Jason Furman, POTUS’s Chief Economist, on Inequality, Piketty, and Growth

May 10th, 2014 at 10:04 am

I was up at the crack of dawn this AM, sipping coffee on the back porch, serenaded by a cacophony of noisy birds and thoroughly enjoying this new, highly readable paper by CEA chair Jason Furman.  It’s a kind of Piketty-inspired set of observations and reflections on inequality, growth, and policies to dampen the former and boost the latter.

Regarding the rise of inequality, Furman starts from the revealing decomposition that the increase in overall inequality is a function of the increase in inequality within labor income, within capital income, and changes in their relative shares.  A central tenet of Piketty’s work is in regard to that last part: as the capital share of income grows, so will inequality.

One of Jason’s contributions here is to think more about the “within distribution” changes.  He shows (see his table 1) that once you get up to the very top of the income scale, most of the growth in inequality in recent decades is from the increased concentration within capital income itself—not a higher share of capital income nor more unequal labor income.

This has serious implications that one might find even more worrisome than TPs r>g.  That is, even holding factor shares constant, inequality could grow based on greater concentration within the shares.

While Jason stresses this finding re capital income, I’ve thought about this in terms of g and labor income.  While faster g relative to r surely helps in precisely the way TP implies—more demand, more employment, more wage income—the US experience clearly shows that when it comes to reducing inequality, growth is of course necessary, but it is not sufficient.  Again, that’s due to the increased concentration of income within labor’s share, a point TP himself stresses in the context of “supermanagers.”

A few other points re Jason’s “Furmanations”:

–It’s always important to remember in this context that labor income in Saez and Piketty’s data includes realized stock options, so these factor income splits are a bit more ambiguous than our discussions imply.

–Jason seems less convinced than TP that r will remain stable amidst higher capital accumulation, slower growth, and lower interest rates.  Who knows and I take his points.  But it was interesting to hear Bob Solow, who knows a little bit about this, broadly support these aspects of TPs conclusions.

–I particularly enjoyed his section on inequality and growth (though he omitted a key citation).  He does, however, kind of shift the question from “does inequality hurt growth?” to “do redistributive policies that push back on inequality hurt growth?”  Both questions are extremely important, but they’re different.

–On the latter question, he cites recent IMF work finding that “progressive policies, by themselves, are neutral for the magnitude and sustainability of growth…” and goes further, quantifying the impact on inequality of a number of such policies from the Obama years: “Taken together these policies will reduce the Gini coefficient, a standard measure of inequality, by 0.6 index points—the equivalent of about half a decade of increased inequality.”

–That’s an important and promising line of work—I’d encourage anyone crunching microdata to undertake such simulations to quantify the impact on inequality on such measures.

–The policy ideas—early childhood education, tax incentives in support of research and innovation, more progressive wealth taxation, higher minimum wage–mostly made sense to me (I’ve seen not a smidgen of evidence that international trade agreements push back on inequality!), but outside of infrastructure investment (see our lousy ranking on this in the figure below), there was nothing here on the demand side (though he explicitly notes the need for more aggregate demand in the intro).  Clearly, my work to convince those in high office to loudly and persistently beat the full employment drum is not complete!


Source: Furman, 2014.




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9 comments in reply to "Jason Furman, POTUS’s Chief Economist, on Inequality, Piketty, and Growth"

  1. Peter K. says:

    Sorry about the long comment. Piketty and Furman give one a lot to think about. I feel like Furman doesn’t really grapple with the economic history (and policy history) of the last 40 years and how it differs from the post-war years.

    Furman assumes we’ll get to full employment one of these days.”I am confident that we will finish digging out of the hole left by the Great Recession …But even after we do, we will still face the major challenges…”

    The problem is the shampoo economy and the Republicans blocking fiscal action. There’s also the secstags with not enough investment for growth.

    I don’t understand why he feels r will lower along with g. For the past 5 years, profits have been high as growth has been slow. As Obama himself has said, labor hasn’t shared in productivity gains for a while. It doesn’t seem like Furman fully examines this issue. Solow writes “productivity growth has been running ahead of real wage growth in the American economy for the last few decades, with no sign of a reversal, so the capital share has risen and the labor share fallen.”

