Had a good debate on the issue of income inequality with Greg Mankiw at Dartmouth, well moderated by Charlie Wheelan. If there’s a forthcoming video of the event, I’ll link to it.
It was a real treat to have the time to stretch out on the issue–to get away from sound bites–and to do so with Greg, who gracefully and cogently applies clearheaded mainstream economics to the issue.
Obviously, there’s much we disagree on, but I think we disagreed without being disagreeable. They may not sound like much, but I consider it an advance.
He clearly has a much more benign view of the impact of inequality on society, opportunity, politics, and so on, and he worries a lot more than I do about unintended consequences of pushing back on it. I worry about the consequences of allowing worries about unintended consequences to prevent countervailing actions.
Two factual disagreements, which ain’t much after an hour-and-a-half (i.e, we agreed on most of the basic facts). Greg argues that CBO household income data show federal effective tax rates of the top 1% to be about the same now as they were in the late 1970s.
Those data go from 1979-2010 and show the effective rate of the top 1% to be 35% in 1979 and 29% in 2010. So that’s my point. His point comes from the last chart on this page where CBO guesstimates effective rates in 2013 under current law–that dot does look close to the ’79 level, so he’s got a point too (TPC data show also pretty hefty increases in the effective rates of the top 1% post 2012, also supporting Greg’s assertion). However, since then, based on profitability and asset appreciation, the effective rate of the top 1% may now be below that last dot.
It’s true that the top 1% are paying a share of the federal tax bill, but as I suggested, that’s because they’re getting most of the income gains and thus their effective rates have fallen since the late 1970s. Top statutory rates on both income and cap gains are significantly lower now than in the late 1970s, even with the upper income changes associated with the 2012 fiscal cliff deal–remember, that deal locked in 80% of what were then the Bush tax cuts.
Second, and here Greg may well be right, we disagreed as to whether high-frequency trading actually raised (Greg) or lowered (me) liquidity in equity markets. As I said, based on one and only one paper I’ve read on this (though I found it convincing), HFT lowers liquidity as liquidity providers can get burned as faster traders pick off stale quotes (millisecond price differences) before the original sellers can adjust.
Someone asked for the list I ticked off of examples of “rents” or rent-like distortions that drive inequality higher:
–As per Bertrand et al, oil industry CEOs paid for luck as their comp moves up with world oil prices;
–Tippy-top exec comp that moves up and down with the stock market;
—Discontinuity as the top 0.1% of comp increases sharply relative to the average;
–Top inequality driven not by educational wage premiums but by relative gains of the wealthiest;
–Financial “innovators” overpaid relative to risks they created;
–“Regulatory capture” as financial sector pay rose as deregulation faded;
–Low accountability of comp in finance (JP Morgan gets fined; Jamie Dimon gets raise);
–Persistent race and gender earnings differentials;
–Tax loopholes, like carried interest and international tax avoidance;
–Piketty effects: accumulated wealth builds while labor income falls;
–HFT, as noted above;
–Rents in US health care, like big pharma.
And that’s surely a partial list. What else, OTEers??
As I recall, Greg agreed with some of these but not all.
Anyway, the debate led me to believe that there’s a non-trivial set of ideas that reasonable people with differing views could agree on, as you’ll see if there’s a video.