Links of the Week - 27 June 2014

A weekly collection of links from the Conscience Warrior Newsfeed


How much does right-wing rhetoric contribute to right-wing terrorism?
Paul Waldman

40 maps that explain food in America
Ezra Klein and Susannah Locke

What If the Rise in Income Inequality Had Never Happened?
Josh Zumbrun

Markets Are Less Volatile. Should We Worry?
Neil Irwin

Disciplined Democrats
Paul Krugman

Dual Endogeneity: Capital Share, Institutional Failure, and Piketty

While much of the economics and finance commentariat has been debating Thomas Piketty's epic Captial in the Twenty-First Century in recent months, one point I have not seen raised is whether a concern for inequality is increasing in national income. That is to say, do countries begin to care more about inequality more as they become richer? (I am analogizing this to the construction employed by Brad DeLong regarding government services as a normal good on a country-wide level. See his 2010 IAS 107 lectures.)

So the hypothesis here is that "concern for economic inequality" is a normal good, in the sense that, as nations become wealthier, they demand more of it. This is a loquacious way of saying, in effect, that this is a first-world problem. 

This is not, of course, to minimize the seriousness of the issue. Whether one believes that the marked increase in income and wealth inequality in the developed world over the last thirty or forty years is justified (the "wages are determined by the value of the marginal product" argument), or not justified (the "wages include economic rents and are determined, at least in part, by market power" argument), or if one subscribes to some hybrid of these two views, the plain fact is that economic inequality is rising. In the former view, the earnings of lower-income workers have been stagnant because their skills have not kept pace with technology, and globalization has exposed them to foreign competition. In this view, people with less capital have chosen to save less of their income than people with more capital. In the latter view, institutional changes have stripped lower-income workers of the bargaining power to negotiate wages that keep pace with increases in productivity, and these workers have consequently saved less as their wages tend toward subsistence.

Just as there is a continuum of views as to the reasons for rising economic inequality, there are (at least) two views about what this rise means. First is the "negative feedback" view, popular among those whose economic views tend toward those of the New Classical school. In this view, rising inequality serves as an incentive to technological progress, which is inherently egalitarian. As new technologies emerge, some economic hegemonies are broken, while new ones are made. Thus, (some of) the rich become poorer and (some of) the poor become richer. From this perspective, economic inequality is likely periodic over longer time horizons.

The alternate view about the meaning of a rise in economic inequality is the "positive feedback" view. This is Piketty's prediction. His now-famous "r > g" framework describes a relationship among returns to capital, economic growth, the elasticity of substitution between capital and labor, and the capital share of income in which returns to capital are sufficiently high so as to increase the capital share steadily over time. In this framework, the capital share of income rises asymptotically. This leads to economic inequality as the stock of capital is disproportionately concentrated in the hands of a small fraction of the populations of industrial countries.

Neither view about the justification of rising economic inequality is inherently incompatible with either view about the implication of the rise. That is to say, the view that all incomes are "rightly earned" (determined by the value of one's marginal product) is not intellectually inconsistent with the view that the capital share is tending toward infinity. Nor is it intellectually inconsistent to simultaneously believe that wages are largely determined by market power and that economic inequality is cyclical and self-correcting. 

Whether or not economic inequality is justified, if its rise is not self-correcting, the end result would be disastrously destabilizing. Whether this means the Marx-Engels story about workers casting off their bonds, or it means the Acemoglu-Robinson story about a decreased faith in democratic and market institutions, leading to greater political corruption and a breakdown of property rights and other norms, the story is certain to end in tears. Even if the rise in economic inequality is self-correcting, there is a danger that the correction looks less like the "creative-destruction-through-technological-progress" story, and more closely resembles the "industrial-sabotage-and-torching-the-estates" story. 

Piketty's remedy for this problem is a global wealth tax. This policy is likely practically difficult and politically impossible, but it is important that it be discussed; income taxes were once thought practically difficult and politically impossible, but most of the industrial world has now had them for a hundred years. In the United States, this would actually mean an expanded wealth tax, as most communities already tax developed and undeveloped land, leading to a deeply regressive wealth tax, as the share of total wealth represented by one's home is decreasing in income. 

So this brings us back to "concern for economic inequality" as a normal good. Maybe rich countries care about this issue because people in rich countries have more to lose in a upheaval. That's a pretty unsatisfactory answer; whatever people have got, "most of it" is always a lot to lose. Maybe rich countries care more about this issue because their citizens have grown comfortably unaccustomed to riots and burning factories, while people in less-developed countries expect that there will be those sorts of things, and are chiefly concerned with feeding, clothing, and housing their families. 

Whatever the reason, economic inequality is rising, and has been for a few decades. And whatever the reason, people have begun to notice, and to care. So what is to be done about it? As noted above, the only wealth tax that is within the Overton Window is the regressive property tax model in place in most of the United States. If Piketty's prediction holds, and the capital share of income continues to rise, the frontier of politically acceptable policies will retreat further from any policy that might reverse that trend. This is grim.

