximate balance and no increase in inequality over the generations. With a more reasonable figure on r-g or with more children, wealth per person actually declines.

Thus, Piketty’s “patrimonial capital” contains its own internal contradiction. The more patrimony the less capital.

ROMNEY-CARD-1So how can we increase fertility among the rich? Mormon fertility is higher than average so capital inequality could decline if more rich people will be or become Mormons. Had we elected a President Romney (5 children and some 22 grandchildren! Or is it 23? Romney has lost count), perhaps that would have encouraged greater fertility among the rich.

It’s an evolutionary puzzle why the rich don’t have more children as the costs to them are low and at very high levels of wealth there is no quantity-quality tradeoff. Perhaps this is a temporary response to the shock of birth control. If so, the effect of the shock is likely to fade over time as evolution works its logic.

In Selfish Reasons to Have More Kids Bryan Caplan notes that we overestimate the effect of parental investment on children and we underestimate the pleasures of grandchildren, in both cases choosing too few children. The rich should read Bryan’s book.

In these calculations I have assumed that primogeniture won’t make a comeback, that seems solid. Assortative mating, however, will slow wealth dispersion. I have also assumed that savings and fertility are independent which is unlikely to be the case. Becker and Barro (1988) suggest that more children will increase savings but less than proportionally so the logic continues to hold. Note also that this works both ways, wealthy people with fewer children will save less. Bill Gates has three children but has already given away a substantial fraction of his fortune and he has pledged to give away much more. Even parental altruism has its limits and Bill Gates has decided that on the margin he would rather give money to poor children in Africa than to his own children. Bill Gates’s shadow will not eat our future.

So what is the second surefire method to reduce capital inequality? Reduce fertility among the rich! If the rich as a class have fewer than 2 children then it follows inexorably that their time is numbered, albeit without first creating a small number of very rich people.

The logic of r-g turns out to be highly dependent on savings behavior, fertility decisions and the nature of altruistic bequests.

19th century inequality and the arts

Here is a well-written piece by Epicurean Dealmaker (ED) on the arts and economic inequality.   Another response is here from Salon, also see the pieces that ED links to, such as Henry Farrell (and more here and Matt here).  Unfortunately, ED cannot get beyond his preferred framing of the problem in terms of inequality and inequality alone.  He has “inequality on the brain.”

Here is the nub of the critique:

Cowen takes a detour to praise the cultural dynamism and productivity of 19th Century France, which he claims results from the substantial socioeconomic inequality of the period. This is a pivot too far.

ED fails to note that:

1. Much of the artistic creativity of the 19th century stemmed from its wealth creation, not from its inequality per se.  He specifies a setting where a robber baron stole from a working man, and supposes I am defending the theft by arguing it brought us some good art.  That is an imaginary creation of ED.  The very passage from me he cites refers to the virtues of wealth but does not refer to inequality.

2. For much of the latter three-quarters of the 19th century, consumption inequality appears to have declined.  Oops.

3. Many of his intemperate statements about the history of art are wrong or doubtful or exaggerated and have been answered or at least contested, including in the five books I have written on the economics of the arts, including In Praise of Commercial Culture.

4. Let’s not talk about “the arts.”  Reproducible and non-reproducible art forms will respond very differently to income inequality, as Alex and I argued in the SEJ.  Cooking is yet another story, if we are going to call that art.

5. Piketty himself neglects the “wealth can generate additional TFP” possibility, and that remains a significant hole in his argument.

Overall this ED post is a good example of how easily and quickly one can go awry by an obsession with framing everything in terms of inequality.  It also shows the drawbacks of a relative unfamiliarity with the basic literature, including for that matter the recent book by Piketty.

Assorted links

1. Data on blockbuster movies.

2. Can China use its capital in a time of crisis?

3. My Piketty NYT column from July: “If you’d like to know where American political debates are headed, the data suggest a simple answer. The next major struggle — in economic terms at least — will be over whether taxes on personal wealth should rise — and by how much.”  I believe this was the first coverage of Piketty in a major media outlet.

4. The prices of Qatari license plates.

5. First Bay area sex truck (what does this imply about living quarters?)

Assorted links

1. Good interview with Michael Strain.

2. Raw data from Piketty, lots of it.  And confronting the Texas police with Bayesian reasoning.  And how Paul Krugman views his own endeavors.

