Results for “piketty”
176 found

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.

Assorted links

1. Do you beam with pride or get upset at this article about young, rich philanthropists being courted by the White House?

2. Profile of Thomas Piketty.

3. As a kid I enjoyed Dodgeball.  I still remember me and Jimmy Wainwright being the last two guys on the floor.  (Sadly, Jimmy caught my rather unconvincing fifth grade toss.)   This article calls it “America’s most demonized sport,” but they don’t seem to have heard of the game we used to call “Kill the guy with the ball.”

4. CDs vs. vinyl, I say CDs have higher average quality but vinyl has higher peaks for the very best classical music.

5. Why do economics majors earn so much?  And economics humor.

6. Are babies a performance-enhancing drug?

How to read (any book like) Capital in the Twenty-First Century?

Mike, a loyal MR reader, asks me:

How do you recommend approaching a book like Capital in the Twenty-First Century?  I’m a reasonably smart guy, undergrad econ, ee, mba from good schools, somewhat well read, etc., but the density, length and relative subjectivity(?) of Piketty’s topic has me hesitant.

Do I start with the reviews or another book(s), dive right in or find a discussion group (usually lucky if anyone actually reads even part it).  Maybe I approach it like the bible, one paragraph at a time over several years 🙂

For truly serious books, I recommend the following.  Read it once, straight through, with a minimum of fuss.  If you get truly, totally stuck on some point, which the rest of the book depends upon, find somebody to ask.  Otherwise just keep on plowing straight through.

Then write a review of the book.  Or jot down your notes, but in any case force yourself to take definite stances by putting words down on paper (or screen).

Then reread the book carefully, because now you know what you are looking for.  Revise what you wrote.

Of course only a few books a year (if that many) need to be read this way.

Starting by reading reviews of the book is fine for most people, but usually I prefer not to.  I read just enough of reviews to discern whether I wish to read the book (or watch the movie) at all.  Then I stop reading the review, as I do not wish to be contaminated by the reviewer’s perspective and I feel I usually have enough background to make sense of the book without the assistance.  I intend no slight toward reviewers, but the whole point of the reading/review process is to get some independent draws from the urn rather than a cascade of overly mutually influenced opinion.  That said, I recommend this “skip reviews” approach only to people who read a great deal very seriously.

Reading groups can be useful to either a) force you to read a book you won’t otherwise pick up, b) force you to defend your point of view on a book, or c) induct you into knowing a book really really well when currently you only know the book well.  Or, most of all, d) bond a group of people together.  All that is fine.  But I don’t see readings groups as very useful for simply “reading books.”  As Robin Hanson might say, readings groups aren’t about reading, or for that matter books.

Few people can stay interested reading one paragraph a day from a book.  One underrated virtue of fast reading is that you make enough progress to keep yourself interested and this also can improve comprehension.

Assorted links

1. Scott Winship reviews Piketty.  And Kevin Hassett on Piketty.

2. Why should there be deflation in Sweden?

3. Why is the singing of the national anthem so much better for hockey?

4. Liberalism unrelinquished, a project headed by Daniel Klein to reclaim the use of this word.  They are looking for signers.

5. Professional actor reading a Yelp review.

6. Will health care spending balloon again?

Assorted links

1. Praying and fasting at high latitudes.  And how charismatic was Jesus?

2. A brief look at Modinomics.  And here.  And how can we reduce deaths on Indian railway tracks? (scroll down a bit to reach that discussion)

3. Modern Russian cancer ward?  The general topic of pain relief is one of the most neglected in public policy and it requires more deregulation in the United States as well.

4. Dutch “glow in the dark” roads.

5. Amazon seems to be proceeding with drone plans.  And what are the best options for regulatory reform?, by Philip A. Wallach.

6. The earnings of economics majors.

7. James K. Galbraith writes a Cambridge critique of Piketty.  A good and interesting piece, one of the best reviews.

Assorted links

1. How the Japanese are reengineering (and improving) on American culture.

2. Viagra ice cream markets in everything.

3. Insights into Vox.com and how it views its competitors.  And here is Joshua Gans on Vox.

4. Philippe Legrain, European Spring, a useful and well-written popular look at the European economic mess, $2.99 on Kindle.

5. I call it the Thomas Piketty clothing line.  (The important point, however, is that Zara is much more important these days and that militates against Piketty.)  Here Diane Coyle reviews Piketty.

6. Chrystia Freeland dialogue with Larry Summers, starts at about 40:00.  It is the best Larry video I have viewed.  Here is a Sendhil Mullainathan talk on machine learning which I have not viewed.

7. Mohamed El-Arian is now writing for Bloomberg.

8. The new academic celebrity.