Similarly, if a country becomes increasingly in debt, and spends large amounts of income servicing this debt this will be reflected in a decreased GNI but not a decreased GDP. Similarly, if a country sells off its resources to entities outside their country this will also be reflected over time in decreased GNI, but not decreased GDP. This would make the use of GDP more attractive for politicians in countries with increasing national debt and decreasing assets.,
One of the biggest skills I’ve gained writing an economics blog is dispassionate writing and thinking. Sure, we all have ideologies and spirit, but a common thread across good writing is relatively sterile analysis. For me, that means not writing about things that truly incite me (beyond an intellectual curiosity). Like the criminal justice system. Or elephants and their poachers.
But as Ferris Jabr writes, “to look an elephant in the face is to gaze upon genius”. It is abundantly clear to me that the problem is largely economic, and therefore something that I should at least try to blog about without expletive passion (of which there is plenty elsewhere). I hope more economists publicly and privately advocate market solutions to the poaching problem – because the government, unsurprisingly, lacks the necessary competence in basic market design and incentive formation.
Economics is a constructive field, and is therefore concerned with efficient means of building a market. The task at hand is efficiently destroying a market. That is very difficult. It’s not really possible argue whether a market is driven by supply or demand, but for reasons I’ll outline, it is fair to assume restricting demand should be the primary tactic.
African governments unfortunately lack the competence, wherewithal, and and will to fight monied (probably Chinese) interests in any meaningful way. The investment necessary in good law enforcement to prevent large poaching networks is something that Africa will not have for a long time. And, anyway, that money is better spent on education and infrastructure. African countries shouldn’t have to drain the public purse because of foreign demand that dwarves its national wealth. More importantly, the production function will remain cheap so long as poachers need to kill elephants to put food on their children’s plate. And who can blame them? Poaching wouldn’t be a problem if elephants roamed American prairies as they do African forests. But Africa is no America, and any real effort should start with demand.
A ban is the crucial first step, but easily circumvented (in the United States, for example, you can only purchase ivory that is at least a hundred years old – but how hard is it to forge the necessary documents), especially if the punishment isn’t commensurate with the potential reward.
Enforcement is also ridiculously expensive. Police officers and the DEA waste billions trying to stop people from smoking crack, but the results are a complete joke. Sure we don’t have the brightest people spending that money (to say the least), but enforcement costs are non-trivial, especially without a culture that supports the cause (If everyone was a murderer, police officers couldn’t do a thing about it).
Civilizing people is a long process. It took centuries for humans to see the moral flaws with slavery – a far more heinous crime – and the socioeconomic forces in emerging markets to flaunt wealth is strong; without a government that really cares it is unlikely we’ll get anywhere. So molding culture is out of the question (in the time period we have, which isn’t that long).
In contemplating a solution, I couldn’t but think of George Akerloff’s “A Market for Lemons”, one of the best pieces of economic intuition and analysis I’ve had the pleasure of reading. Without getting into the details, the import of his paper is that a market can break down under a little information asymmetry.
Policymakers and conservationists need to stop auctioning horns and burning stockpiles of ivory, they need to create this asymmetry. And it’s not hard. By virtue of being a black market, there isn’t a good organized body that can consistently verify the quality of ivory in general. Sure, it’s easy to access, but ultimately there’s a lot of supply chain uncertainty.
There is a cheap way to exploit this. The government, or some general body that has access to tons of ivory, should douse (or credibly commit to dousing) the tusks with some sort of deadly poison, and sell the stuff across all markets. Granting some additional complexities, the black market could not differentiate between clean and lethal ivory, and buyers would refrain from buying all ivory in fear. The market would be paralyzed. It is analogous to Wall Street during a bank run, and probably stronger given that lives – and not just portfolios – are on the line. And it’s far cheaper than anything we’re trying to do now. (As a commenter notes, another smart method would be to flood the market with uncertainty of authenticity, but this is a lot harder to achieve, and possibly very expensive).