Another approach could be a policy portfolio that aims to democratize capital ownership. This could take the form of government-managed individual stock and bond portfolios, sort of a government 401k. One problem with this is that people are going to want to liquidate them prematurely. Can that be disallowed? This plan seems problematic. Another possibility is a US sovereign wealth fund. If the federal government raised revenue in this manner, it would allow tax rate reductions for poorer people, reducing inequality indirectly.

There are some that would argue that the moral way to organize society is to establish some set of rules and then let the market sort it out. Implicit in this view is that there are no externalities, no irrationalities or other behavioral inefficiencies, and no information asymmetries. Also implicit in this view is that the effect of market power imbalances on trade are either immaterial, or a feature of the system. It is a natural result of this view that "limited government" could be viewed as a virtue in and of itself. 

The fact is, free-marketeer rhetoric aside, there is neither a divinely-ordained income and wealth distribution, nor a divinely-ordained optimal mix of command and markets. It's all choices. This is why democratic institutions are so important. The increased concentration of wealth and incomes has begun to erode both democratic institutions, via the sanction of purchased political favors, and the belief in the utility of markets. The dung heap of history is teeming with the rotten carcasses of civilizations that lost faith in democracy and markets. If we are lucky, the path dependency of this condition is weak.

For an excellent mathematical treatment of r > g, including a necessary discussion of the different components of r, see Brad DeLong.

Links of the Week - 20 June 2014

A weekly collection of links from the Conscience Warrior Newsfeed


No Need to Read the Fed’s Beige Book if You Read This Instead
Binyamin Appelbaum

The War on Coal has Already Happened
Paul Krugman

A former Obama advisor: sometimes less health care is better health care
Adrianna McIntyre

How much do Americans drive?
The FRED Blog

Why is Capital So Much Stronger than Labor?
Jared Bernstein

Mankiw, The Recovery, and Intellectual Consistency

Greg Mankiw passes along the following image:

And the following analysis:

At face value, it indicates the labor market is almost back to normal. If so, this fact suggests that the Fed may soon need to back off its policy of near zero interest rates, and that the slow pace of economic growth experienced in recent years reflects slow growth in potential due to adverse structural forces rather than inadequate aggregate demand.

If we can go back in time to the heady days of 2012, when Professor Mankiw was going all-out to elect his client Mitt Romney, we will find this post, in which Professor Mankiw purports to "[monitor] this so-called recovery" with the following image:

This image, accompanied only by the phrase "monitoring this so-called recovery," seems to be intended to imply that the recovery from the Great Recession of 2008, which had occurred during the presidency of Governor Romney's opponent, Barack Obama, was tepid. A casual reader may also infer from Professor Mankiw's sparse presentation that he intends readers to place the blame for this tepidity at the feet of President Obama. This is Natural and Good, as, after all, Professor Mankiw had a professional interest in Governor Romney's defeat of President Obama.

So, returning now to the first image, and the attendant commentary. Professor Mankiw now believes that "the labor market is almost back to normal," and that, accordingly, "the slow pace of economic growth experienced in recent years reflects slow growth in potential due to adverse structural forces rather than inadequate aggregate demand."

Since Professor Mankiw was good enough to provide a FRED graph to make his 2012 case, we can easily extend that analysis up through the present-day. Doing so gives us the following image, which shows that the trend has largely continued:

Now, if Professor Mankiw's blog posts were not typically so, ahem, brief, his readers may have enjoyed the gift of his analysis as to why the first image shows that "the labor market is almost back to normal," while the second and third images show a recovery that, in Professor Mankiw's view, may not truly even deserve that label.

An alternate possibility is, of course, that both posts are self-contained drive-by hit pieces that do not reflect any pretense of inter-temporal intellectual consistency. Only Professor Mankiw can know for sure...

Links of the Week - 13 June 2014

A weekly collection of links from the Conscience Warrior Newsfeed


Here’s some wasteful Big Government spending. Why isn’t Fox News outraged?
Paul Waldman

Hate your cable company? Economics explains why
Matthew Yglesias

No, David Brooks, we don’t need less democracy
Matt O'Brien

Does David Brooks know that Simpson-Bowles failed?
Ezra Klein

You can be a beneficiary of racism even if you’re not a racist
Ezra Klein

Deflating Expectations
Zachary Karabell

Driverless cars will mean the end of mass car ownership
Timothy B. Lee

Do Conservatives Have Any New Ideas?
Noah Smith

That Old-Time Inequality Denial
Paul Krugman

Unjust Deserts
Brad DeLong

Links of the Week - 6 June 2014

A weekly collection of links from the Conscience Warrior Newsfeed


Why the Housing Bubble Tanked the Economy And the Tech Bubble Didn’t
Amir Sufi and Atif Mian

Analyzing Position Values In the 2014 Drafts
Chase Stuart

Inflation targeting vs price-level targeting: A new survey of theory and empirics
Michael Hatcher & Patrick Minford