3. When do men not want a pretty face? (speculative)

4. My 2005 post on whether or not we should tax capital.  And the bad rentier?

5. Very good Edward Luce FT piece on Modi.

6. Andrew Gelman on Seth Roberts, great piece.

7. Al Roth predicts 98 years out (seems more like thirty years out to me, or even less).

Accounting for U.S. Earnings and Wealth Inequality

Believe it or not, there is an article on wealth and inequality in the United States, with a reasonably good and accurately calibrated model.  It is authored by Ana Castaneda, Javier Dıaz-Gimenez and Jose-Vıctor Rıos-Rull, and it was published in the Journal of Political Economy in 2003.

I find the conclusion a good place to start:

…we provide a theory of earnings and wealth inequality, based on the optimal choices of households with identical and standard preferences, that accounts for the U.S. earnings and wealth inequality almost exactly. We show that uninsured idiosyncratic earnings risk, retirement, altruism, and government transfers to retired households are essential ingredients of our theory, since they allow us to replicate the observed earnings to wealth ratios of both the rich and the poor households simultaneously. We also show that calibrating the earnings process directly is a must if we want our model economies to replicate the observed distributions of earnings and wealth in sufficient detail.

Here is the abstract:

We show that a theory of earnings and wealth inequality based on the optimal choices of ex-ante identical households who face uninsured idiosyncratic shocks to their endowments of efficiency labor units accounts for the U.S. earnings and wealth inequality almost exactly. Relative to previous work, we make three major changes to the way in which this basic theory is implemented:

(i) we mix the main features of the dynastic and the life-cycle abstractions, that is, we assume that our households are altruistic, and that they go through the life-cycle stages of working-age and of retirement;

(ii) we model explicitly some of the quantitative properties of the U.S. social security system; and

(iii) we calibrate our model economies to the Lorenz curves of U.S. earnings and wealth as reported by the 1992 Survey of Consumer Finances. Furthermore, our theory succeeds in accounting for the observed earnings and wealth inequality in spite of the disincentives created by the mildly progressive U.S. income and estate tax systems, that are additional explicit features of our model economies.

In other words we already have a theory which does quite well in explaining U.S. wealth inequality, and it isn’t based on the total centrality of a comparison of r and g, as you find in Piketty.  And no one in the current debates is citing this piece, Piketty included.  From the main results, note this:

We find that abolishing estate taxation brings about an increase in steady-state output of 0.35 percent and an increase in the steady-state stock of capital of 0.87 percent. Along every other dimension, the differences between the benchmark and the No EstateTax model economies are negligible. If anything, we find that abolishing estate taxation brings about a very small increase in wealth inequality [emphasis added]. Specifically, the Gini index of wealth increases from 0.79 to 0.80, and the share of total wealth owned by the top quintile increases from 81.97 percent to 82.33 percent.

We conjecture that the main reason that justifies these findings is that, given the demographics of our model economy, the role played by the estate tax rate in determining the after-tax rate of return of the economy is quantitatively very small.

I don’t hear this point brought up very much these days.

An ungated pdf is here, and for the pointer I thank Tony Smith.  You should by the way also read the Krusell and Smith paper, which deals with similar topics.  See this survey too.

So much of the current Piketty debate is simply forgetting that…science exists and has already offered a wide range of insights on these topics, as well as having rendered some of the more extreme claims unlikely.  In addition to what I offered Sunday, via Tony Smith here are a few additional links:

1. Huggett: http://www9.georgetown.edu/faculty/mh5/research/jedc1993.pdf

2. Aiyagari: http://www.minneapolisfed.org/research/WP/WP502.pdf

3. Heathcote et al: http://www.jonathanheathcote.com/HSV_AR.pdf

Update: Piketty did cite the main piece discussed here in 2010.

Assorted links

1. A dialogue on negative natural rates of interest.

2. Berlin from space.

3. The Walmart fortune is supporting charter schools.

4. Facts about sloths.

5. Early Stiglitz as a precursor of Piketty, and the Stiglitz dissertation here (pdf).  The associated Econometrica piece is here (pdf).  Here is a JEL paper surveying the literature on growth and inequality (pdf).  Most useful yet, there is Bertola’s survey on distribution and growth (pdf).  You also should go back and read Pasinetti’s old papers from the 1960s.  These are old issues people, and there are no simple answers.  A lot of the current discussion is in fact moving the debate backwards from where it had been decades ago.

