20% of Americans are in the top 2%

For years I’ve been arguing that income distribution data is meaningless for all sorts of reasons.  One is that it treats capital income and wage income as being equivalent.  A second problem is the life cycle issue—I’ve been in all 5 quintiles at various times in my life, but I’ve never really been anything other than “middle class” in a sociological sense.  (I started middle class and am now upper middle class.)

It seems the press is catching on to this problem:

Fully 20 percent of U.S. adults become rich for parts of their lives, wielding outsize influence on America’s economy and politics. This little-known group may pose the biggest barrier to reducing the nation’s income inequality.

The growing numbers of the U.S. poor have been well documented, but survey data provided to The Associated Press detail the flip side of the record income gap “” the rise of the “new rich.”

Made up largely of older professionals, working married couples and more educated singles, the new rich are those with household income of $250,000 or more at some point during their working lives. That puts them, if sometimes temporarily, in the top 2 percent of earners.

Even outside periods of unusual wealth, members of this group generally hover in the $100,000-plus income range, keeping them in the top 20 percent of earners.

When I sell my rental unit and move to California I’ll have a huge capital gain, and be “rich” that year.  It makes no different whether my real capital gain is zero, the government treats nominal gains as if they are “income,” and economists treat income inequality as if it actually measures “economic inequality.”  The economic inequality debate is still pretty much in the Stone Age. GIGO.

Why does this matter?  Consider all the progressives who wonder “what’s the matter with Kansas?”  (I.e., why are our conservative opponents so stupid?)  Have you noticed that they never ask what’s the matter with Washington, or Massachusetts?  Maybe they should. Here are a couple examples:

1.  Washington state has no income tax at all.  And yet we are constantly told by progressives that “polls show” the public agrees with them. “Polls show” the people say “yes” when asked if it would be nice if the government would provide all sorts of free goodies to everyone. “Polls show” that voters like big government, and think the rich get off too lightly.  So obviously if you had a referendum on replacing Washington state’s regressive Texas-style tax system with an income tax that only applied to the top 1.2% of residents, the liberal voters of Washington state would pass the referendum overwhelmingly.  Or am I missing something?  I guess I am, as in 2010 they rejected the proposal by the razor thin margin of 64% to 36%, despite the Bill Gates fortune bankrolling the “tax the rich” initiative.

2.  Even more liberal Massachusetts has a flat tax with a top rate that is lower that the horribly regressive top rate recently set by the fanatical Tea Party GOP in North Carolina.  Massachusetts is even more liberal than Washington state, with the GOP now almost completely extinct in the State House.  So obviously if there were a referendum to make the income tax progressive, a proposal that would hurt only a “tiny number of taxpayers,” it would pass overwhelmingly, wouldn’t it?  Nope.

There have been five past efforts to amend the constitution to allow for a graduated income tax, but each time””in 1962, ’68, ’72, ’76, and ’94″”ballot referendums to confirm the amendments went down to defeat. All the referendum votes “have failed by wide margins,”

I hesitated to write this post.  I’m actually glad that people who support progressive income taxes are so clueless about both income inequality and politics. It makes it much easier to defeat them politically.

PS.  Marcus Nunes has a wonderful new post that directed me to a left wing blog that advocates intentionally driving the economy into a recession as a way to reduce inequality.  That’s a wonderful idea.  I strongly encourage all progressives to read this Angry Bear post, and adopt the “breaking bones to fix bones” model of the economy.  Voters will love it and that will finally convince them to adopt all your other socialist ideas.

PPS.  I have another post on income inequality over at Econlog.


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72 Responses to “20% of Americans are in the top 2%”

  1. Gravatar of TravisV TravisV
    10. April 2014 at 18:49

    Prof. Sumner,

    Re: the Angry Bear post, you have argued numerous times that deep recessions tend to result in huge state interventions into the economy…..

  2. Gravatar of Elwailly Elwailly
    10. April 2014 at 19:35

    I agree with you that arguments about who is where in the lower 99.9% and at what times in their lives is not relevant to anything. Really it’s mostly the 0.1% that are capturing an increasing share of income in the last two decades.

    You’re talking past the liberals when you ignore this.

  3. Gravatar of Edward Lambert Edward Lambert
    10. April 2014 at 19:49

    The idea behind breaking bones is that sometimes a broken bone does not heal correctly. Then from then on, for example, the person cannot walk well. So the Doctor will re-break the bone and set it correctly.
    After the crisis, labor share fell. Profits increased. Inequality is increasing. Financial stability is becoming more of a concern to the Federal Reserve. Inflation is staying low, as well as in Europe. There is weak demand from low labor share to support demand and efficiently stabilize credit. The transmission mechanisms of liquidity to middle and low income households was not good enough. Christian Romer acknowledged this in her talk.
    The economy healed incorrectly after the crisis. The economy is proceeding with a permanent limp related to policies that increase inequality, including monetary policy, which does not have a direct mechanism to transfer liquidity to middle and lower incomes.
    Weak demand is limiting supply, as Larry Summers said in referring to Inverse Say’s Law. Potential GDP is lower than people thought or think. Weak demand is related to low labor share. The economic environment is not conducive to raising wages. There is concern that inflation will stay below target for years, in the US and Europe.
    So what do you do? Do you just keep moving forward with the same policy thinking that a far off full employment will solve the situation, while inequality gets more and more entrenched everyday? Maybe you, but not me. I do not want to see the US become like a Latin American country with undemocratic and unstable politics and many marginalized workers. You know this is happening.
    Let’s say you are a brick layer and you are building a wall. Your foreman comes and sees that your wall is not straight.
    Will he say, “just keep building. We have to finish this house”? No, a good foreman will say, “Tear it down and start over”.
    So break the bone again, let the person scream as you set it correctly. They will be grateful later on. Would you be too squeamish to do such a thing? If so, you would not be a good doctor. And the principle applies to being a good economist too.
    Remember Volcker? He broke the economy to set inflation correctly. It eventually took some 15 years to control inflation and stabilize monetary policy around it, but it had to be done. Volcker was a great economic doctor.

  4. Gravatar of Philippe Philippe
    10. April 2014 at 20:49

    so what’s your recommendation, Edward? Reverse QE and raise the overnight rate? What would that achieve.

  5. Gravatar of Edward Lambert Edward Lambert
    10. April 2014 at 21:05

    You link above to a post by Marcus Nunes where he says the recession was unintended. Yet, read the first two interviews at this link… They knew a recession would occur.

    http://www.pbs.org/wgbh/commandingheights/shared/minitext/ufd_reaganomics_full.html

    ” many people warned President Reagan that if he did this, there’s likely to be a recession. And obviously who wants a recession? But I can remember President Reagan using those famous words, “If not now, when? If not us, who?” So he did the right thing, and we did have recession. But also, inflation dropped like a stone.” George Shultz

    Reagan and Volcker had the backbone (speaking of bones) to go through the recession risking political backlash. Some members of the Federal Reserve in the late 1970’s and early 1980’s did not have the backbone and started voting against raising the Fed rate.
    Would you have had the backbone?
    I don’t think you would have from what you sarcastically wrote above, “… a left wing blog that advocates intentionally driving the economy into a recession as a way to reduce inequality… Voters will love it…”
    Well, voters didn’t like inflation back then and they certainly don’t like inequality now. In the end, Reagan’s approval rating went back up. You do what you have to do.