It sounds like a batshit crazy idea, and it probably is, but it’s not morally that much worse than what we have now (that is even completely ignoring the cruelty of purchasing ivory in the first place). The human suffering of the current system is immense, with many poor Africans threatened or bullied into poaching under the threat of death. Moreover, many African governments – in a Hail Mary effort to combat the Chinese economy – have draconian penalties for those caught poaching. I would only transfer that risk from producer to consumer, suggesting the trade, ethically, is weakly superior at least.
It is hard to imagine such a fragile market functioning with a competent organization trying to fool it. It wouldn’t even require governmental support (though may be illegal). If you’re a mess about the ethics of poisoning people, we can try the flu instead.
This is, like unemployment, a moral, social, and political problem. And, like unemployment, it has an economic solution. I don’t know if what I’ve outlined could actually work in practice (though I am somewhat confident that a well-thought out try, with the proper support, would make a difference). But I do know that without aligning incentives and goals we have no hope. It’s time for better ideas than burning stockpiles or auctioning hunts.
A number of people have commented on a new paper from Robert Gordon, professional pessimist. Many people have identified the specific issues with the logic in this essay. But I think it’s important to discuss a central problem with the very idea of Gordonesque gloom.
First, distinguish between positive and negative pessimism. If NASA were to tell us, with great confidence, that an astroid will strike Earth tomorrow there is no case for disdain. This is a scientific judgement and, at least philosophically, would be akin to standing in front of a speeding train and claiming that it won’t hit you. That is not the sort of pessimism that concerns us. But Gordon is making a much more powerful claim, a pessimism about what won’t happen – that our entrepreneurs cannot create another industrial revolution, that we’ve pretty much done the most we can with robots, and artificial intelligence is limited to the grocery store.
This requires a certain knowledge about the trend of technological progress and the economic value thereof. Gordon knows much more about the former than most and may well be the reigning expert on the latter. Unfortunately that doesn’t help us out. Because, believe it or not, most any of us can make this claim without any technical skill and little more than economic knowledge.
If you knew that some form of AI was going to revolutionize the world, and that building it is tractable, there’s a good chance it already exists or will be built relatively soon. Because that’s all you need to know to make a profit from basically nothing (patent the idea and rent the rights out when someone who can build it builds it). But it’s very rare that we make something from nothing so most of us, like Gordon, don’t see anything great about the future.
But that only means that me, you and Gordon don’t know what that invention will be, not that some arbitrary such invention won’t be. So Gordon is claiming that the space of all future invention is limited and the costs of finding the marginal source of technological growth are limited and, equivalently, that he knows the space of all future growth.
That’s a rather strong claim. He rather strongly asserts that the last three stagnant decades are a better indication than the last century. Choosing the postwar boom may be an outlier but, accordingly, so too would choosing a bad period like the past fifty years arbitrarily. By claiming that he understands growth will slow, Gordon implicitly declares that he understands the mechanics of future innovation.
No tiger mom would have let her daughter publish this piece for a fifth grade project, let alone in the New York Times. Amy Chua, in a little under 3000 words, explains her theory of power and prosperity in modern America. Absent from this essay, however, is a single reference to any scientific study. Not only does the article exclude any hyperlinks – appalling for any serious journalism in the 21st Century – it refers to several anonymous “studies” without providing any information about the authors, making it well-nigh impossible for a reader to track it down.
The form is bad, but the message is worse. Chua and Rubenfeld (who, surprise surprise, extol Asians and Jews) argue that Asian success is largely a function of a superiority complex tempered by deep insecurity and a low discount rate, that is delayed gratification. They argue that initial wealth disparity is largely irrelevant:
The most comforting explanation of these facts is that they are mere artifacts of class — rich parents passing on advantages to their children — or of immigrants arriving in this country with high skill and education levels. Important as these factors are, they explain only a small part of the picture.
In fact, it would be comforting if the propensity towards prosperity could be captured in three, wishy-washy traits shared by a large group of people. Reality is much more complicated, as the authors surely understand, and a host of other factors do matter. Responsible journalism would demand that Chua and Rubenfeld at least acknowledge the limitation of this argument in this form, but readers are not made aware of any competing explanations.
