Dude, Where’s Your Piketty Review??!!

April 19th, 2014 at 10:01 am

I’m way late in weighing in on Thomas Piketty’s great book “Capital in the 21st Century,” (note the lack of subtitle–I like that–gives the title that much more weight!).  That’s because I’m reading it really slowly but I’m almost done.

Why so slow?  In part, because I’m savoring it–it’s a wonderful read, with trenchant insights every few pages, and there are lots of pages.  Also, the damn thing is dense, and often after reading a few pages I realize I haven’t absorbed the last few paragraphs, so I need to take a break.  Probably my own absorptive capacity ain’t what it used to be.

And, of course, there’s been no shortage of insightful economists weighing in.  Anyway, a very few insights off of top of head, with the caveat that I’m still processing all of this:

–While TPs policy advice is extremely sound, and political economy pervades the analysis, this is not so much a book about economic policy.  It is a book about economic cosmology–about the mechanics of how economies work from the perspective of wealth accumulation.

–In that sense, it’s more Newtonian than Keynesian.  The former changed the way we understood the universe.  The latter did too (re the economic universe), but to a lesser extent, and what emerged was less a new understanding of the relationships between growth, inequality, capital, and labor, and more a very different, much more activist, policy approach to the business cycle.

–In part, this difference also stems from TPs extremely “low-frequency” look at the data–his extremely broad, historical scope.  His focus is thus structural, not cyclical.  I find this to be a fascinating and salutary difference between the very high-frequency work that many American economists engage in (e.g., forecasting next month’s jobs numbers–I’d love to hear what TP would say about that endeavor).

–The danger in Newtonian economics is that people will think you’re asserting immutable, deterministic relations, e.g., his famous r>g.  But TP is very, very careful to hedge on that point, stressing that the forces he documents are responsive to intervention.  As he says in the NYT today: “…capitalism and markets should be the slave of democracy and not the opposite.”

–This cosmology observation is far from a critique–it’s what Krugman means when he says the book will change the way we think about the economy.  I certainly hope Paul’s right about that.  It’s been interesting to see the lack of response from the right, though I’m sure it’s coming.

–Just a note re his fame (see NYT link above re that).  So I get a typical call from a reporter the other day, asking me what I thought about some developments around poverty policy.  He then asks, “And how do you think Thomas Piketty would answer these questions?”  And, having intellectually “lived with” TP for a few weeks now, I actually think I gave a pretty good answer!

Rents, Rents, Everywhere Rents!

April 17th, 2014 at 2:25 pm

Once you start seeing rents at the high end of the US compensation scale, it’s hard to stop (“rents” in this context means being paid well above your actual contribution to your firm’s value-added).

There’s all the “front-running” stuff by high-frequency traders that’s finally getting a lot of press, which is a close cousin of the early-info traders I’ve written about a few times.  Then there’s the collusion among Silicon Valley CEOs to suppress competitive wage bargaining in the labor market (h/t: KA).

And then there’s the extreme cyclicality of top-tier wage trends.

Start with EPIs revealing wage series, developed from Social Security administrative wage data, a highly reliable source.  The figure below, from their State of Working America, shows the extremes of growing earnings inequality since the late 1970s.  It plots real earnings by income group, indexed to 1979, to enable comparison of very different scales—by 2012, the average annual earnings of the top 1% was about $650,000, while that of the bottom 90% was $32,000 (and that of the top 0.1%, not shown, was $2.5 million).

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Now, OTEers know I’m always going on about tight labor markets and wage trends, but the point I’ve stressed is that full employment boosts the pay of low-wage workers the most, middle-wage a good bit, and not at all at the top of the scale (see, for example, figure 5 here).

One can see the full employment impact of the latter 1990s in the figure’s bottom line for the 0-90%, as those are about the only years in the series where the bottom 90% gets a clear boost.  But look at those very large cyclical bips and bops amidst the top 1%–and they’re even more pronounced for the top 0.1%.  What the heck’s up with that?

Did our supermanagers, as Thomas Piketty calls them, suddenly all become super-responsive to the business cycle?  Did they all bang their heads at the same time and suddenly become terribly unproductive, only to recover from their amnesia shortly thereafter?  Under what version of marginal product does this pattern prevail?  In fact, that pattern looks a lot like the movements in the stock market!  J’accuse!