  6. Gravatar of Edward Lambert Edward Lambert
    10. April 2014 at 22:01

    Phillipe,
    There is a growing problem of inequality that is getting more entrenched everyday. Monetary policy is feeding the inequality. We can see who is benefiting and who is not. Just as inflation adversely affected economic decision-making back in the 1970’s, inequality is distorting decisions now to the point that financial stability is once again a primary concern. Asset prices are once again becoming distorted. The central bankers talk about it.
    Yet, the Fed is in a trap now. If they tighten to stop this, they really do risk a recession. Profit rates have peaked. So what do they do? They choose to push on keeping a hopeful face that a far off full employment will rectify the problems, including inequality and low inflation. That is the only way out of this trap. Basically they didn’t realize the strength of weak demand to foil their plans. They expected the economy would have recovered by now.
    My view is that a recession will happen anyway before their full employment level is reached due to weak effective demand, which monetary policy could not resolve. And the recession will easily be blamed on a monetary policy that benefited the rich at the expense of everyone else. Then as the economy recovers, there will be pressure to not have the same policy response again. The new response will have to incorporate policies directing liquidity at middle and low incomes.
    Larry Summers has already pointed to weak demand causing low production. He has said that policy in the future must be directed at demand. That means labor income in my book. The words of Larry Summers have influence. So the stage is already set. When the next recession happens, the foundation is already laid for a policy switch toward directly helping middle and lower incomes.
    The next recession will open the door to more progressive policies. People all over the world are talking about the problems of inequality. So now I am hopeful for the changes in the next recession.
    Anyway, I differ from economists like David Beckworth on potential GDP. I see it as much lower than they do. The result is that the Fed rate should be higher. Keeping it low increases the financial instability. But the Fed is in a trap. They want out of QE. Like I said they expected the economy would have already recovered by now. So they are uncertain about what is foiling their plans. But they have to move slowly being careful not to alarm anyone considering the instability of international markets. They may say they will support the economy if data is weak, but irregardless, they will not turn back from persistent tapering and eventually raising the Fed rate.

  7. Gravatar of Steve Steve
    10. April 2014 at 23:33

    The budget deficit is becoming very cyclical due to rising income tax progressivity, especially on volatile capital income. Currently we are rapidly moving toward a balanced or at least a seemingly sustainable budget deficit due to surging tax receipts.

    The next recession will be characterized by an exploding budget deficit as the incomes of the wealthy plunge. The next recession (and not a moment before) will also produce a political realization that the current entitlement system is unsustainably large. Edward Lambert is 100% dead wrong. Be careful what you wish for.

  8. Gravatar of Benjamin Cole Benjamin Cole
    11. April 2014 at 02:22

    Interesting post.

    I will take a stab at the other side of the coin.

    Why do we never hear about the need to “incentivize” middle-income workers through lower income taxes? The right-wing always talks about lowering the top MTR, not the middle-range MTR.

    Which would have the bigger impact on the economy? Cutting taxes at the highest MTR, or the middle-range MTR (and incentivizing a hundred million workers or so).

    I hunk there was merit to the cut the opt MTR rate argument a couple decade back. Then the MTR was higher (90 percent in the 1960s, 70 percent in the 1970s) and then capital was scarce.

    Now the problem is capital gluts.

    Yes, I prefer consumption taxes and PIGOU and gasoline and pollution taxes and no income taxes. But if we are going to have this argument…..

  9. Gravatar of Tom Brown Tom Brown
    11. April 2014 at 04:03

    I second Benjamin’s question.

  10. Gravatar of Phil Phil
    11. April 2014 at 04:41

    Ill bet MA voters already pay a relatively progressive tax on their income in the form of property taxes. And ill bet it taises eay more money than the invlme taxes in either MA and NC.

  11. Gravatar of Morgan Warstler Morgan Warstler
    11. April 2014 at 04:43

    Good stuff!

    Let’s look again at Saez graph form yesterday:

    http://www.zerohedge.com/news/2014-04-09/richest-rich-have-never-been-richer-rest-us

    The top 1/3 of private sector Americans who spend part of earning life in top 20%…

    Basically OWN the whole country.

    That’s a huge block of the wealth in the bottom 90% on the graph 25.6% AND the 34.6% (90-99) AND the 18.3% (99-99.9).

    So let’s just say:

    A Power (top 1/3): 70% SEVENTY PERCENT OF PIE and 50% of the votes.

    B Power (oligarchs) 21% of pie no votes.

    C Power (public employees and bottom 2/3): 9% of pie and 50% of votes.

    —–

    Now any of you who consider yourselves game theorists, please explain who in the game WANTS to convince voters this is a two player game?

    What is their motive? When Saez and Piketty talk about 99% vs 1%

    WHAT IS THEIR MOTIVE FOR NOT ADMITTING THIS IS 3 PLAYER GAME?

    I submit to you logically the ONLY reason for making it a two player game is IF you are the public employees (who have 9%) and the oligarchs.

    If you cared about the bottom 2/3 of private sector who have NO wealth and 50% of votes…

    You would counsel them to partner with the guys who have the other 50% of the votes and 70% of the money.

    Think about it, who stands more to lose if the bottom 2/3 of private sector agree to follow the the top 1/3 of private sector to go gut the oligarchs?

    The CURRENT public sector employees don’t lose, their pensions are now safe.

    Sure, there won’t be as many future public sector employees, but there aren’t as many famers or factory workers any more either.

    No, the bottom 2/3 of private sector are sold daily down the river by the elites of the Democrat party. They partner with the oligarchs, they manage the bureaucracy, they run academia, and they work in the media.

  12. Gravatar of ssumner ssumner
    11. April 2014 at 04:46

    Travis, That’s right.

    Elwailly, What liberals don’t seem to understand is that income inequality is a horrible measure of economic inequality. Indeed people should simply stop talking about “income.” That’s why I never talk about the “income” earned by the “0.1%,” it’s meaningless.

    My other suggestion to liberals is that they focus on real problems like unemployment and poverty and out of control intellectual property rights, not fake problems like “inequality.”

    Edward, Suppose a recession causes problem X. Is the logical conclusion that to solve X you should create another recession, or do exactly the opposite policy–stimulus? I think the answer is obvious.

    Regarding the early 1980s, yes a recession may be involved in stopping excessively fast NGDP growth, but our problem today is exactly the opposite of 1980.

    Ben, Casey Mulligan has done a lot of work on high MTRs for the middle class.

    My other response is that top rates don’t just affect people at the top, they affect everyone.

  13. Gravatar of ssumner ssumner
    11. April 2014 at 04:47

    Phil, I very much doubt the property tax is progressive.

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. April 2014 at 07:19

    “PS Marcus Nunes has a wonderful new post that directed me to a left wing blog that advocates intentionally driving the economy into a recession as a way to reduce inequality. That’s a wonderful idea. I strongly encourage all progressives to read this Angry Bear post, and adopt the “breaking bones to fix bones” model of the economy. Voters will love it and that will finally convince them to adopt all your other socialist ideas.”

    Angry Bear advertises itself as a “[s]lightly left of center economic commentary on news, politics and the economy.” But since Edward Lambert has joined Angry Bear his posts have been a constant drumbeat against adequate aggregate demand stimulus, particularly monetary stimulus. I consider myself “slightly left of center” and I think anyone who does would be puzzled why a blog that characterizes itself so would be against adequate aggregate demand.