    On the other hand, as Baker has written in his review of K21, there are lot of low hanging fruit policies some which Furman mentions like infrastructure spending. Or even if the Fed switched to an NGDP level path target. Labor did share in productivity gains in the tight labor market of the late 90s, so it’s doable. (Interesting that Furman writes “although all of these capital tax rates remain below what they were prior to 1997.”)

    My takeaway from Piketty is ultimately that shrinking r so that it is less than g is what matters. Reforms are worthwhile to the extent they strengthen the political push to make that happen. Because otherwise you get an oligarchical doom loop. Because as good as the New Deal and Great Society reforms were, they didn’t prevent the recent rise of r over g and the return of Gilded Age levels of inequality.

    It is interesting that Furman chose to deliver this speech which mentions “race-to-the bottom” national tax incentives in Ireland, a known haven. It may be that it’s a race between keeping a lid on inequality and the process of global arbitrage playing itself out. In his review Baker mentions the waning days of China as a low-wage haven.

    • Robert Buttons says:

      we will NEVER have full employment.. Those that benefit from more “stimulus” will simply move the goalposts for the mercurial definition of “Full employment”

      • jonas says:

        Can you list seven people whose benefit from more stimulus is greater than their share of the normal societal benefit of more stimulus?

        Challenger: Can you do so without invoking Austrian “economics?”

        • Robert Buttons says:

          Brian Harrison (solyndra), Chris Gronet (Solyndra), Tom Tiller (Abound Solar), David Ramm (Brightsource), Bob King (UAW), Mary Barra (GM), Tom Werner (sun power)

          • root_e says:

            The Republican/Conservative complaint about Solyndra shows that they have no idea of risk in a competitive market. All they understand is no-bid contracts and tax treats.

    • Smith says:

      The New Deal reforms did prevent a rise of r over g, which is why they needed to be reversed or evaded before the gilded age returned. The fact that center left and liberals don’t recognize this shows their near total ignorance of the actual game they are playing (and losing). You can start with Taft-Hartly of 1947 reversing hard won labor rights. 90% marginal tax rates on income over $2 million dollars up to 1960 acted as a powerful break on excessive compensation. As recently as 2005, major changes were made to the Fair Labor Standards Act that took away many protections for labor. Glass Steagall and other regulatory responses to the Great Depression that sought to regulate banking were repealed, along with allowing shadow banking which seeks to avoid regulation altogether. This creates the bloated overpaid useless reckless economy crashing financial sector (including hedge funds with carried interest) as an important contributor to inequality.
      The economic history of the last 40 years is just a continuation of the past 69 year assault on the post WWII New Deal economy. Hence, in 2004, Bush tried to privatize Social Security, Republicans rail against unemployment insurance, and seek to repeal the current inadequate financial regulation. The right and the rich (two separate though overlapping groups) fight a long war of attrition which they are winning. The center right party (the Democrats) seek an accommodation with the 10% 1% and .1% upper income groups that run the country (and in which they are well represented), while tempering the inclination of more conservative elements of the “power elite”. Politically they each serve as a foil to the other while basically pursuing the same policies that create rising inequality. Hence Reagan and Bush II run Keynesian deficits, but targeted for defense industry and tax cuts for the rich, and Clinton and Obama deregulate (Glass Steagall and shadow banking) and cut taxes (80% of Bush tax cuts) respectively.

      New Deal unable to prevent r>g? No way, restore those tax rates, labor rights, and financial regulation and then we’ll talk.

  2. root_e says:

    The tax system, at the least, magnifies this form of inequality by rewarding expenditures on tax avoidance. H&R Block is not going to get you a 15% rate or a perpetual trust or a “foundation” that can shelter wealth or – in particular – a gun shy IRS that doesn’t want to engage in painful litigation. If your wealth is high enough to pay for a team of tax lawyers, you have leapt into a higher return on income tax world.

  3. PeonInChief says:

    And the cat’s name is?

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