The Real Earnings of the Top 0.1% (left axis) and the Dow Jones Index (right axis)

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Now, as EPI’s Larry Mishel points out—and this post comes out of discussions with Larry about these data—the salary of these top earners is increasingly a function of stock options (though the truly “skilled” ones know how to time, if not backdate, the options to avoid such capital losses).  So the pattern in the above figure isn’t so surprising.  But unless you want to bend yourself into a pretzel to do so, explaining why a bubble-induced implosion in equity values should sharply and temporarily reduce to the marginal product of a narrow group of execs seems like a fool’s errand.

A slightly more formal analysis reinforces the point about whose pay is more sensitive to tautness and slack in the job market–and whose isn’t.  The table below shows a simple Phillip’s wage curve regression of the traditional format (see data note if interested).  An extra percentage point of unemployment (technically, an added point to the unemployment gap) lowers the average wage growth of the bottom 90% of workers by a highly significant one percent and that simple model explains almost a third of the variance in this series.  For the top 0.1%, however, the coefficient is insignificant and the model explains nothing.

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It’s neither a coincidence nor a surprise that the earnings of these tippy-top earners moves with the market these days.  But it sure makes it hard to tell a story that doesn’t involve a hefty dose of rent seeking—and not just seeking, but finding!

 

Data note: The dependent variable in the regression is the log change in nominal salary minus the rate of inflation lagged one year (using the CPI-RS inflation index).  The sole independent variable is actual unemployment rate minus the CBO’s NAIRU, or their unemployment rate associated with full employment.

 

Janet Yellen Holds Forth (and does so exceptionally clearly)

April 16th, 2014 at 5:42 pm

I enjoyed the chair’s speech today, assessing the state of the economy and holding forth on the Fed’s macro policy.  Here are some bullets, along with an observation about an important way that life has gotten harder—maybe significantly harder—for the Fed in recent years.

–As is her wont, Yellen focused on the slack that remains in the job market.  The number 6.5% as an unemployment benchmark was not in the speech.  Clearly, and appropriately, the Fed no longer wants to signal that number as a meaningful threshold, focusing instead on “full employment” which for them is around 5.4%.

–In this regard, she referred to the gap between the current unemployment rate and this target as a significant shortfall, one that could take “…more than two years to close.”

–Let’s say that’s right, and I doubt it’s pessimistic.  Let’s also stipulate, though I’ve got some issues with this assertion, that the unemployment rate was at full employment in 2007.  That means a nine-year stretch—2007-2016—of slack job markets.  And they accuse Japan having suffered through a lost decade.

–Numerous times in both her speech and Q&A, the chair noted low and decelerating inflation (core PCE) as a challenge.  If I’m Yellen, I’m a little unsettled by such low inflation, even as there’s been some tightening and a bit of nominal wage growth (see figure three here).  A key point she made is this, and it’s one I’ll return to in a moment: “…during the recovery, very high levels of slack have seemingly not generated strong downward pressure on inflation. We must therefore watch carefully to see whether diminishing slack is helping return inflation to our objective.”

–She again emphasized this critical point: “I believe that long-term unemployment might fall appreciably if economic conditions were stronger.”  I think Yellen believes, as do I, that a stronger job market could not just lower long-term unemployment, suggesting a significant cyclical component remains in the jobless rate, but even more importantly, stronger growth could pull some folks who’ve left the labor force back in.  I think of that as “reverse hysteresis” and it’s a very big deal regarding both living standards and macro growth.

So, what’s this troubling problem I referenced above?  It is this: I think that while inflation has become less responsive to slack and thus to Fed actions that target slack, market reactions and even global capital flows have grown considerably more elastic to Fed moves.

It is pretty widely agreed that the Phillips curve has flattened in recent years, as I cover here.  For full employment types, like Dean Baker and I, that’s good news in that you can worry less about price pressures as the jobless rate falls.  For inflation hawks, on the other hand, it means the Fed could find it tougher than it thinks to slow faster price growth.