    With respect to Edward Lambert’s current post, he says:

    “As it is, Christina Romer is telling us not to fear an economic correction as long as its recovery is done correctly. It is like re-breaking a bone to set it straight. If the re-breaking of a bone is not done, the bone won’t work correctly in the future. It is proper medicine. You will be better off going through the moment of extra pain…My prescription is to re-break the economic bone which has not set correctly, and this time let’s be aggressive in setting straight better wages and labor share from the start. The idea of re-breaking the economy may sound crazy to you, but the methods of medicine have a greater wisdom than what I see currently among economists.”

    But if you listen to Christina Romer’s speech (Edward has a fondness for posting videos rather than papers, precisely because I believe he hopes no one will take the time to view them) she says in her list of strategies:

    “Avoid crises if possible.”

    “End crises quickly if they do happen.”

    “Use monetary and fiscal policy aggressively.”

    and

    “Avoid self-inflicted wounds.”

    This is exactly counter to Edward Lambert’s perscription of re-breaking the economy.

    Although Edward Lambert’s concern with inequality and the minimum wage may brand him as left-wing, I’m not sure that’s the best way to understand him.

    One key to understanding his views is that he considers himself to be a follower of “Institutional Economics”. Paul Krugman had this to say about Institutional Economics recently:

    http://krugman.blogs.nytimes.com/2014/03/26/dare-to-be-silly/

    “…Before I turn to Syll’s critique, let me summarize my understanding of one of the great turning points in the practice of economics – the turn away from institutional economics in the 1940s and 1950s. Until that time, institutional economics – generally taking the form of long, discursive books rich in historical detail – had been a strong presence in U.S. thought. But then came Samuelson and associates, and models took over.

    Why did this happen? It wasn’t, as some might imagine, about free-market ideology: Samuelson started with Keynesian macro (or “Keynesian” macro, if you feel the urge to claim that the master meant something different), and in fact faced a fierce campaign by right-wingers to keep his work out of the schools. No, what happened was the Great Depression.

    Think about it. Here we had an utter catastrophe, and people wanted answers: how could this happen, what can we do? Institutional economics replied, in effect, by saying “Clearly what is happening is a complex process with deep historical roots. We need to address those complexities. It would be foolish to expect easy answers.” Meanwhile, American Keynesians said, “We have inadequate demand. Increase government spending!”…”

    So you see, indifference to adequate aggregate demand stimulus has apparently always been a key feature of Institutional Economics.

  15. Gravatar of TravisV TravisV
    11. April 2014 at 07:31

    Mark Sadowski,

    Very very insightful analysis and link, thanks!

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. April 2014 at 08:02

    Some other keys to understanding Edward Lambert’s economic views:

    1) His model of “Effective Demand” misappropriates its name chiefly from Keynes, but also from Michal Kalecki. In Lambert’s model, labor share of income acts as a constraint on employment and capacity utilization which he terms the “effective demand limit”. But if you actually read Keynes’ General Theory (Chapter 3) you’ll find that “effective demand” is simply the intersection point between the aggregate demand and aggregate supply curves. Keynes argues that effective demand can be increased through monetary stimulus and public works projects. Similarly, Kalecki argues that effective demand can be increased through aggregate demand stimulus. This of course runs completely counter to Lambert’s claim that effective demand is a limit to employment and capacity utilization against which aggregate demand stimulus is totally ineffective.

    2) Edward Lamberts’ model of “Effective Demand” is originally derived from the work of Boddy and Crotty (1975), Boddy (2007) and Goldstein (1986, 1996). Rather than link all three I’ll simply link the most recent paper:

    http://www.peri.umass.edu/fileadmin/pdf/conference_papers/crotty/Boddy_Crotty.pdf

    Boddy shows through careful examination of the research evidence that labor share of income can be described as a function of employment and industrial capacity utilization. Once again Lambert perverts this, this time by inverting cause and effect. In his model, employment and capacity utilization are functions of the labor share of income. The fact that this runs counter to his own sources and a large body of research evidence seems to be of no concern to him, since he is not interested in the truth, only in advancing his own model of “Effective Demand”.

    3) If you examine his blog posts, you’ll find that Edward Lambert’s main public policy perscription is the reduction of aggregate demand stimulus, specifically by ending QE and raising interest rates. Given what we know from the research evidence, this is exactly the opposite of what should be done if one’s goal were to raise labor share of income, as Lambert repeatedly claims.

    I have a hard time reconciling all of this with the idea that Lambert’s intentions are good and that it is his thinking that is simply muddled. How can one so blatantly misapprehend Keynes and Kalecki, or Boddy, Crotty and Goldstein? There is something seriously amiss here.

  17. Gravatar of Tom Brown Tom Brown
    11. April 2014 at 08:08

    Mark A. Sadowski,

    When was NGDP targeting and/or NGDPLT first proposed? Does it go back to the 1930s or before? Thanks.

  18. Gravatar of Doug M Doug M
    11. April 2014 at 08:10

    The recession to correct inequality….
    Suppose you destroy 20% of the wealth of the top 20% and additional 10% (30% total) of the wealth of the top 2 percent and 10% of the wealth of the remaining 80.

    Has inequality been corrected? Somewhat, but the rich are still a lot richer than the poor.

    Is anyone better off? No! everyone is poorer, everyone gets less stuff.

    Who is hurt most? The people who were barely scraping by are still barely scraping by. The people who were in a place to try to get ahead are now moving backwards. And the rich cancel a party because the don’t want to send the wrong message.

    The prescription of a recession to counter inequality is a recipe to widespread suffering.

  19. Gravatar of W. Peden W. Peden
    11. April 2014 at 08:24

    This would be the best game ever-

    https://www.youtube.com/user/TIMIFOX/videos

    There would be a cheat code where you get to play Mark A. Sadowski.

  20. Gravatar of W. Peden W. Peden
    11. April 2014 at 08:25

    I also like the French name for the Cambridge Capital controversy- the “argument of the two Cambridges”.

  21. Gravatar of brendan brendan
    11. April 2014 at 08:29

    Mark Sadowski said:
    “Once again Lambert perverts this, this time by inverting cause and effect. In his model, employment and capacity utilization are functions of the labor share of income. The fact that this runs counter to his own sources and a large body of research evidence seems to be of no concern to him, since he is not interested in the truth, only in advancing his own model of “Effective Demand”.”

    How much ridiculousness in economics stems from this? By this I mean some guy designs some particular Hammer early in his career, patents it and spends the rest of his career Hammering away with it, regardless of whether it can drive a nail.

    Example: John Taylor’s hammer drives nails pretty well. But the NGDPLT hammer is better. But JT isn’t about to upgrade.

  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. April 2014 at 08:41

    Tom Brown,
    As far as I know, NGDPLT was first proposed by James Meade in 1978:

    http://www.jstor.org/discover/10.2307/2232044?uid=3739592&uid=2&uid=4&uid=3739256&sid=21101643441097

    Recall that James Meade was the one who derived the money multiplier formula relating the monetary base to broad money supply involving the currency ratio and reserve ratio in 1934.

  23. Gravatar of W. Peden W. Peden
    11. April 2014 at 08:42

    Brendan,

    As a general rule, science progresses (at least at a big level) by the funeral. That’s why it’s always impressive when someone really committed to a theory gives it up: it’s a sign that they’re thinking rationally and that some rigorous argumentation is going on.

  24. Gravatar of Tom Brown Tom Brown
    11. April 2014 at 09:00

    brendan,

    “John Taylor’s hammer drives nails pretty well. But the NGDPLT hammer is better.”

    I believe Mark told me one time that John Taylor’s rule was originally for NGDP (level?) targeting. I’m sure Mark will correct me if I’m wrong.

