Piketty’s Payoff

Jordan Weissmann argues that whether the famed economist is ultimately right or wrong, he’s had a fundamental influence on how his field thinks about inequality:

Predictably, economists are split on the merits of Capital’s big idea—though the breakdown doesn’t fall neatly along liberal and conservative lines. Heavyweights like Krugman and Robert Solow, both Nobel Prize winners, have been supportive while others, including right-leaning figures like Cowen and left-of-center thinkers like former Harvard president, Treasury secretary, and Obama adviser Larry Summers, have been critical. When I asked Justin Wolfers, a plugged-in senior fellow at the Peterson Institute for International Economics, for an assessment, he told me that while Capital had unquestionably forced economists to grapple with inequality in new ways, Piketty’s theoretical framework hadn’t made much of an impact in the field. …

Yet in December, highly respected Stanford University professor Chad Jones released an entire working paper exploring how r>g relates to concepts in macroeconomics.

The field may not be going wild for the theory, as Wolfers suggests, but at least some researchers are engaging it outside the world of econ blogs. And in the end, it doesn’t matter if the academy gives Capital a gold star. What matters is that even its detractors are now considering wealth in a way economists haven’t in years—as more than income that’s been stowed away in a bank or brokerage account, as something that may have the power to shape the economy itself.

Clive Crook is less thrilled by the Frenchman’s big splash:

Even critics of “Capital” … are generous in praising Piketty for his industry and especially his ambition. Attention, social scientists. Don’t worry about being wrong, just be wrong in a big way. Be wrong because you over-reach. Be wrong the way Marx was wrong (but maybe hope for less collateral damage). Above all, admirers and critics alike pay tribute to “Capital” for drawing attention to inequality. I hadn’t noticed that it was lacking attention to begin with. The American left pays attention to little else. It was really the reverse: The obsession with inequality demanded, so to speak, an academic testament, and that’s what “Capital” provided. Piketty’s economics leaves a lot to be desired, but his timing was fantastic.

The Economist is perplexing a lot of people by putting Piketty at only #13 in its list of the world’s 25 most influential economists – and not one woman. The most glaring omission on that front is Fed Chair Janet Yellen, says Ben Casselman:

Now, there are lots of ways to gauge influence. Yellen’s academic work, for example, is respected but not groundbreaking. But The Economist’s rankings explicitly aim to track “clout outside the ivory tower,” as measured by media attention. How, by that measure, could Yellen not come out near, if not at, the top?

The answer: The Economist excluded “serving central bank governors.” That leads to some strange results, since the list includes not only former governors but also the presidents of the various regional Fed banks. There aren’t many contexts in which Philadelphia Fed President Charles Plosser is more influential than Yellen.

Still, one could argue that Yellen isn’t so much influential as flat-out powerful. So fine, leave her off the list. The rankings are still deeply strange. The top scorer, for example, is health care economist Jonathan Gruber, whose prominence in the media in recent months has been due almost entirely to the emergence of a video in which he said President Obama’s signature health care law passed in part due to the “stupidity of the American voter.” That isn’t influence — that’s a gaffe. Or take No. 25, San Francisco Fed President John Williams, an undeniably important economist but one who apparently scored higher because The Economist’s algorithm mixed him up with a discredited conspiracy theorist who happens to share his name.

Tyler Cowen made his own list and put Piketty at the top, adding:

e. There is no right-wing or center-right economist on the list.  See the EJW symposium on why there is no Milton Friedman today.  Krugman is probably the most politically conservative figure among the top five.

f. Behavioral economics as a whole is quite influential, but with no single dominant figure of influence.  In actuality Cass Sunstein (not formally an economist) and Richard Thaler might globally be #1 in the behavioral area, followed by Daniel Kahneman.

Those Regressive Scandinavians, Ctd

Mike Konczal lets the air out of Cathie Jo Martin and Alexander Hertel-Fernandez’s claim that the US has a more progressive tax system than Sweden:

They are measuring how much of tax revenue comes from the top decile (or, alternatively, the concentration coefficient of tax revenue), and calling that the progressivity of taxation (“how much more (or less) of the tax burden falls on the wealthiest households”). The fact that the United States gets so much more of its tax revenue from the rich when compared to Sweden means we have a much more progressive tax policy, one of the most progressive in the world. Congratulations?

