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.

A Setback For Abenomics

Japan’s economy is officially in a recession again, after its GDP shrank for two consecutive quarters. An increase in the country’s sales tax in April is believed to have been the tipping point:

“No part of Japan’s economy looks encouraging,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, who had the weakest forecast in a Bloomberg News survey, with a 0.8% growth estimate for real GDP. “Today’s data will leave another traumatic memory for Japanese politicians about sales tax hikes.” For Prime Minister Shinzo Abe, the report probably guarantees he will put off the tax increase scheduled for October 2015, a move that people familiar with the matter have said will trigger a snap election next month. Japan also tipped into a recession after a 1997 consumption-levy rise, leading to the fall of the government of the day.

Sure enough, Abe called a snap election today to secure a popular mandate for delaying the next planned tax hike. Matt O’Brien faults the prime minister for putting the brakes on fiscal stimulus and turning toward austerity while the economy was still too weak:

The problem … is that the government has started working at cross purposes with the central bank.

See, at first, the government was spending money to jumpstart growth, and the Bank of Japan (BOJ) was buying bonds with newly-printed money to do the same. It was enough to send unemployment down to 3.6 percent now, and inflation finally up into positive territory. But then, six months ago, the government became more worried about its debt of 230 percent of GDP than it was about the recovery. It raised the sales tax from 5 to 8 percent, and the economy promptly tanked. The BOJ has responded by buying even more bonds with even more newly-printed money, but not before domestic prices, as measured by the GDP deflator, began falling again, this time at a -0.3 percent pace.

Abenomics, in other words, has gone from being fiscal and monetary stimulus to fiscal austerity and even more monetary stimulus—and that, at least for now, has brought back deflation.

The Bloomberg View editors also blame a lack of fiscal stimulus … twenty years ago, that is:

[M]ost economists agree it would have been much better if Japan had done two things after its asset-price bubble burst in the early 1990s: pursued a much more ambitious fiscal stimulus program, and moved quickly to force banks to recognize losses and recapitalize.

Instead, Japan’s ill-timed effort to balance its budget with a consumption-tax increase in 1997 sent the economy into recession, and a paralyzed banking sector contributed to an extended period of stagnation that has done much more to worsen the debt burden than well-targeted government spending would have. From 1993 through 2013, gross government debt grew at an average annualized rate of 5.3 percent — a pace that normal economic growth would have largely neutralized. In the absence of that growth, the gross-debt-to-GDP ratio went from 80 percent to more than 240 percent. That’s by far the highest among 179 countries tracked by the International Monetary Fund.

Danny Vinik hopes the US doesn’t make the same mistakes:

[I]it’s very easy for policymakers to cut off the growth if they implement dumb policies, as Japan did with the VAT increase. In particular, this means that the Federal Reserve should not raise interest rates from zero until workers actually see significant wage growth. So far, Fed Chair Janet Yellen has demonstrated a commitment to ignoring inflation hawks inside and outside the central bank. She must continue to do so. It also means that Congress cannot raise taxes on broad swaths of Americans or make significant cuts to government spending

Tyler Cowen is surprised that anyone is surprised:

Unemployment in Japan already had fallen to about three and a half percent.  So how much of a miracle could Abenomics accomplish in the first place?  Not much, not even for committed Keynesians.  Commentators have grown to expect so much of the Phillips curve these days, but still a mechanism for the output boost is required and the Phillips curve (at best) holds only in some contexts.  Japan simply hasn’t had that many laborers to put back to work.  Getting more women in the workforce, as Abe has tried to do, is a positive development, but that is not mainly about macro policy nor is it mainly about the short run.

In the same vein, McArdle extracts a lesson about the limited powers of policy:

Despite a really good package of reforms,  Japan’s economy is still so fragile that a 3 percent hike in the sales tax  (even one accompanied by a $51 billion stimulus program) is enough to push it back into recession. …

What this suggests to me is that there may simply be limits on what good economic policy can achieve.  This is not a very useful thing for an economics columnist to write, because then what are we supposed to suggest week after week?  But there it is: Japan’s economic problems, particularly its long demographic shift, may simply not be very amenable to better policy.  Japan’s exports have a lot more competition than they used to, and the country is heading for the demographics of an Assisted Living facility.  Better monetary policy won’t change either of those facts.

Ben Casselman adds that Japan’s unexpected slide into recession “should also give pause to economists in the U.S.”:

When the Bureau of Economic Analysis said the U.S. economy contracted at a 2.1 percent rate earlier this year, most economists shrugged it off as a one-off fluke driven by bad weather. They appear to have been correct: The U.S. went on to post its best consecutive quarters of growth since the recession. But that outcome was far from guaranteed. As I noted at the time, negative quarters are rare outside of recessions. Economists are notoriously terrible at forecasting downturns: Most economists failed to “predict” the last U.S. recession even after it had already begun. (They also miss in the other direction, forecasting recessions that never took place.)

Middle Class Wealth Is So ’90s


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.

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.

The Fed Is Getting Back To Normal

Ylan Mui has the details of yesterday’s Federal Open Market Committee meeting, in which Federal Reserve Chair Janet Yellen laid out a plan to draw down the Fed’s massive stimulus program in light of the economic recovery and the upward trajectory of the job market:

The improving outlook means that the recovery no longer needs as much support from the nation’s central bank.