  25. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. April 2014 at 09:07

    Tom Brown,
    “I believe Mark told me one time that John Taylor’s rule was originally for NGDP (level?) targeting. I’m sure Mark will correct me if I’m wrong.”

    You’re wrong.

    I said the Taylor rule is the special case of NGDP targeting. Pages 7-11:

    “Note that the Taylor rule is a special case of nominal-GDP targeting… The chief difference between the two policy approaches is that under nominal-GDP targeting, policymakers look at a longer history of price changes than they do under the Taylor rule when deciding on the appropriate policy setting. Secondarily, the estimate of potential output that enters the nominal-GDP-targeting rule is less sensitive to short-term supply shocks than is the estimate that enters the Taylor rule.”

    http://www.dallasfed.org/assets/documents/research/staff/staff1202.pdf

  26. Gravatar of Jim Glass Jim Glass
    11. April 2014 at 09:19

    @ Benjamin Cole (and Tom Brown)

    Why do we never hear about the need to “incentivize” middle-income workers through lower income taxes?

    The infamous Bush tax cuts reduced marginal rates all the way through, the most at the bottom, dropping the lowest bracket rate by a full third.

    You didn’t notice? Weren’t listening?

    Even Krugman recently marvelously admitted that the great bulk of the Bush tax cuts benefited the non-rich — after he endorsed Obama and the Democrats making 98% of them permanent.

    Maybe you just listened to Krugman and the Dems spending the eight years Bush was in office bashing them as being “for the rich, for the rich, for the rich”, without actually looking at the cuts? And didn’t pay any attention to Krugman’s and the Dems’ final opinion on the matter?

  27. Gravatar of Tom Brown Tom Brown
    11. April 2014 at 09:21

    Mark, thanks. How about Holbrook Working (1923)?
    http://fmwww.bc.edu/EC-P/wp802.pdf

  28. Gravatar of Jim Glass Jim Glass
    11. April 2014 at 09:22

    Marcus Nunes has a wonderful new post that directed me to a left wing blog that advocates intentionally driving the economy into a recession as a way to reduce inequality…

    Back when I was a student visiting in the old Soviet Union they used to tell a joke:
    ~~

    An Angel of God visits peasant Ivan and says, “You’ve been a good man and as your reward The Lord will grant you anything you wish: gold, a dacha, a young wife. But your neighbor Dmitri has been an even better man than you, and so will receive twice what you ask for: twice the gold, two dachas, two young wives(!). But you will choose for both of you.”

    Ivan thinks for a minute and replies, “Lord, make me blind in one eye.”
    ~~

    They were only half joking, and it was funny because it was true. But at that point they were escaping the grip of the worst of it.

    I just listened to a really good audio series on the history of China, and it was no joke there at all. Millions died and going on two billion impoverished via the very explicit pursuit of this idea. Mao explicitly said “Better poor than…” and did what it took to make it so.

    This is a very dangerous idea, and it is rooted in our biology. (“Hunter gatherer societies were highly egalitarian — but not peacefully egalitarian, violently egalitarian”, Herbert Gintis.) It is amusing only when you don’t see it as any kind of real threat. But it still exists right here in the USA, and not just in crank blog posts. Here in NYC the old-lefties (and ex-Sandinistas) returning to power at the top of the public school system are openly speaking this language, particulary in their “war on charter schools” (which happily is going disastrously for them.)

    So enjoy the wonderful and laugh, but not too much.

  29. Gravatar of Tom Brown Tom Brown
    11. April 2014 at 09:26

    Jim Glass,

    “You didn’t notice? Weren’t listening?”

    Yes, and yes.

    “Maybe you just listened to Krugman and the Dems spending the eight years Bush was in office bashing them as being “for the rich, for the rich, for the rich”, without actually looking at the cuts? And didn’t pay any attention to Krugman’s and the Dems’ final opinion on the matter?”

    No, none of that, … that would give me way too much credit, since I’m pretty sure I didn’t pay any attention to Krugman during the full eight years of Bush’s presidency. I just thought it sounded like a good question. Thanks for your comment.

  30. Gravatar of Jim Glass Jim Glass
    11. April 2014 at 09:30

    … Really it’s mostly the 0.1% …

    Is Warren Buffett truly such a threat to democracy and the economy?

    I’m fascinated about how all the ‘inequality politics’ has so suddenly shifted from quintiles to “the top 0.1%”, and have a theory about it.

    “Inequality” is always a big Democratic election-year issue, of course, though it’s never won an election or captured a swing vote. It’s a “base motivator”. And the way it is pushed in election years is highly orchestrated after being fully poll tested.

    It’s no different than the “minimum wage” and “equal pay for women” — the Dems have no chance of doing anything about them, they can’t get legislation through the House (and what legislation are they going to pass about “the top 1%?”) … so it is all posing, but consider all the effort and money they are putting into it. All three of this issues have suddenly arisen at once with an election nearing as focused “base motivating” and to change the overall political discussion as far the heck away as possible from the political debacle that is Obamacare.

    The thing is, why the big change in the inequality argument? I have a clip file that has Krugman in 1990s election year op-eds pounding away on *quintiles*, there is no movement between quintiles, the top quintiles are taking everything, and all the other Dems pounding that too over ad over. Now suddenly Krugman and the rest have collectively forgotten that, and it is all the awful “top 1%”.

    If I were a cynic (is it possible to be a cynic about politics?) I’d maybe think this:

    Today a liberal Democrat politician looks out at his audience at a fund raiser here in Manhattan, or in Boston or L.A., etc., and sees … the top quintile. Is this politician going to say to that audience: “Inequality is the issue and *you* are the problem! You with your top educations, and high-paid jobs, marrying each other to stratify society! Sending your kids to top pre-kindergardens so the children of the poor will never have any chance to compete with them, locking in inequality forever. *You*…”

    Don’t think so. “You are the problem” never polls well. “They are the problem” always polls much better. So if the Dems want to keep the inequality issue who does “they, them” become? Necessarily one must push up the ladder, “they” become the top 1%, of even better the top 0.1%.

    But not specific named super-rich Hollywood superstars or TV stars or sports heros of course, everybody likes them. “They” become “CEOs and bankers”. But not even specific named CEOs. Warren Buffett and Steve Jobs, everyone likes them too Anonymous, un-named CEOs and bankers. Them!

    They are the threat to democracy and the economy. “They” always polls well.

  31. Gravatar of Philippe Philippe
    11. April 2014 at 09:33

    Edward Lambert,

    your reply was rather vague… I still have no real idea why you think undoing QE and raising the overnight interest rate would benefit the middle and lower classes. Something to do with financial instability and inequality, but I’m not sure what exactly.

  32. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. April 2014 at 09:36

    Tom Brown,
    No, Holbrook Working proposed a framework for Price Level Targeting (PLT). From page 3 of your own source:

    “Working’s (1923) objective was to find a value for the money supply that would be consistent with long-run price stability. At the time of his writing, many others had investigated Quantity Theory relationships empirically.5 From this research, strategies to stabilize the price level emerged but even Fisher’s (1920) plan did not incorporate a method for dealing with lags in the process. Thus, Working’s innovation was to recognize the role of lags and to establish a policy framework that embedded a long-run desired path for price stability. A central bank then could compare the current price level against the desired long-run path and evaluate whether the stance of policy was too accommodative or too restrictive.”

    Here’s a link to his paper:

    http://qje.oxfordjournals.org/content/37/2/228.short

    Incidentally, the Riksbank experimented with PLT in the 1930s.

