Results for “piketty”
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Sunday assorted links

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

2. More details on rising white mortality.

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

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

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

6. Surge pricing for parking meters.

Assorted Thursday links

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

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

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

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

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

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

7. Ireland growing at six to seven percent.

Singapore as financial corporation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monday assorted links

1. Krugman reviews the “new” Piketty book.

2. The economics of microbial trade (speculative).

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

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

5. The great sushi craze of 1905.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

*The Economics of Inequality*

That is the new — well sort of new — Thomas Piketty book.  It was first published in France in 1997 and then updated several times through 2014, though we are told most of the book has kept its original structure.  It is a good, short read and will appeal to anyone with an interest in Piketty and “that sort of thing.”  The full-blown g > r model is not here, but you can see Piketty edging into being Piketty, with plenty of talk about capital-labor substitutability.

Ricardo Hausmann on Greece

From his Facebook page:

So Greece said no to a plan that was no longer on the table. Paul Krugman and Jeffrey Sachs celebrate the decision. They hope to get a debt write-down for Greece. I honestly do not understand their position. To me, the Greek debt is pretty much irrelevant. The country is not paying a single euro in interest on its debt in net terms. It has been running primary deficits ( a shortage of revenues over spending excluding interest payments). Its debt is high but the interest rate is super-low, courtesy of European taxpayers.

If Greece writes down its debts, its banks will be bankrupted. The ECB will not be able to bail them out and the banking freeze will continue, accelerating the economic collapse. I don’t see how the banks can be bailed out in a week and I don’t see how the economy can avoid the catastrophe. Sachs in Project Syndicate says that Greece has the right to remain in the euro. I don’t know what that means in practical terms. The Greeks may be as euphoric with this “victory” as Europeans were in the summer of 1914.

By the way, here is Thomas Piketty on Germany.

Greece and Syriza lost the public relations battle

One of the most striking aspects of the Greek situation is just how much the Greek government has lost the public relations battle.  They have lost it among the social democracies, and they have lost it most of all with the other small countries in Europe.  They retain some sympathy in the American government, but we are not willing to put any money on the table and basically we want the European Union to clean up the problems for us.

If you look at the progressive economists, Stiglitz, Krugman, Piketty and Sachs all recommend a “no” vote on the referendum.  Though they would not frame it this way, they are advocating a kind of extra austerity for the purposes of a greater long-run good; Greece’s primary surplus vanished some time ago, so signaling a break with Europe will only make matters tougher.  You could call this “properly mood affiliated austerity,” cloaked by strange presumptions about bargaining, namely the view that a “no” vote will induce a more favorable offer.  It seems, with their on the ground understanding, most Greek economists are strongly in the “yes” camp.

The progressives do have some good points and I absolutely favor significant debt relief for Greece.  That said, the Greek government has handled the last few months so badly it really is incumbent on them to show they will do better.  I don’t see many signs in that direction, quite the contrary, and any reasonable democratic government will ask for Greek institutional progress before putting up much more in the way of money.  The entire handling of Greferendum should alert the progressives that they have been egging on the wrong horse; the heroic Hugo Dixon nails it.

I take the progressive “clustering out on a limb” here as a sign that, for better or worse, progressivism as an ideology has reached and indeed gone beyond its high water mark.  The progressives are siding with a corrupt, clientist state, which won’t cut its defense spending down to Nato norms, against some admittedly imperfect social democracies, thereby sustaining the meme of powerful aggressor vs. victim, Arnold Kling telephone.

Interfluidity has an interesting but quite wrong post on how to think about Greece.  International relations simply could not be run on the principles he advocates, most of all in conjunction with democratic nation states.  His weakest point becomes evident when he writes:

Among creditors, a big catchphrase now is “moral hazard”. We cannot be too kind to Greece, we cannot forgive their debt with few string attached, because what kind of precedent would that set? If bad borrowers, other sovereigns, got the idea that they can overborrow without consequence, if Spanish and Portuguese populists perceive perhaps a better deal is on offer, they might demand that. They might continue to borrow and expect forgiveness, and where would it end except for the bankruptcy of the good Europeans who actually produce and save?

