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.
THE VIEW FROM MY BACK PORCH!