  33. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. April 2014 at 09:47

    Marcus Nunes turned my comments on Edward Lambert into a post:

    http://thefaintofheart.wordpress.com/2014/04/11/re-breaking-bones-is-the-opposite-of-what-should-be-done/

    And Edward Lambert has turned his comments here into a post responding to Scott:

    http://angrybearblog.com/2014/04/scott-sumner-thinks-volcker-recession-was-unintended-really.html

    P.S. Alex Tabarrok has also posted on Edward Lambert’s perscription of re-breaking the economy:

    http://marginalrevolution.com/marginalrevolution/2014/04/breaking-bones.html

  34. Gravatar of Morgan Warstler Morgan Warstler
    11. April 2014 at 09:57

    Jim, the shift is coming because of the game strategy I keep hammering on…

    The only true way to reduce the distance between the oligarchs and the top 1/3, is to let the top 1/3 determine the battle plan, wage the war, and keep most of the spoils from killing the .1%.

    Right now the DeKrugmans have AT LEAST gotten to the point where they do not want the top 1/3 to fight them.

    But the top 1/3 are the A Power, they will also require the spoils.

    Our future economy is premised on the bottom 80% making up the massive service sector that is not very productive working 40 hours a week. And the over achieving top 20% working 60 hours and delivering incredible productivity gains. This is Tyler Cowen’s mea culpa from the the GS.

    So in that future economy, we want the entire top 1/3 who spend part of earning life in top 20% to need plenty of services.

    Reducing unemployment of the low skilled is really just about increasing the demand for service jobs.

    And that’s why the A power are going to keep the spoils, they work long long hours, and the need the bottom 2/3 to nanny their kids, fix their bikes, yell at them to do more push ups, paint their nails, cook their food, rub their back, and write blog posts that make them feel good about themselves..

  35. Gravatar of Morgan Warstler Morgan Warstler
    11. April 2014 at 10:03

    Imagine Victorian England where there are only two staff to each of the upper class, where the consumption and status between the two is much closer together, and staff work far fewer hours.

    This is optimal economic social justice. Anyone on the left who seeks more equality than that is broken.

  36. Gravatar of W. Peden W. Peden
    11. April 2014 at 10:11

    Jim Glass,

    Well put.

    Although it may be just a pleasant feature of democracy at work: the actual optimal strategy in democratic politics tends to be to concentrate the benefits and disperse the costs, so hammering on small (and potentially electorally significant) groups becomes a bad idea, especially if those groups become well-organised.

  37. Gravatar of Tom Brown Tom Brown
    11. April 2014 at 10:58

    Mark A. Sadowski,

    What are your views on inequality?

  38. Gravatar of Matt McOsker Matt McOsker
    11. April 2014 at 11:30

    Everyone gets one vote. The 99%, the 90% or the 80%, if they agreed, have more political influence than those making more money than they do.

  39. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. April 2014 at 11:43

    Tom Brown,
    Without going into the gruesome details my guesstimated decomposition for the sources of increased inequality in the U.S. since the 1970s is:

    1)Education (inequality of compensation)-30.3%
    2)Other Inequality of Compensation-20.0%
    3)Decline in Unions (inequality of compensation)-19.7%
    4)Tight monetary policy (decreased labor share)-18.8%
    5)Other Decreased Labor Share-10.0%
    6)Tight monetary policy (inequality of compensation)-1.2%

    Remaining major factors to be distributed between the two “Other” categories (30% total): Tax Progressivity, Globalization, Minimum Wages, etc.

    At the risk of giving Scott heart palpatations, I favor laws strengthening labor unions and I favor raising the minimum wage. In particular, I think the minimum wage should be set at the OECD “low-wage” work level which is two-thirds of the median wage (roughly $11 an hour), and which also happens to be where it was at its peak in 1968.

    I also favor comprehensive tax reform involving the institution of a wealth tax, a progressive consumption tax, and the elimination of corporate and personal income taxes.

    I believe that regulating the level of inequality is a necessary and desirable political goal. The job of macroeconomists is to find ways of achieving this which are most compatible with long run economic growth.

    Above all, the single most important thing which can be done to reduce inequality is to minimize negative aggregate demand shocks to the economy. So a policy of NGDPLT is a very good place to start if you favor minimizing excessive inequality.

  40. Gravatar of Matt McOsker Matt McOsker
    11. April 2014 at 11:51

    Mark how about a consumption tax tied to inflation, it goes higher with inflation, lower with less inflation or recessions?

    Second, I cannot prove but my hunch is a lot of inequality comes from access to credit, as credit can allow a significant amount of leverage. And tied to private credit is deficit spending that allows private savings to increase. The latter requires the deficit spending to be targeted to the lower income groups.

  41. Gravatar of Tom Brown Tom Brown
    11. April 2014 at 11:53

    Mark, I greatly appreciate it. Thanks!

  42. Gravatar of Jim Glass Jim Glass
    11. April 2014 at 12:06

    Regarding an empirical political science/public choice take on the inequality issue at the Congressional district level — the costs and benefits for specific Congresspeople district-by-district — here are a couple interesting posts:

    This one suggests why the issue is more important to Democrats than Republicans, via nifty charts and graphs (and a data list for all Congressional districts) showing how Democrats on the whole represent districts containing far more economic inequality than do Republicans (consider Manhattan versus midwestern farm country) — making it a home-district issue for the former but not the latter…

    http://www.theatlantic.com/politics/archive/2014/04/the-polarized-partisan-geography-of-inequality/360130/

    And this one suggests that the results of the actions the Democrats thus feel driven to take may not work out so well for them in the larger political market, particularly in the districts ‘in play’ that will determine which party does best in the election…

    http://www.bloombergview.com/articles/2014-04-09/democrats-have-the-bigger-inequality-problem

  43. Gravatar of W. Peden W. Peden
    11. April 2014 at 12:17

    Matt McOsker,

    “Second, I cannot prove but my hunch is a lot of inequality comes from access to credit, as credit can allow a significant amount of leverage. And tied to private credit is deficit spending that allows private savings to increase. The latter requires the deficit spending to be targeted to the lower income groups.”

    There is a fair amount of literature related to credit constraints affecting the consumption of low income persons. IIRC, the tendency in the empirical studies of the consumption function has been (as methodology has improved) to emphasise the importance of credit constraints as the explanation for lower degrees of consumption-smoothing among low income persons, as opposed to a direct income-propensity to consume relation as postulated by Keynes.

    Put another way, failures of the financial system mean that low income persons have to be more erratic in their consumption than they’d be in a better financial system.

  44. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. April 2014 at 12:18

    Matt McOsker,
    “Mark how about a consumption tax tied to inflation, it goes higher with inflation, lower with less inflation or recessions?”

    Well, first of all I am totally opposed to Inflation Targeting (IT). But even if you tied a progressive consumption tax to NGDPLT, I don’t think that would be a good idea either. The use of fiscal policy to regulate aggregate demand only came back into vogue because the idea that we were in a “liquidity trap” became popular. I don’t believe there is any evidence the liquidity trap exists, and I think it is extremely inefficient to use fiscal policy to regulate aggregate demand.

    “Second, I cannot prove but my hunch is a lot of inequality comes from access to credit, as credit can allow a significant amount of leverage.”

    I think the growth of household sector leverage since 1980 is related to deregulation and financial innovation. I favor somewhat tighter financial regulation.

    “And tied to private credit is deficit spending that allows private savings to increase. The latter requires the deficit spending to be targeted to the lower income groups.”