Assorted links

1. Robocopulation.

2. Japanese markets in everything: turtle taxis.  And The Onion on the great stagnation.

3. Piketty discovers risk.  And what Piketty actually should favor.

4. I bet it’s not as good as Mr. Yung’s fish n’ chips in New Zealand, not even at $2k a head.

5. The campaign to measure gross output.

6. Deeply strange research results, concerning women married to fishermen.

7. Philip Cook on crime and lead.

Most of the 19th century was a good time for equality (Department of Ahem…)

From “Real Inequality in Europe Since 1500,” (pdf) by Philip T. Hoffman, David Jacks, Patricia A. Levin, and Peter H. Lindert:

Introducing a concept of real, as opposed to nominal, inequality of income or wealth suggests some historical reinterpretations, buttressed by a closer look at consumption by the rich. The purchasing powers of different income classes depend on how relative prices move. Relative prices affected real inequality more strongly in earlier centuries than in the twentieth. Between 1500 and about 1800, staple food and fuels became dearer, while luxury goods, especially servants, became cheaper, greatly widening the inequality of lifestyles. Peace, industrialization, and globalization reversed this inegalitarian price effect in the nineteenth century, at least for England.

If you have been following the recent debates over Thomas Piketty, you might have come away with…um…the opposite impression.  The emphasis there is added by this blogger. As for other countries:

Thus the great grain globalization of the late nineteenth century favored workers’ relative purchasing power in food-importing Western Europe, though not in food-exporting areas.

By the way here is Scott Sumner on consumption inequality.

For the pointer I thank John Nye.

Assorted links

1. Do customer ratings of restaurants award authenticity for its own sake?  And negative reviews as a way of coping with service-related trauma.

2. A criticism of Kurzweil.

3. Korean food in old Seoul.

4. How economically geared up is Russia for war?

5. UK housing prices are looking scary.

6. Do not ban chocolate milk.  And claims about cat cognition (speculative).

7. Robert Solow’s guide to Piketty.  And Kling on Solow on Piketty is completely correct.

Copyright is Out of Control

I have written about patent and copyright law primarily from the perspective of an economist interested in the institutions and incentives that maximize innovation. As a textbook author, however, I must deal with copyright law in practice. Dealing with copyright law on the ground hasn’t caused me to change my views but it has made me more frustrated. I have also come to appreciate some of the subtler costs of the system. Two cases in point.

A lot of textbooks hire a photo editor to pick generic stock photos, this simplifies things because the bundlers pre-authorize permissions and prices. But we hand picked every photo in our book to illustrate a point which means that our permissions and legal staff often have to find owners and clear permissions on an individual basis. We are grateful that our publisher is willing to do this to produce a quality product but it sometimes leads to absurdities. For example, the publisher doesn’t like to use public domain images. Why not? What could be better than free? The problem is that the bundlers insulate a publisher from lawsuits but when we use a public domain image the publisher is open to lawsuit if a mistake has been made and that makes them fearful.

The general lesson is that strong IP shrinks the public domain not just because it keeps things out of the public domain but also because it makes the public domain appear to be uncertain and dangerous. It’s as if clean, mountain spring water were freely available but people bought from the bottlers instead out of fear of contamination.

Copyright law is one of the forces behind the rise of the mega-bundlers. Mega-bundlers benefit from economies of scale in cataloging IP but there are also economies of scale in dealing with the legal system and insuring against/for lawsuit. It’s probably no accident that two of the largest bundlers, Corbis and Getty, are owned by Bill Gates and (Getty heir), Mark Getty respectively. (FYI, Piketty should have said more about this kind of 21st century rentier in Capital).

Here is another example. To illustrate the point that, contrary to what is often argued, a rich person might get more from another dollar than a poor person we have in Modern Principles a movie still of Scrooge McDuck swimming in money. We think the image speaks for itself but apparently that is a problem. The rights to the photo are–we are told–not the same as the rights to the characters shown within the photo. Thus, even though we have bought and paid for the right to print the photo, to ensure that the use of the characters within the photo falls under fair use we must discuss, comment on and critique the content of the photo in the text. 

The distinction between the photo IP and the what’s in the photo IP is one only a lawyer could appreciate, as is the solution. And I mean that without irony. I am not critiquing our publisher or their lawyers. Bear in mind that this is coming to us from the very highest legal counsel of a multi-billion dollar firm. Thus, I do not doubt that the dangers are real and the legal analysis acute. The problem is copyright law itself.

The episode illustrates more generally how the complexity of copyright law has greatly elevated the power of lawyers. It’s no accident that the permissions director is one of the few people at our publisher whose signature is absolutely necessary before our book, or any book, can be published. 

I am reminded of Mancur Olson’s 9th implication in The Rise and Decline of Nations:

The accumulation of distributional coalitions increases the complexity of regulation, the role of government, and the complexity of understandings, and changes the direction of social evolution.