The nerve. The fucking nerve. Lenders, having been made nearly whole on their ill-conceived, profit-motivated punts, now fear that if anybody is nice to somebody who doesn’t deserve it, where will it end? I’d resort to that cliché about chutspa, the kid who murders his parents then seeks leniency ‘cuz he’s an orphan. But it’s really too cute for the occasion.

That’s a non-answer, with anger filling in for the required substance as to why Germany and others should allow this.  “Your government is making things much worse.  If you want to borrow so much more from us, you have to play by the rules and also stop spitting in our face and calling us Nazis and terrorists while negotiating” is more relevant — and yes relevant is the right word here — than any point he makes.

A political program has to be something that voters could at least potentially believe, and international negotiations therefore cannot stray too far from common-sense morality, including when it comes to creditor-debtor relations.  That is the point which today’s progressive economists are running away from as fast as is humanly possible.  And for all the Buchanan-esque and public choice points about “rules of the game” this one about common sense morality unfortunately has ended up as the most important.

Look at this way: if you lost a public relations battle to Germany, you are probably doing something very badly wrong.

Saturday assorted links

1. In fact, people get annoyed pretty easily at a whole lot of different things.  What would Bryan Caplan say?

2. Hadrian, the robot bricklayer.  And commercial jetpack coming for 150k.

3. FT lunch with Piketty.

4. An insider’s guide to better eating in Chinese detention centers.

5. Google Sheep View.

6. Swedish scientists build artificial neurons to connect with organic neurons.

7. “Please, someone, buy me…

Friday assorted links

1. The world’s largest employers.

2. Rates of return seem to be falling.

3. ” I think it’s fair to say he doesn’t have any argument against my claim, because there are no good arguments against my claim.”  I agree.

4. Ben Casnocha on my dialogues with Thiel and Sachs.

5. Why various Republican proposals would make the problems with Obamacare worse.

6. More on Alice Goffman.

7. Virginia Postrel has further detail on the Paulson grant to Harvard.

8. William Upton on Kansas fiscal policy.  And what is the nature of Rand Paul’s tax plan?

Thursday assorted links

1. What if Canada can’t become a major tech cluster?  And what does the Canadian trade balance look like without oil?

2. Broken windows theory tests.

3. “Austerity evidently killed GDP, but not the labor market. That’s a very interesting hypothesis, but I’m wondering which textbook theory is consistent with it?”  That’s the UK, folks.

4. Does hiking cigarette taxes drive poor people to enroll in food stamps (pdf)?  And which colleges have the best food?

5. Not a surprise, but a clarification: the U.S. won’t give up what is in effect its IMF veto.

6. Olivier Blanchard is leaving the IMF for the Peterson Institute.  And Piketty will be joining LSE, it seems.

7. UberCopter, pretty cheap, considering…

Does war drive progressive income taxation?

Here is evidence for the Roberts Higgs thesis and, if I recall correctly, some recent remarks by Thomas Piketty on revolution and tax progressivity (does anyone know the link?).  Juliana Londoño Vélez writes:

Abstract    I argue that progressive income taxation in the twentieth century is a product of the exigency of war and not of democracy. I obtain long-run series of the top marginal personal income tax rate for a large sample of OECD countries, and use data on wars of mass mobilization and democracy from the Correlates of War data set and Scheve & Stasavage (2012) to test this hypothesis. My results suggest that wars of mass mobilization (i.e. wars in which more than 2% of the population served in the military) cause substantial increases in tax progressivity. These effects are persistent and do not vanish upon the conclusion of war.

The full paper is here (pdf), taken from the generally interesting Berkeley Economic History Lab list, as cited by Barry Eichengreen.  As Barry notes, see also the revised and much improved version of Lemin Wu’s paper on the Malthusian trap (pdf).