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Noted for Your Afternoon Procrastination for October 27, 2014

Screenshot 10 3 14 6 17 PMOver at Equitable Growth--The Equitablog


Must- and Shall-Reads:

And Over Here:

  1. Carter Price: Miscalculating the Wealth of the Rich Reveals Unintended Biases: "In an ambitious effort... Philip Armour... Richard Burkhauser... and Jeff Larrimore... estimate... trends in inequality based on... Haig-Simons... income... consumption plus change in net wealth... [and] claim inequality has not been rising over time.... [Unfortunately] their methodological choices bias the results to downplay relative income growth at the top.... >The Haig-Simons measure introduces substantial volatility as well based on changes in the market valuation of assets.... Mark Zuckerberg... [was] one of the poorest people in the world in 2012 because his net worth fell by $4.2 billion.... Haig-Simons... factor[s] out volatility in realized capital [gains]... but... introduces... volatility in the valuation of capital holdings.... Inflation in housing prices during the 2000s... show[s] up as a rising Haig-Simons income... [but] much of this valuation was a bubble.... The authors... include near-cash benefits... a single national housing index... the Dow Jones Industrial Average... for all types of stock income... limitations on details of high-income households.... Each of these methodological choices will artificially bias their estimates toward a lower valuation of income growth at the top of the distribution..."

  2. Nick Bunker: Piketty and the Elasticity of Substitution: "A particularly technical and effective critique of Piketty is from Matt Rognlie.... Loukas Karabarbounis and Brent Neiman... show that the gross labor share and the net labor share move in the same direction when the shift is caused by a technological shock... point out that the gross and net elasticities are on the same side of 1.... Rognlie’s point about these two elasticities being lower than 1 doesn’t hold up if capital is gaining due to a new technology that makes capital cheaper..."

  3. Carter Price: Why should policymakers care about economic inequality?: "It was long assumed economic growth led to less economic inequality but also that any economic policy efforts to alleviate inequality would necessarily slow economic growth. These views, however, were formed in an era before there was sufficient data to truly test this view.... In an early survey... Roland Benabou at Princeton University in 1996 found that the vast majority of studies said high and rising inequality harmed economic growth.... Sarah Voitchovsky... find[s]... substantial disagreement about the relationship between inequality and growth.... Recent work by... Andrew Berg, Jonathan Ostry, and Charalombos Tsangaridis... Roy van der Weide... and Branko Milanovic of the City University of New York have robustly found a negative relationship between economic inequality for developed countries and within the United States.... Other studies find that a highly skewed distribution of income and wealth depresses consumption... leading to unsustainably excessive borrowing..."

  4. Paul Hannon: BOE’s Cunliffe Says Bankers Earn Too Much, Reducing Returns to Investors: "Jon Cunliffe... noted that bankers continue to be paid very highly relative to the returns they generate for shareholders. ‘Another driver of low returns on assets and equity is the fact that banks’ pay bill has not adjusted to the smaller returns banks are now earning,’ he said. ‘Put simply, shareholders have gone from getting 60 cents for every dollar in pay for staff to getting 25 cents per dollar.... But, given lower levels of leverage, it is unlikely that we will see, or want to see again, the returns on equity that we saw before the crisis. In the new world, pay bills may well have further to adjust.’"

  5. Emmanuel Saez and Gabriel Zucman: Exploding wealth inequality in the United States: "The share of total income earned by the top 1%... less than 10% in the late 1970s but now exceeds 20%.... A large portion of this increase is due to an upsurge in the labor incomes earned by senior company executives and successful entrepreneurs. But... did wealth inequality rise as well?... The answer is a definitive yes.... We use comprehensive data on capital income—such as dividends, interest, rents, and business profits—that is reported on individual income tax returns since 1913. We then capitalize this income so that it matches the amount of wealth recorded in the Federal Reserve’s Flow of Funds.... In this way we obtain annual estimates of U.S. wealth inequality stretching back a century. Wealth inequality, it turns out, has followed a spectacular U-shape evolution over the past 100 years.... How can we explain the growing disparity in American wealth? The answer is that the combination of higher income inequality alongside a growing disparity in the ability to save for most Americans is fueling the explosion in wealth inequality. For the bottom 90 percent of families, real wage gains (after factoring in inflation) were very limited over the past three decades, but for their counterparts in the top 1 percent real wages grew fast. In addition, the saving rate of middle class and lower class families collapsed over the same period while it remained substantial at the top.... If income inequality stays high and if the saving rate of the bottom 90 percent of families remains low then wealth disparity will keep increasing. Ten or twenty years from now, all the gains in wealth democratization achieved during the New Deal and the post-war decades could be lost.... There are a number of specific policy reforms needed to rebuild middle class wealth.... Prudent financial regulation to rein in predatory lending, incentives to help people save... steps to boost the wages of the bottom 90 percent of workers are needed.... One final reform also needs to be on the policymaking agenda: the collection of better data on wealth...