    I think Lane Kenworthy was largely right when he argued the best way to achieve lower inequality is not through more progressive income taxation but rather through larger government financed by consumption taxes. He shows that’s how they do it in Scandinavia:

    http://lanekenworthy.net/2008/02/10/taxes-and-inequality-lessons-from-abroad/

    In my opinion, if you could combine Scandinavian fiscal policy, with NGDPLT for monetary policy, that would be just about ideal.

  45. Gravatar of Jim Glass Jim Glass
    11. April 2014 at 15:01

    I cannot prove but my hunch is a lot of inequality comes from access to credit, as credit can allow a significant amount of leverage.

    Studies find that improved access to credit significantly reduces consumption inequality — which is what really matters as to welfare — by enabling people to smooth consumption over time. E.g:

    http://economics.sas.upenn.edu/~dkrueger/research/consinc.pdf

    As to the income side, for a non-election year perspective, I cannot help but refer again to that noted right-wing radical Robert Gordon (of CBO, NBER, the Boskin Commission, the popular textbook, etc.)…

    “The rise in American inequality has been exaggerated both in magnitude and timing … This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure….”

    http://www.nber.org/papers/w15351

  46. Gravatar of TravisV TravisV
    11. April 2014 at 18:30

    Mark Sadowski,

    You wrote:

    “Given what we know from the research evidence, this is exactly the opposite of what should be done if one’s goal were to raise labor share of income, as Lambert repeatedly claims.”

    What is the most persuasive research evidence out there illustrating this point?

    P.S.: Thanks for all the great insight!

    P.P.S.: I LOVE how this blog attracts people from such diverse ideological viewpoints as Morgan Warstler, Bonnie Carr and Mark Sadowski!

  47. Gravatar of ssumner ssumner
    11. April 2014 at 19:26

    Mark, Hayek advocated NGDP targeting even earlier, but I don’t know if it was level targeting.

    Jim Glass, You asked:

    “Is Warren Buffett truly such a threat to democracy and the economy?”

    I’m very worried about the political influence of both Gates and Buffett. They are trying to get higher income tax rates enacted. What puzzles me is why leftists are worried about people like Gates, Buffett, Soros, etc.

    Otherwise great comment.

    Mark, I wish I could say that reducing demand shocks will reduce inequality, but I doubt it. I agree with many of your policy proposals, but would replace the minimum wage with a wage subsidy.

    I agree that the Scandinavian fiscal policy is much more sensible than ours. However we could never get away with the level of progressivity in their fiscal policy, as we are a much more unequal society. Indeed even they are having to cut back under pressure from immigration. They will become increasingly conservative.

  48. Gravatar of Tom Brown Tom Brown
    12. April 2014 at 03:07

    “What puzzles me is why leftists are worried about people like Gates, Buffett, Soros, etc.”

    “are” or “aren’t?

  49. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. April 2014 at 04:00

    TravisV,
    “What is the most persuasive research evidence out there illustrating this point?”

    I’ll give you two, since they work better in tandem. One is on correlation, the other is on causality.

    The drop in labor share of income in the US since 1980, and the OECD more generally, is strongly correlated to disinflation, or tight monetary policy:

    Inflation and Factor Shares
    Francisco Alcalá and F. Israel Sanchoy
    August, 2000

    Abstract:
    “We use results from the literature on the determinants of price-cost margins to derive an equation relating labor’s share of national income to the inflation rate (as well as to the output gap, the unemployment rate and the capital stock per worker). The equation is tested with a panel of 15 OECD countries. We obtain a robust positive relationship between inflation and the labor share. Our results suggest that disiflation is not distributively neutral, provide empirical support for the distinct concern about price stability shown by trade unions and employers’ organizations, and help explaining the negative impact of inflation on growth.”

    http://pareto.uab.es/wp/2000/46000.pdf

    Moreover the direction of causality is from inflation to labor share, not from labor share to inflation:

    Does Wage Inflation Cause Price Inflation?
    Gregory D. Hess and Mark. E. Schweitzer
    April 2000

    Abstract:
    “Recent attention has turned from unemployment levels to wage growth as an indicator of imminent inflation. But is there any evidence to support the assumption that increased wages cause inflation? This study updates and expands earlier research into this question and finds little support for the view that higher wages cause higher prices. On the contrary, the authors find more evidence that higher prices lead to wage growth.”

    http://www.clevelandfed.org/research/policydis/pd1.pdf

  50. Gravatar of W. Peden W. Peden
    12. April 2014 at 04:43

    Mark A. Sadowski,

    That last paper reminds me of what Friedman had to say about the relationship between prices and wages. Also, he pointed out that trade unions tend to be behind on inflation, and their pressing for big wage increases were results of inflation rather than the cause of inflation itself. In other words, cost-push wage pressures are not the source of high inflation.

  51. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. April 2014 at 05:44

    W. Peden,
    It’s interesting that you (being British) should point this out. I’ve noticed that a key belief that British anti-monetarists (e.g. Philip Pilkington) all seem to share is that high inflation is really a cost-push phenomenon that is driven by wages. The empirical evidence, at least with respect to the US, is that this is definitely not true.

  52. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. April 2014 at 07:15

    Edward Lambert’s latest post:

    http://angrybearblog.com/2014/04/recessions-a-taoist-principle-of-healing.html

    “I have written recently about how a recession could open the door to progressive policies to reduce inequality. Of course it is crazy to call for a recession. Yet the message is one of healing. So to understand this message… let’s explore a healing principle of Taoism.

    “In order to heal, you must first learn to kill.”

    When I was taught this principle at a Taoist school of traditional Chinese medicine, I thought it was crazy. Yet, the wisdom here is beyond the western mind. We in the west wouldn’t make killing a prerequisite for healing. Our stomachs turn and our eyes roll. We are taught to cherish life. We would rather say, “In order to heal, you must first learn to love.” Logically we cannot make sense of the principle. We end up saying that the Chinese are crazy.

    In the same way, we find a recession disgusting. It is not that we are afraid of recessions, but rather trained to see them as unnatural and socially unacceptable. So when Reagan and Volcker created a recession to combat inflation, they were taking a big social risk.

    Yet, let’s see if we can understand the wisdom with our western minds…”

    He goes on to say:

    “In order to heal the economy, you must first learn to kill the economy.”

    In my limited understanding of Taoistic Chinese traditional medicine, illness is seen as part of an imbalance of the whole person, not just an isolated event. Illness is also seen in the context of the person´s relationships with the wider world: other people, food, the home, the workplace, the environment, etc.

    So, to cure an illness, one must treat the entire person as well as the person’s relationships with the wider world. Taoistic Chinese traditional medicine also strikes me as minimalistic, rather than interventionistic, as one must be careful not to disrupt the person’s existing internal and external harmonies. Nowhere do I recall reading that Taoistic Chinese traditional medicine stated that “in order to heal, you must first learn to kill.”

    Maybe someone who knows more about Taoistic Chinese traditional medicine than myself has something to say about this.

    Given Edward Lambert:

    1) Routinely cites people as evidence for his views, when on closer inspection their views are almost always the opposite of his own.
    2) Has misappropriated terminology implying his views are the same as the people from whom he took the terms.
    3) Cited empirical research and yet constructed a model with assumptions that totally contradict that research.

    I strongly suspect he is now blatantly misrepresenting the teachings of Taoistic Chinese traditional medicine.

  53. Gravatar of Philippe Philippe
    12. April 2014 at 08:23

    Mark,

    I’m interested in whether that’s Philip Pilkington’s view on inflation, so I’ve posted a link to your comment over at his site.