The facts are also pretty shaky. The authors contend:
Today’s wealthy Mormon businessmen often started from humble origins. Although India and China send the most immigrants to the United States through employment-based channels, almost half of all Indian immigrants and over half of Chinese immigrants do not enter the country under those criteria. Many are poor and poorly educated. Comprehensive data published by the Russell Sage Foundation in 2013 showed that the children of Chinese, Korean and Vietnamese immigrants experienced exceptional upward mobility regardless of their parents’ socioeconomic or educational background.
The words here quietly pull wool over the eyes of a casual reader. Half of Indian immigrants do not enter the country under the intense criteria of employment-based channels. That means half do. I wonder what percent of caucasian, black, or latino children have parents that work in jobs important enough to qualify for such visas. The figure is certainly well below 50%.
While some Indian emigre are definitely “poor and poorly educated”, even the immigrants who enter without a Bachelor’s degree face the hard climb out of India to begin with. The initial culture and characteristic of Indians who have the wherewithal to pay for a ticket to the United States and the gumption to take that risk sets this group far apart from the immigrant culture. An observer need only walk through London – to which the entry barriers for an Indian are (or at least used to be) substantially lower – to see that the rich Indians of America are a lucky exception, not the rule.
It is interesting to compare the fate of Indians – who are by far the richest ethnicity in the United States, earning on average more than $85,000 annually – with their Sri Lankan, Pakistani, and Bangladeshi compatriots who earn $65,000, $61,000, and $46,000 respectively. Cultural differences are a natural explanation, but Indians are closer to all of these groups than they are with caucasians suggesting that there is something else going on. Of course, if one is inclined to think that this story is about Indians in general (as opposed to Indian-Americans) he need only see that Sri Lanka is twice as prosperous as India, Pakistan is not all that much poorer, and Bangladesh, while a little poorer, fares better on many social indicators.
This tells us that there’s something special about the type of Indians that make it to America. Whether it be education, intelligence, or an entrepreneurial spirit, it would be ridiculous – in the words of Chua and Rubenfeld – to compare this attribute to this group’s some stereotypically-selected characteristics not shared by caucasians.
It would be remiss to discuss Indian-American success without considering medical professionals, an oddly protected class. Wikipedia tells me that 35,000 Indians are physicians which is fivefold larger than what would be expected from a random distribution. However, the American Medical Association (approximately a cartel) and inefficiently strong health-related regulation prevent the equilibrium rate inflow of medical professionals keeping the wage rate of doctors artificially high, suggesting that many Indians benefit from an artifact of the law rather than some cultural force.
Groups rise and fall over time, and that may even be for the reasons suggested in the article. But by the authors’ own logic, the United States should be scared shitless of Japanese and Korean prosperity – surely these countries, with their laborious education and work ethic, must be more prosperous? New York Times readers may be interested to learn that the average American earns a whole $20,000 more than the Koreans, despite our “failing” school systems and complacence. Some may be tempted to argue that this is largely due to affluent immigrants, but remember that Caucasians earn at or above the national average.
Children of successful immigrants, like myself, are in many ways as privileged as blue-blooded protestants. And, similarly, many of us feel every bit as entitled (we work hard, but I doubt many of us think that we’ll actually ever earn $46,000 a year by the time we have kids). While at an archetypical level it may appeal to speak of certain traits – superiority, insecurity, and self control – shared by many successful immigrants, this is informed by neither theory nor evidence, but rather someone’s wish to project her idea of success onto a group as a whole.
Ultimately, some parts of this article are unimpeachably accurate. No doubt that attaining power and prosperity demands hard work, patience, and confidence. This is common sense, and not in any significant way restricted to immigrants. The authors further a sad misconception among liberal elites – that immigrants work hard while complacent Americans watch TV. This couldn’t be farther from the truth. Americans – particularly the stagnant middle – are among the most hard working (even overworked) in the world. Moreover, these workers are also incredibly productive by international standards, bringing in over $60 per hour on average.