The problem is, of course, that we get so much of our tax revenue from the rich because we have one of the highest rates of inequality across peer nations. How unequal a country is will be just as much of a driver of the progressivity of taxation as the actual tax polices. In order to understand how absurd this is, even flat taxes on a very unequal income distribution will mean that taxes are “progressive” as more income will come from the top of the income distribution, just because that’s where all the money is. Yet how would that be progressive taxation?

Middle Class Wealth Is So ’90s

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Tim Fernholz outlines the findings a new working paper by economists Gabriel Zucman and Emmanuel Saez, briefly referenced on the Dish last week, which “shows that growing income inequality is fueling a commensurate disparity in total wealth”:

The two economists used tax data to build the most complete picture to date of U.S. wealth. Their findings are worrisome. Today, the top 0.1 percent of Americans—about 160,000 families, with net assets greater than $20 million—own 22 percent of household wealth, while the share of wealth held by the bottom 90 percent of Americans is no different than during their grandparents’ time. What does this look like at the household level? Perhaps the most striking chart produced by the economists’ efforts to measure U.S. wealth is the one [above], which shows that after a long march upward, and then a steep decline, the “average real wealth of bottom 90 percent families is no higher in 2012 than in 1986.” Meanwhile, the top 1 percent of wealthy families has almost completely recovered from the ill effects of the financial crisis.

Bryce Covert mentions how the paper connects the growing wealth gap to income inequality:

Wealth inequality is a separate phenomenon from income inequality, but one has fueled the other. “[T]he combination of higher income inequality alongside a growing disparity in the ability to save for most Americans is fuelling the explosion in wealth inequality,” the economists write. The bottom 60 percent of Americans have experienced a lost decade of either stagnant or falling wages since 2000 despite increasing their productivity 25 percent over the same period. But wages for the 1 percent grew by about 200 percent since the 1960s. At the same time, the wealthy have been able to put away more of that money into savings [while] the rest of America struggled to save. The 1 percent now saves more than a third of its income while the bottom 90 percent doesn’t save anything.

The Limits Of Meritocracy

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Matt O’Brien discusses a new paper showing how even “poor kids who do everything right don’t do much better than rich kids who do everything wrong”:

You can see that in the above chart, based on a new paper from Richard Reeves and Isabel Sawhill, presented at the Federal Reserve Bank of Boston’s annual conference, which is underway. Specifically, rich high school dropouts remain in the top about as much as poor college grads stay stuck in the bottom — 14 versus 16 percent, respectively. Not only that, but these low-income strivers are just as likely to end up in the bottom as these wealthy ne’er-do-wells. Some meritocracy.

What’s going on?

Well, it’s all about glass floors and glass ceilings. Rich kids who can go work for the family business — and, in Canada at least, 70 percent of the sons of the top 1 percent do just that — or inherit the family estate don’t need a high school diploma to get ahead. It’s an extreme example of what economists call “opportunity hoarding.” That includes everything from legacy college admissions to unpaid internships that let affluent parents rig the game a little more in their children’s favor.

Noting the abundance of other studies that point to this same class disparity, Freddie stresses that the notion of America as a pure meritocracy has been thoroughly debunked, even if many people still believe in it:

The question of how much control the average individual has over his or her own economic outcomes is not a theoretical or ideological question. What to do about the odds, that’s philosophical and political. But the power of chance and received advantage — those things can be measured, and have to be. And what we are finding, more and more, is that the outcomes of individuals are buffeted constantly by the forces of economic inequality. Education has been proffered as a tool to counteract these forces, but that claim, too, cannot withstand scrutiny. Redistributive efforts are required to address these differences in opportunity. In the meantime, it falls on us to chip away, bit by bit, on the lie of American meritocracy.

A Kick In The Assets For The Middle Class

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Why doesn’t the recovery feel like a recovery for so many Americans? Matt O’Brien offers the above chart as one answer:

This is a story about stocks and houses. The middle class doesn’t have much of the former, which has rebounded sharply, but has lots of the latter, which hasn’t. Indeed, only 9.2 percent of the middle 20 percent of households owns stocks, versus almost half of the top 20 percent. So the middle class has not only missed out on getting a raise, but also on the big bull market the past five years.

The only thing they haven’t missed out on was the housing bust: 63 percent of that middle quintile own their homes, which are more likely to be a financial albatross than asset. And it doesn’t help that, with student loans hitting $1.2 trillion, people have to take out more and more debt just to try to stay in, or join, the middle class. It’s no surprise, then, that people are still so gloomy about the economy.