But at the same time, and here I’m admittedly in anecdotal mode, it seems like financial markets and capital flows are increasingly sensitive to the slightest unexpected Fed actions, even when those actions should really be expected, with last summer’s “taper-tantrum” being exhibit number one.

This raises the stakes for forward guidance/expectations management.  Both Yellen and before her, Bernanke, were pretty clear that their main client is the real economy, which is as it should be.  But if it’s true that financial markets have grown more sensitive to Fed moves than inflation, that poses a challenge the Fed can’t ignore.

Two Things to Watch and One to Listen To

April 16th, 2014 at 2:25 pm

Typically, I impose on my readers to…um…read, but here are three links to things I strongly recommend you watch or give a listen to.

1) Thomas Piketty at EPI: His book, Capital in the 21st Century, is quickly and deservedly on its way to becoming a classic, and here he is on a great panel moderated by Heather Boushey and featuring Robert Solow, Betsey Stevenson, and Josh Bivens.

A few highlights: I found Bivens’ opening remarks extremely crisp and incisive.  Solow’s contributions were also very important, especially his connection of Piketty’s main thesis—wealth accumulation is likely to accelerate in the future as the return to capital exceeds the growth rate (which they talk about as r>g)—to the secular stagnation hypothesis.  I also appreciated Boushey and Stevenson both tying human capital investments to better inputs into growth with the potential to raise future g.

2) An excellent tax policy discussion on the Diane Rehm show: just three extremely clear-speaking experts talking about tax policy and ways it might and might not be changed (I listened to this while running—learn while you burn!).

Highlights include many of the comments of Alan Viard from the right of center American Enterprise, who said much I’d agree with, including the need for more revenue and full-throated support of the proposal to expand the EITC to childless workers (they get a very small benefit now, but there’s some bipartisan interest in raising it).  OK, Viard wants to get rid of the corporate tax but a) the corporate tax is truly a mess, and b) at least he wants to raise the revenue back from the individual side.  Ed Klienbard’s response in this exchange was much closer to where I am on this issue.

3) Finally, Larry Summers again, this time talking about secular stagnation and repeating many of his admonitions on fiscal policy from his keynote speech at our full employment event.  Here’s an outstanding quote (h/t: CCH):

Somehow, the people who are worried about the deficit think that they’ve got some kind of monopoly on morality in terms of the way we care about our children. I’m here to tell you that from the point of view of my children I am a lot more worried about bequeathing them no investments in the advancement of science, bequeathing them a vast bill for deferred maintenance, bequeathing them a starved public sector that no longer functions because of attrition of all the most able civil servants, than I am bequeathing them paper debt that’s accumulating interest at less than 1 percent in real terms.

Exactly.

Tax Day Round Up

April 15th, 2014 at 3:27 pm

–Here’s my more detailed take on the tax fairness question, over at the NYT Economix Blog, including a graph I that I think quite gets to the nub of the matter.

–CBPP’s Chuck Marr has put together such an elucidating collection of tax charts that I cannot help but pilfer a couple.

–As I point out at the end of my NYT piece (and here too), the US is not a high-tax country.  That, according to this chart from the OECD, is an understatement.  In fact, ”when measured as a share of the economy, total government receipts (a broad measure of revenue) are lower in the United States than in any other member of the Organisation for Economic Co-operation and Development (OECD), even after accounting for the modest revenue increases in the 2012 “fiscal cliff” deal and the taxes that fund health reform.”

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–Shift from corporate to payroll taxes: “Individual income tax revenues have held steady for many decades at a little under half of federal revenue.  The share of federal revenue from payroll taxes (mostly Social Security and Medicare taxes) grew sharply between the 1950s and 1980s and has since remained relatively stable.  Conversely, the share of federal revenue from corporate taxes fell sharply between the 1950s and 1980s and has remained at this lower level.”

Note that the latter trend has coincided with sharp increases in profitability, both pre- and post-tax.  Given that the trend in business investment has been nothing special, implying the ratio of capital to output hasn’t increased much, these factors all imply an increase in the return to capital, amidst a flattening of the return to labor (the real wage).  Just like Piketty said would happen!

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