I conclude by agreeing with Chua’s conclusion. It is crucial for America as a political entity to rekindle a sense of urgency and insecurity vis-a-vis China, but this is not at all a mirror of similar conclusions they draw to Americans as a cultural group. China’s ascendence is almost irrelevant on a per capita basis, where even the 80th percentile of urban workers hardly hold a candle to the 20th percentile of all American workers. China’s relevance is predicated on the control this one political entity has on such large a group of people.
More importantly, America’s glory to which the authors allude, while supervised by a sense of insecurity, was almost entirely political. Bipartisan consensus let America fight, and indeed win, the Cold War by putting a man on the moon, passing landmark civil and social legislation, and overseeing the most rapid rise in living standards in the country’s history. But, if anything, Americans work harder today while politicians flounder. This is a story of politics, not people.
I am open to disagreement on this issue, and a piece with actual references may be a nice start.
Monetary offset has been on my mind for a while now. Scott Sumner (among other market monetarists) are running victory laps (and to an extent, rightfully so) considering the relatively healthy growth last year despite significant fiscal drag. There’s no doubt, as stock and bond market reactions prove, that monetary policy has been helpful. But both the theory and empirics behind a strong and automatic offset – as favored by market monetarists – is weak. I should preface this by noting I’m largely in agreement with the market monetarist argument for nominal income targeting.
Let’s imagine (for now) that the zero bound did not bind – whether that be through the efficacy of unconventional monetary tools, a higher inflation target, or a Herculean ability for the Fed to handcuff its own hands years into the future and convince the market that it threw away the key. Standard economic theory supposes that in this world fiscal policy does not determine the price level given an inflation-targeting central bank arguing that if the government increases its budget and hence aggregate demand, the central bank will increase rates to maintain credibility. Hence government spending cannot decrease unemployment.
If we’re talking about totally discretionary stimulus this may be true. But consider a government that offers generous unemployment insurance (UI) with reemployment credits or guarantees employment (either generally or in a recession). Soon after recession, the government institutes very long UI and, in doing so, increases its primary deficit from 2% to 10%. Let’s say hysteresis effects are minimal and expansionary policies don’t simultaneously increase aggregate supply. Expansionary spending then, by Law of the Excluded Middle, either increases the price level or it does not. Given an upward-sloping supply curve (depressed as the economy might be), the former case is more likely. Monetarists argue that an independent central bank offsets policy in one of the following ways:
- By force of expectation, given its credibility to an inflation target.
- By being more cautious with its stimulus programs (or halting them altogether, depending on relevant magnitudes) than the counterfactual without stimulus or deeper austerity.
It feels like the first point used to be more popular than it is now, given that the Fed has zilch credibility on its inflation target (by definition, if it had any credibility, long term expectations wouldn’t be as low as they are). The second point is pretty fragile given behavioral features, decentralization of central banking decisions, and the need to have a precise ability to estimate price level elasticity of aggregate supply if it is low (which it is in a weak economy).
So after the government promises insurance to layoffs and credits to employers who hire said layoffs the central bank estimates the effect this has on the price level and accordingly decreases the rate at which it purchases assets. This creates a new wave of unemployed workers – that, after all, is the core of monetary offset models – which would require even more deficit spending to finance the promised unemployed benefits. This would require an even greater offset, requiring even more stabilization.
In this case two things can happen. Either the value of a credit default swap on Treasuries increases, as the market starts loosing confidence that we can service future deficits, or prices rise as markets expect the Fed to monetize deficits in an effort to prevent default. In a world where bond yields and CDS values aren’t soaring, the only possible conclusion is that the Fed stops offsetting government spending.