When School Reform And Democracy Meet
Ta-Nehisi Coates

The Hot Seat: ‘Stress Test,’ by Timothy F. Geithner
Michael Lewis

Market priesthood
Noah Smith

Faith-based Freaks
Paul Krugman

Unemployment: It’s Not Personal
Paul Krugman

Economists used to be the priests of free markets—now they’re just a bunch of engineers
Noah Smith

Tim Geithner and the paradox behind the government’s crisis response
Zachary Goldfarb

Why Tim Geithner is wrong on homeowner debt relief
Atif Mian & Amir Sufi

Why salaries shouldn't be secret
Felix Salmon

Reading "Capital": Chapters 10, 11, and 12
Ryan Avent

I'm not a Democrat. I'm an anti-Republican.
Damon Linker

The Green Lantern Theory of the Presidency, explained
Ezra Klein

Links of the Week - 30 May 2014

A weekly collection of links from the Conscience Warrior Newsfeed


Rich Parents Planned This
Matt Bruenig

Derek Thompson: Reads Annie Lowrey on Why America’s Essentials Are Getting More Expensive While Its Toys Are Getting Cheap
via Brad DeLong

Inequality Has Been Going On Forever ... but That Doesn’t Mean It’s Inevitable
David Leonhardt

The Limits of Lyndon Johnson
Elizabeth Drew

Why Participation Is Down
Evan Soltas

Capital in the Twenty-First Century at The Graduate Center, CUNY [video]
via Mark Thoma

Distance to inflation target
The FRED Blog

Where do profits come from?
Matthew Yglesias

How NFL teams ignore basic economics and draft players irrationally
Joseph Stromberg

Piketty’s Arguments Still Hold Up, After Taxes
Jared Bernstein

Inside the President’s Inner Circle
Sandra Sobieraj Westfall

Sticky prices: how we confuse students, and sometimes ourselves -
imon Wren-Lewis

The diminishing usefulness of the Fed Funds rate
Sober Look

The Stock Market, in Six Charts
Neil Irwin

Slides for: Mr. Piketty and the “Neoclassicists”: A Suggested Interpretation
Brad DeLong

Links of the Week - 23 May 2014

A weekly collection of links from the Conscience Warrior Newsfeed


Notes and Finger Exercises on Thomas Piketty’s “Capital in the Twenty-First Century”
Brad DeLong

The Fishermen
Evan Soltas

Studying the Rich
Mike Konczal

What Piketty’s Conservative Critics Get Wrong
Kathleen Geier

Myths about the political beliefs of economists
Chris Auld

My review of Megan McArdle’s review of Capital In the 21st Century
Fredrik deBoer

4 ways to stop the U.S. from becoming a Piketty-style oligarchy
Matt O'Brien

In What Sense Does Economics Need a “New Paradigm”?
Brad DeLong

This map shows America’s real unemployment problem
Ezra Klein

Trading in Milliseconds: When Correlations Break Down
Jared Bernstein

Who holds (and has held) Federal Debt?

Via the outstanding FRED Blog, this is a graphic that shows how the composition of Federal debt-holders has evolved over time. The FRED Blog posted this data as a pie chart showing the current composition. I thought it would be more interesting to show the evolution. The left axis shows the percent (totaling 100).

The brown area shows the percentage of outstanding Federal debt held by foreign and international investors. The white area is the percentage held by domestic investors.* The green area is the percentage held by the Federal Reserve.





*The amount of Federal debt held by domestic investors is not calculated directly, so this series is determined by arithmetic.

Links of the Week - 16 May 2014

A weekly collection of links from the Conscience Warrior Newsfeed


"Capital" and its discontents
Ryan Avent

Thomas Piketty Is Right: Everything you need to know about 'Capital in the Twenty-First Century'
Robert Solow

The Neo-Fisherite Rebellion
Noah Smith

Ranchers like Cliven Bundy are moochers
Matthew Yglesias

The Taylor Rule
The FRED Blog

Thomas Piketty doesn’t hate capitalism
Matthew Yglesias

Will 2014 end up like 1914?
Larry Summers

Links of the Week - 9 May 2014

A weekly collection of links from the Conscience Warrior Newsfeed


Beyond the Laffer Curve — the case for confiscatory taxation
Matthew Yglesias

Sadomonetarists
Jonathan Wight

No, inequality doesn't help the economy grow
Matthew Yglesias

Adam Smith is not the antidote to Thomas Piketty
Deborah Boucoyannis

Economist Receives Rock Star Treatment
Jennifer Schuessler

Links of the Week - 2 May 2014

A weekly collection of links from the Conscience Warrior Newsfeed


Does inflation make you poorer?
Noah Smith

‘Capital in the Twenty-First Century’, by Thomas Piketty
Martin Wolf

Piketty Day Notes
Paul Krugman

Not a summary of economics
Noah Smith

Yes, the Pay Gap Persists
Evan Soltas