  6. Matt O'Brien: Why Europe is doomed: "'Merkel felt betrayed by Draghi's speech.... Her entourage is also deeply skeptical about Draghi's plan to buy up asset-backed securities (ABS) and covered bonds in the hope of encouraging commercial banks to lend... worry that if this scheme doesn't work, the ECB president will be tempted to launch full-blown government bond buying, or quantitative easing. This is a taboo in Germany and a step Merkel's allies fear would play into the hands of the country's new anti-euro party, the Alternative for Germany (AfD).'... Euro-zone inflation has fallen to just 0.3 percent, more than low enough to hurt their not-really-recovering economy.... But instead of doing anything about it, the ECB has just told people to pay no attention to the disinflation behind the curtain.... This façade lasted until August. That's when ECB chief Mario Draghi finally admitted, in some off-script remarks, that inflation had fallen too low, and Europe's governments had to help out by doing less austerity. Cue the German freakout. Now here's what you need to remember about the ECB. It hasn't been willing to do anything without the German government's buy-in.... Once you understand that, you understand why Europe has floundered from one existential crisis to the next. There will be a problem, the ECB will dawdle, then it will try to persuade Angela Merkel to get on board, they'll debate whether it should do too little too late or too late too little, and then, finally, the ECB will do just enough to keep the euro zone from falling apart. But now even the bare minimum is too much for Merkel..."

  7. Is the Affordable Care Act Working?: "After a year fully in place, the Affordable Care Act has largely succeeded in delivering on President Obama’s main promises"

Should Be Aware of:


  1. Stephen Mandis: What It Will Take to Change the Culture of Wall Street: "As I reflected upon my career at Goldman Sachs, though, what stood out was the importance of its organizational structure. That’s something sociologists pay a lot of attention to, while economists generally don’t.... I document... how Goldman drifted from a focus on ethical standards of behavior to legal ones — from what one ‘should’ do to what one ‘can’ do.... The importance of focusing on organizational behavior... culture had more to do with the financial crisis than leverage ratios did.... To achieve sustained success and avoid firm-endangering risks, a firm like Goldman has to cultivate financial interdependence among its top employees..."
    | Don't Blame the Apple and Exonerate the Tree | Culture, Not Leverage, Made Wall Street Riskier

  2. Lance Taylor et al.: Structuralist Response to Piketty's Capital in the Twenty-First Century: "New School Economist Lance Taylor released a symposium of literature on Thomas Piketty’s Capital in the Twenty-First Century in conjunction with the INET-sponsored research project on Economic Sustainability, Distribution and Stability.... Lance Taylor: Thomas Piketty’s Capital in the Twenty-First Century: Introduction to a Structuralist Symposium. Prabhat Patnaik: Capitalism, Inequality and Globalization: Thomas Piketty’s Capital in the Twenty-First Century. Nelson Barbosa-Filho: Elasticity of substitution and social conflict: a structuralist note on Piketty’s Capital in the 21st Century. Gregor Semieniuk: Piketty’s Elasticity of Substitution: A Critique. Lance Taylor: The Triumph of the Rentier? Thomas Piketty vs. Luigi Pasinetti and John Maynard Keynes."

  3. Nick Bunker: A Deeper Understanding of Secular Stagnation: "According to Eggertsson and Mehrotra... policymakers can move an economy out of this nasty equilibrium... monetary policy can help boost the economy only if the central bank credibly commits to a higher inflation target. This result is interesting given Summers’s claim that monetary policy may not be helpful in just such a situation. In this way, the model supports a critique of Summers’s original formulation of secular stagnation best articulated by the Economist’s Ryan Avent.... Backing up Summers... fiscal policy is helpful as well. By increasing the amount of public debt, fiscal policy increases the natural rate of interest..."