In fact, to the extent the market knows the Fed would never let the government default, the Fed’s offset would be offset by expectations of its future relaxation of its offset. This sounds a lot like the fiscal theory of the price level, and in some sense it is, but the distinction is that there must be some mechanism in place that requires the government to increase its deficit in response to monetary contraction. If there was no such mechanism – i.e. fiscal policy was only a one time, discretionary cash hand out – monetary policy could offset austerity perfectly well. (A helicopter drop of money and cash hand out financed by bond buying is actually the same thing, so offset could be surgically precise, as both Keynesians and monetarists agree). The only way fiscal theories could work in this environment is a government that engages in discretionary policy every time the central bank tightens policy which is unrealistic and, by definition, not rules-based. So the possibility of hyperinflation from ARRA was well, nonexistent.
There are second order effects too. If the interest elasticity of government spending is higher than the interest elasticity of investment (and studies suggest that this is probably the case), much of the benefit from easier money comes from cheap finance to beneficiary governments, reducing net outlays. Therefore tighter policy would decrease both the government’s primary and non-primary balance. This, by the way, is not negligible – the United States may face $75 billion in increased debt servicing to finance the same level of operations.
If the political situation is such that the government may only engage in a certain level of deficit spending (either by law as in Europe or institutional arrangement as in the US) offset would require the government itself to tighten its budget.
The point of the post so far is that monetary offset cannot be as theoretically sound as its proponents make it seem. There are multiple sources of positive and negative feedback, and actual results depend on the precise role of each which itself depends on the complex slew of automatic stabilizers, central bank learning mechanisms, and so forth. However, as outlined above, that economic conditions today resemble that setup seem unlikely given the preponderance of automatic stabilizers.
The empirical case for full monetary offset is stronger, but still wanting. Yes growth was a lot stronger than some Keynesian models suggested. That itself doesn’t mean anything, especially for anyone that (like me) believes in an at least approximate efficient market hypothesis. No model that can predict growth can exist. The question is whether growth today violates the Keynesian story. Perhaps a macroeconometrician will answer this better than I, but frankly the magnitudes don’t justify that explanation either. While fiscal drag was unfortunate, the United States certainly didn’t succumb to the same austerity as Europe and within the margin that it did plenty of other factors, including an improving supply side, can explain strong growth beyond monetary offset. As for Europe, where’s the offset?
Let me end this post with a final example which captures the point of the above reasoning. Imagine the government guaranteed employment at below market wage rates as a primary automatic stabilizer. In a recession, as deficits increase, monetary offset would force a growing number into government employment. The logical conclusion would be a huge deficit and huge government work force, but not unemployment by virtue of the government’s promise to employ. The only way total GDP would be affected would be a decreased output per worker, a supply-side phenomenon because the government makes for a bad employer. But supply-side concerns are not market monetarists’ concern. Is there any model with guaranteed employment monetary offset decreases total employment?
Of course, deficits would never get so out of hand before the central bank stopped offsetting. But even monetarists agree that monetary offset would not increase employment, only government deficit. By virtue of that transfer of liabilities, the private sector is allowed to deleverage which itself increases aggregate demand.
The feedback loops here are just way too complicated for the simple monetary offset story to be true.
Late Addendum: Scott Sumner comments on his blog (in response to another):
I’ve always argued that zero is a sort of benchmark, a starting point in the analysis. If the fiscal stimulus is large enough to bankrupt a country, then for fiscal theory of the price level reasons I’d expect a positive multiplier. In not (i.e. in the US) I expect the multiplier is zero on average, but may be above or below zero for the reasons you indicate. What matters is the expected multiplier, not the actual multiplier, and I see no reason to expect a multiplier that is significantly different from zero. In 2013 we saw about what I expected.
That’s fair enough. But the point here is bankruptcy conditions are non-negligible with automatic stabilizers. Not in general, but certainly if the offset is persistent (that is if the “expected multiplier” remains at or near zero).
Paul Krugman notes that persistent unemployment hurts the employed as well by decreasing their bargaining power, citing the low (voluntary) quit rate as evidence. This is an interesting claim with compelling evidence – wages grow a lot faster for everyone when unemployment is low. But there’s something peculiar about the the recent recovery – it’s relatively powerless. Let me explain. Both the early and late 2000s recessions have been followed by so called “jobless recoveries” where output rises a lot quicker than employment. One would expect that this would be correlated with slower increase in bargaining power (using quit rate as a proxy) though there is no way to be sure, the JOLTS dataset we use to measure these things only goes as far back as the turn of the century.