Since the start of this year, the Fed has been slowly reducing the amount of money it is pumping into the economy. The central bank said Wednesday it will reduce its purchases of Treasuries and mortgage-backed securities to $15 billion in October, down from $85 billion a month last year. The Fed expects to end the program altogether when it meets next month.

Still, the Fed said it will maintain the size of its balance sheet for now –which stands at $4.4 trillion — by reinvesting maturing securities. The Fed holds more than four times as many assets as it did before the 2008 financial crisis. Though the central bank said Wednesday it is committed to shrinking the balance sheet to a more normal size, it formally announced it does not plan to sell any of its assets, a reversal of the plan laid out three years ago. Instead, the Fed said it will eventually stop reinvesting maturing securities and let them run off. However, the central bank said Wednesday that process will not start until after it has successfully raised its benchmark interest rate.

Neil Irwin rejoices at the prospect of a return to boring monetary policy:

For the last six years, Federal Reserve policy has been sexy, or at least as sexy as monetary policy can ever be. Leaders of the central bank have had to improvise answers to tremendously consequential questions. What should the Fed do to combat a severe financial crisis? (Pretty much anything they could think of, and then some, was the answer.) What should the Fed do to stimulate a depressed economy when interest rates are already near zero? (Buy trillions of dollars in securities and pledge to keep interest rates at zero for a really long time.) Should it consider more radical measures like lifting its target for inflation? (No.)

But now, the big questions of Fed policy have mostly been answered, all the more so after this week’s meeting of the Federal Open Market Committee and the news conference on Wednesday by Janet L. Yellen, its chairwoman. And that is terrific news.

Michael Grunwald is on the same page:

It’s true that our recovery from the Great Recession has been slower than previous recoveries from ordinary recessions. But it has been much stronger than previous recoveries in nations that endured major financial crises—and much stronger than Europe’s current recovery. The euro zone’s output has not yet reached pre-crisis levels; it’s still struggling with 12% unemployment and a risk of deflation.

We’re doing a lot better than that. We had more effective bank bailouts, more generous fiscal stimulus—until Republicans took over the House after the 2010 midterms and began demanding austerity—and much more accommodative monetary policy. It’s all worked remarkably well. We’ve faced some headwinds—the contagion from the near-collapse of Greece in 2010, the turmoil after we nearly defaulted on our debt in 2011—but the economy has continued its path of slow but steady growth. That’s why Yellen was able to discuss those mind-numbing “policy normalization principles,” the guidelines the Fed will follow as it starts raising rates and reining in its bloated balance sheet in 2015. We’re approaching normal. And the Fed’s forecast for the next few years also looks pretty decent.

But the Bloomberg View editors oppose ending the Fed’s extraordinary measures:

[T]he Fed has better tools than monetary policy to mitigate financial threats to the broader economy. It can require banks to fund themselves with more loss-absorbing equity, and it can pressure them to steer clear of obvious trouble spots. As a member of the Financial Stability Oversight Council, it can also push for better monitoring of risks that might be building outside the regulated banking system. For monetary policy, the biggest question is whether the Fed can get employment back to pre-recession levels without generating too much inflation. The concern is that structural changes such as shrinking labor-force participation and decelerating productivity might have made that goal impossible. If so, and without government action to combat stagnation, central bankers might have to write off the livelihoods of millions of people as a permanent loss.

So far, there’s little evidence that the Fed has reached the limit of what it can do. Giving up too soon would be a tragedy, even if inflation temporarily overshoots the Fed’s target. Hence, the central bank would do well to maintain room for maneuver.

And Andrew Flowers notes that the debate over the effectiveness of the third round of “quantitative easing” is not settled:

The latest Survey of Consumer Finances showed that the typical household’s income fell by 5 percent (after adjusting for inflation) from 2010 to 2013 — which covers all of QE2 and the bulk of QE3. And economic inequality rose. Because the rich tend to hold a greater percentage of their assets in stocks, and stock prices rose, 2013 saw a widening disparity in wealth.

Critics of QE3 have also worried about inflation. With the Fed effectively printing money to buy $1.6 trillion in bonds, and all this money sloshing around, the prices of all sorts of goods and services could increase, and nullify whatever stimulative effect the program was supposed to have. However, inflation rates have barely budged and remain below the Fed’s 2 percent target, and inflation expectations are stable. This “inflation hysteria” has not materialized, QE3 supporters say; not yet, say the critics.

He also observes that the Fed’s long-term growth projections are pessimistic:

Specifically, the midpoint forecast for real gross domestic product growth in the longer run was lowered to 2.15 percent, down from 2.20 percent in June. In early 2009, when the Fed first began releasing projections, the longer-run midpoint forecast was 2.60 percent. That’s a huge drop. … This “longer run” growth projection is equivalent to potential growth — defined as the economy’s growth rate when using all available resources but without leading to debilitating inflation. And the Fed is not alone in revising down its views of long-run growth: The nonpartisan Congressional Budget Office also revised down potential GDP this year.