  54. Gravatar of ssumner ssumner
    12. April 2014 at 08:38

    Tom, “are”

    Mark, I’m skeptical that disinflation could lower the share of income going to labor. I don’t doubt that causation runs from lower inflation to lower wages, as the second abstract indicates, but that’s perfectly consistent with long run neutrality of money. Any long run non-neutrality needs to be explained.

    Didn’t labor’s share of national income rise in 2009, despite a weak labor market? And didn’t the share fall in 2000, despite a weak labor market?

  55. Gravatar of Tom Brown Tom Brown
    12. April 2014 at 08:50

    Jim Glass,

    “Mao explicitly said “Better poor than…” and did what it took to make it so.”

    W. Peden notices (jokingly) that Nick Rowe seems to be going a bit Maoist yesterday, highlighting this statement from Nick:

    “Some of you academics should be rusticated for a bit, until you learn better.”

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/04/on-forgetting-land-in-models-of-secular-stagnation.html?cid=6a00d83451688169e201a73da7b0f9970d#comment-6a00d83451688169e201a73da7b0f9970d

  56. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. April 2014 at 10:19

    Scott,
    “Mark, I’m skeptical that disinflation could lower the share of income going to labor. I don’t doubt that causation runs from lower inflation to lower wages, as the second abstract indicates, but that’s perfectly consistent with long run neutrality of money. Any long run non-neutrality needs to be explained.”

    Even if money is neutral, that does not mean it is superneutral. Although the rate of growth in money may not affect the value of real economic variables, *changes* in the rate of growth of money may still affect the value of real economic variables. I’m sure you’re aware that there is a fair amount of empirical research demonstrating that money is not long run superneutral (LRSN).

    “Didn’t labor’s share of national income rise in 2009, despite a weak labor market? And didn’t the share [rise] in 2000, despite a weak labor market?”

    There’s three BLS measures of labor share of income: Nonfarm Business Sector, Business Sector and Nonfinancial Corporate Sector:

    https://research.stlouisfed.org/fred2/graph/?graph_id=172132

    All three fell in 2009.

    With respect to “2000”, I think you must mean 2001, as unemployment was well below the natural rate in 2000, and the recession didn’t occur until 2001.

    Yes, for 2001 as a whole two of the BLS indicators rose, but Nonfarm Business Sector labor share fell.

    But even there I think its questionable to say that labor makets were weak in 2001. The unemployment rate didn’t rise above the natural rate until 2001Q4:

    https://research.stlouisfed.org/fred2/graph/?graph_id=137535&category_id=

    For 2001 as a whole unemployment averaged 4.7% which was below the natural rate of 5.0%. But it fell in 2002-2005 when unemployment rose above the natural rate.

    The relationship between labor markets (unemployment) and labor share of income is fairly well established. In fact that’s one of my key points against Edward Lambert. The literature shows not only that there is a relationship, but that the direction of causality runs from unemployment to labor share.

  57. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. April 2014 at 10:25

    My preferred measure of labor share of income is compensation of employees as a percent of national income. I think it’s better than the BLS measures becuase it is more comprehensive (it’s the entire economy) and it factors out depreciation:

    http://research.stlouisfed.org/fred2/graph/?graph_id=98737&category_id=0

    It shows that labor share of income fell from 65.0% in 2008 to 64.2% in 2009. It shows a tiny increase in 2001 (from 65.75% to 65.83%). Labor share reached its all time high of 67.0% in 1980, the very year that core inflation peaked.

  58. Gravatar of ssumner ssumner
    12. April 2014 at 11:06

    Mark, There was a typo there. I meant didn’t labor’s share of national income fall in 2000 despite a STRONG labor market.

    Between 2008:1 and 2009:1 corporate profits after tax fell from 1313 to 671. I think it’s fair to say the deflation of late 2008 and early 2009 sharply reduced the share of national income going to corporations. Did other forms of capital income rise? It would be interesting to get a breakdown. BTW, didn’t the Great Deflation of the early 1930s hurt profits much more than wages?

    As far as studies of superneutrality, I don’t have much faith in any empirical studies in macro, as there are so many problems associated with getting reliable estimates. We don’t even know if measured capital income is the same as actual capital income. But lets say those studies are true. What is the causal mechanism?

    Interesting that labor’s share of national income in 2008 was only 2% below the all time high. That’s not the impression I get reading Krugman and Piketty. :)

  59. Gravatar of Tom Brown Tom Brown
    12. April 2014 at 11:30

    … I’m pretty sure that Becky Hargrove, for example, just kept all the default settings:
    http://monetaryequivalence.blogspot.com/

    … which is what I did once too, but I didn’t like the gray on white text so I just changed that to black, and changed the “used” link color so it was easier to see as well.

  60. Gravatar of Tom Brown Tom Brown
    12. April 2014 at 11:32

    Taken out of context, this sentence:

    “I don’t have much faith in any empirical studies in macro”

    Is like a knife through Mark’s heart. 😀

  61. Gravatar of ssumner ssumner
    12. April 2014 at 12:02

    Tom, I am excluding Mark of course. I thought that went without saying. I distrust all empirical studies not done by Mark.

  62. Gravatar of Tom Brown Tom Brown
    12. April 2014 at 12:16

    Mark, Nick Edmonds too seems to have used the unadorned nearly all-default setting approach:
    http://monetaryreflections.blogspot.com/
    … and Ramanan doesn’t appear to use blogger and he does have a comment box, but it goes to his email (which remains hidden BTW) rather than showing up on his blog pages. I’ve tried it. I’m sure you wouldn’t need to have any comment box if you didn’t want one.

    Plus if a nobody like me puts up a blog about banking balance sheets and gets ~45000 hits on it in a year, and another garbage blog only intended to take a conversation off-line (and gets several thousand hits on it), I’m sure you would be selling large banner ads for Peter Schiff (just like Scott) in NO time! 😀

  63. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. April 2014 at 14:46

    Scott,
    “There was a typo there. I meant didn’t labor’s share of national income fall in 2000 despite a STRONG labor market.”

    Well, that’s even worse. Labor share rose in 2000 by all four measures.

    “Between 2008:1 and 2009:1 corporate profits after tax fell from 1313 to 671.”

    Now I know that’s a mistake. Profits after tax (without IVA and CCAdj) fell from $1,313.7 billion in *2007Q4* to $671.4 billion in *2008Q4* (line 45):

    http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&910=x&911=0&903=53&904=2006&905=2013&906=q

    “I think it’s fair to say the deflation of late 2008 and early 2009 sharply reduced the share of national income going to corporations. Did other forms of capital income rise? It would be interesting to get a breakdown.”

    The fourth quarter of 2008 was an unusually bad quarter for corporate profits. But they bounced back in 2009Q1 and by 2009Q4, which was just two quarters after the economy hit bottom profits after tax (without IVA and CCAdj) were already back up to $1,382.2 billion. Yes, corporate profits fall first in a contraction, but they bounce back first as well.

    Incidentally a better measure of corporate income for this purpose is profits before tax (with IVA and CCAdj) which is line 41.

    1) Labor share of income rose from 64.4% of national income in 2007Q4 to 66.2% in 2008Q4 and then fell to 63.2% in 2009Q4. It was 60.7% of national income in 2013Q4 which is the lowest share since 1951Q4.