But one would at least guess that a recovery in power would be in line with a recovery of the labor market. Using quits and unemployment as the relevant proxies, this would be incorrect:
The above is a simple graph of unemployment and quit level since 2000. Economic theory predicts that sharp falls in output and employment should be followed by proportionally rapid recoveries (the so-called “v-shaped” recession). It is a well-known fact that the late 2000s recession hardly followed this pattern. But the way quits and unemployment differ in their respective dynamics is interesting. Even though the decline in unemployment after 2007 was hardly proportional to the crash, at least it was quicker – that is a higher absolute slope – than the early 2000s. Conversely, not only did quits fall much faster in 2007, they also recovered – in absolute and relative terms – much more slowly!
If you crunch the numbers you’ll see that after 2001 unemployment fell 30% as quickly as it picked up. The same figure for 2007 is 20%. So it’s slower, but at least comparable. On the other hand, in 2001 quits recovered 64% as quickly as they fell whereas for 2007 that figure stands at an anemic 28%. Quits after 2001 picked up at 0.61 points (indexed to 2007) every month, but only 0.43 points in 2007, despite the much sharper crash.
Some of this is not surprising. While a deeper recession would normally be followed by a deeper recovery, there are limitations on the extent to which this relationship can hold, especially noting second order effects of hysteresis and market inflexibility. But some of this is definitely surprising. Using the figures above, unemployment recovered almost 70% as quickly in 2007 as it did in 2001. Without some important structural changes, that figure would be in the same ballpark for relative quit recovery, which only stands around 40%.
Qualitatively this means the willingness of workers to quit their jobs is far less than the unemployment rate would indicate, even using the standards of the 2000s, which weren’t by any measure amazing years for labor. If JOLTS went as far back as the Clinton years we would probably see an even stronger relationship between quits and unemployment, something that’s falling apart.
So now I should answer the proverbial “what does this mean”. There are a number of candidate explanations. Loyal readers know that I’m not hostile to a partially structural read, but even that can’t explain everything, because structural arguments generally accept that unemployment rate (as opposed to employment level or participation rate) is a broadly accurate read of the economy, and that much of labor force exit is due to an aging population (or technology, or whatever). I haven’t looked at the numbers, but if we looked at the above data using employment-population ratio instead of unemployment, the late and early 2000s may not look so different.
Ultimately if we are to believe that the structural power relationship in the labor market has not changed noticeably since 2000, unemployment rate grossly overstates the pace of labor market recovery, and the Fed should not even be thinking about tightening of any type. On the other hand, to the extent that unemployment rate is a good gauge of overall labor market health, workers have seen a pretty substantial fall in their bargaining power since 2000 (and remember this is independent of employment levels, unless there are some severe nonlinearities in the data).
Another explanation comes to mind, though given the magnitude it is unlikely. Tyler Cowen notes that future inequality will likely be tolerated without Occupy-esque discontent as an aging country likes stability and calm. It may similarly be the case that older workers are less likely to quit their job as that implies an abrupt shift and uncertainty. Job changes may also require intrastate relocations, something else that has declined over the last few decades (though there’s a bit of chicken and egg, here).
All are pretty harrowing tales for American workers, though in the long-run the former is preferable. The growing unwillingness of workers to quit places strong disinflationary headwinds in the economy as the ability to hit a wage-price spiral becomes much more difficult. Edward Lazear and James Spletzer also estimated that low churn (of which quits are a big component) cost the US economy $208 billion dollars this recovery. More generally – and in this arena I have no expertise; I turn to leftists like Matt Bruenig – this has social consequences by placing a subservience of labor to capital. I’m generally wary of such distinctions, and it’s unclear that any of the proposed solutions like higher minimum wages and stronger unions would make much of a difference – but the possibility exists and it is important.