    2) Corporate profits fell from 11.8% of national income in 2007Q4 to 8.4% in 2008Q4 and then rose to 12.7% in 2009Q4. It was 14.7% in 2013Q4 which is the highest ever on quarterly records going back to 1947. It’s also higher than any annual record going back to 1929.

    3) Interest income rose from 5.6% of national income to 5.9% in 2008Q4 and fell to 4.1% in 2009Q4. It was 3.3% of national income in 2013Q4 which is up from its recent low of 3.0% in 2012Q2, which in turn was the lowest since 1965Q4.

    4) Rental income rose from 1.6% of national income in 2007Q4 to 2.5% in 2008Q4 to 2.9% in 2009Q4. It was 4.1% of national income in 2013Q4 which is the highest ever on quarterly data going back to 1947. It’s also highest its been on annual records since 1940.

    5) Proprietor income rose from 7.9% of national income in 2007Q4 to 8.2% in 2008Q4 to 8.3% in 2009Q4. It was 9.2% of national income in 2013Q4 which is down from its recent peak of 9.3% in 2013Q1 which in turn was the highest since 1966Q2.

    6) The sum of corporate profits, interest, rent and proprietor income fell from 27.0% of national income in 2007Q4 to 24.9% in 2008Q4 and rose to 28.0% in 2009Q4. It was 31.3% of national income in 2013Q4 which is the highest since 1951Q4.

    https://research.stlouisfed.org/fred2/graph/?graph_id=172148

    Also, you know just as well as I do that inflation is highly volatile. What we’re really talking about is trend inflation. Core inflation has averaged lower this business cycle than it did the previous business cycle. In fact it has fallen on average every business cycle since the original Volcker disinflation. So has labor share of income.

  64. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. April 2014 at 15:06

    Scott,
    “BTW, didn’t the Great Deflation of the early 1930s hurt profits much more than wages?”

    Yes, but again I’m talking about trend rates not cyclical effects. Moreover not all forms of capital income declined as a share of national income. Interest income rose from 4.9% of national income in 1929 to 5.8% in 1930 to 7.1% in 1931 to 8.8% in 1932. Similarly rental income rose from 6.476% of national income in 1929 to 6.498% in 1930 to 6.499% in 1931 to 7.018% in 1932.

    http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&910=x&911=0&903=53&904=1929&905=1941&906=a

    And here’s capital taxable personal income (dividends, interest and rent) as share of total taxable personal income in percent (Source: Piketty and Saez) along with the NGDP growth rate and the rate of change in the GDP implicit price deflator from 1929 through 1937.

    Year-Share-Deflator-NGDP
    1929—21.3—–0.4—–6.4
    1930—21.8—(-3.7)-(-12.0)
    1931—22.0–(-10.4)-(-16.1)
    1932—23.2–(-11.7)-(-23.3)
    1933—21.1—(-2.7)–(-3.9)
    1934—19.0—–5.6—-14.7
    1935—17.4—–2.0—-11.1
    1936—17.6—–1.0—-14.3
    1937—17.1—–4.3—–9.7

    Note that shares of capital taxable personal income vary inversely with inflation and the rate of NGDP growth.

    “But lets say those studies are true. What is the causal mechanism?”

    The mechanism by which this comes about is fairly simple. Accelerating inflation is correlated with falling unemployment rates (relative to the natural rate), falling unemployment rates lead to greater labor bargaining power, and greater labor bargaining power is correlated with lower markups. Furthermore, higher inflation rates create greater price dispersion leading to greater competition among producers to limit markups.

  65. Gravatar of ssumner ssumner
    12. April 2014 at 15:41

    Tom, I don’t actually sell banner ads to Schiff or anyone else. The ads you see are tailored to reflect your interests, and vary from one viewer to another.

    Mark, OK, I accept the data. But you say your argument is about about trend rates, not cyclical effects. But your last comment on the mechanism relies on transitory cyclical effects, before expectations have adjusted to the actual change of inflation. Recall that the natural rate of unemployment actually rose between 1966 and 1981, during the Great Inflation.

    I’m still inclined to think that money is roughly super-neutral in the long run unless I see strong evidence to the contrary. A cross sectional study would be interesting, along the same lines as Lucas’s Neutrality of Money paper from the early 1970s.

    BTW, I think I got the data wrong for two reasons:

    When I was younger corporate profits were very procyclical, and thus the recent pattern of high profits in a weak economy is an outlier. And second I forgot that capital’s share can go up even as corporate profits fall sharply.

  66. Gravatar of Tom Brown Tom Brown
    12. April 2014 at 16:33

    “Tom, I don’t actually sell banner ads to Schiff or anyone else. The ads you see are tailored to reflect your interests, and vary from one viewer to another.”

    Oh God! Why is it showing me Schiff ads then? I hate that guy.

    I was just pulling your chain anyway: I know you don’t have control over what ads appear.

  67. Gravatar of Brian Brian
    12. April 2014 at 18:02

    Mark S – I think anybody who is a regular reader of this blog has a healthy respect for your views and analysis. I’ve never fully understood or at least “trusted” the arguments for raising the minimum wage. Can you expound on why you think its a good idea? Thanks.

  68. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. April 2014 at 19:00

    Brian,
    In my opinion, there is good reason to believe most low wage labor markets are characterized by monopsonistic competition in which large employers have significantly more market power than do unorganized workers. This monopsony could be a result of intentional collusion between employers, or factors such as segmented markets, search costs, information costs, imperfect mobility etc. In such a sitation both wage rates and the amount of labor employed would be lower than would be the case under perfect competition.

    This is a type of market failure and results in workers being paid less than their marginal value. In these conditions an appropriately set minimum wage could increase both wages and employment, with the optimal level being equal to the marginal productivity of labor. Most importantly, in such a situation the higher wage is unlikely to be passed through in the form of higher product prices.

    In addition, research studies by Card and Kreuger on the fast food industry suggest that higher minimum wages reduce turnover which in turn reduces training costs and raises productivity. And, finally, minimum wage workers typically represent such a small proportion of a business’s cost that the increase is too small to matter.

  69. Gravatar of Edward Lambert Edward Lambert
    12. April 2014 at 19:13

    Scott,
    It is strange what I see…
    I wrote a post about how you approved of Marcus’ post… You wrote above here…
    “Marcus Nunes has a wonderful new post that directed me…”
    So I quoted the article that you said was wonderful.

    But then you wrote this comment on my blog…
    “You are even more clueless than I thought. You claim I think the Volcker recession was unintended, but then the body of your post quotes Nunes making that claim. Bizarre, even by Angry Bear standards.”

    You distanced yourself from Marcus and pulled your support from his post. Why did you betray him?

  70. Gravatar of Ari Tai Ari Tai
    13. April 2014 at 03:55

    fyi, Washington State does not have an individual income tax but it does levy a Business and Occupation (B&O) tax on gross receipts that amounts to a tax rate higher than most states, and can largely be estimated per employee based on the type of business and the average revenue-per-employee.

    A number of business moved out of state – or arranged to take their revenues in less punitive jurisdictions.

  71. Gravatar of ssumner ssumner
    13. April 2014 at 14:03

    Tom, At least you didn’t tell me you were seeing porn ads.

    Edward, You said:

    “Why did you betray him?”

    Angry Bear is really scraping the bottom of the barrel hiring clowns like you.

    Ari Tai, Interesting. What about capital income, is it taxed?

  72. Gravatar of Tom Brown Tom Brown
    13. April 2014 at 16:51

    “Tom, At least you didn’t tell me you were seeing porn ads.”

    That I could understand, but Peter Schiff?? …[shiver]

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