The powerless recovery is freaky. We are possibly seeing a greater dependence on employment when tight labor markets are a thing of the past.
Ezra Klein’s remarks on inequality led to a pretty rich discussion, for the most part, disagreeing with his proposition that inequality isn’t the defining challenge of our time. His response today is great, making a clear – and agreeable – case that full employment is the most urgent problem facing policymakers today. The problem, I think, is that this still conflates importance with urgency and that which implies the former most certainly does not so the latter. Most of his recent post is correct. Unemployment is depressing median wages and absolutely nothing is more important right now than job creation.
But I want to focus on another, somewhat tangential, part of his post. Ezra writes:
Within the general rubric of “inequality,” income inequality gets a whole lot more attention than wealth inequality. But wealth inequality is much more concentrated and, in various ways, much more dangerous for the social structure. In particular, it’s wealth inequality that really ossifies social mobility.
The children of the top one percent only occasionally manage to match their parent’s incomes. But they often receive massive inheritances that grow over time, installing them atop the economic ladder and giving them a political reason to fight like hell against progressive tax policies (the Walton family is a good example here). And this kind of inequality doesn’t have any of the salutary benefits of income inequality: Massive inheritances don’t make people work harder. They give them a reason to never work very hard at all, and to try to influence public policy so they never have to work hard in the future, either.
I’ve written something along the same lines before, but have revised my belief that wealth inequality is an important signal. I’ll first detail why I think wealth is not too important before noting some reasons why it might be in the future. For one, wealth inequality has almost always been bad and – unlike income inequality – is not showing significant deterioration. In fact, the richest one percent actually saw a decline in their power over the Clinton boom:
Of course, the wealth Gini is at any given moment in time “worse” than the income Gini, but that’s like comparing apples and oranges. To consider why think about how wealth and inequality thereof accrues: savings and investment. At any arbitrary level of income inequality, wealth inequality will increase, with a higher propensity to save among the rich as the first order effect (and capital gains as an important feedback).
It’s pretty shocking how static wealth distribution has been, then, given the increasing income inequality. It’s difficult to argue then that wealth inequality – which is hardly a changing feature, unlike income – actually matters for political process in the way Ezra suggests. As disgusting as the Walton family’s politics might be, they have if anything only ossified the existing wealth inequality, without any first order effect on income (as Ezra points out, why should useless trust fund babies care about income taxes when they aren’t actually doing anything productive enough to earn seriously). Arguing that it is important that wealth inequality ought to be more important by arguing that wealth inequality engenders policies to protect wealth inequality is begging the question.
A focus on wealth also obscures monetary policymaking. Quantitative easing almost certainly increases wealth inequality, though there are good reasons to believe it improves income inequality (which over the long run would decrease wealth inequality… as you can see the interplay and economic dynamics are complicated to say the least) through a tighter labor market. In fact, one reason why monetary policy over the past decade did not increase wealth inequality as much as it could have is America’s expensive, pro home ownership programs like interest deductions and guaranteed loans.
In a freer real estate market – one that many economists agree would be more efficient and fraught with less moral hazard – it is likely that homes ownership would be more concentrated, with much of the middle class renting from the rich. The easy money policies of the early and late 2000s, then, would have increased wealth inequality that much more. But that would not mean anything, and should not be the basis for any policy action.
On the other hand, some important things are changing and wealth inequality may be more important in the future. As Piketty and Zucman document in a must-read paper, the wealth-to-income ratio in rich countries has increased substantially over the Great Moderation challenging conventional economic wisdom that this ratio is constant over time and reflecting lower population and productivity growth coupled with higher savings.
However, their data is a lot less remarkable for the United States, where population growth is relatively robust, and savings low – the ratio has increased though not markedly so. Still, in an age of automation and increasing capital shares, the increasing ratio could become an important economic issue.
Ultimately, though, capital income is still income. The return of wealth is not as much a reason to worry about wealth inequality but for capital tax parity with income – something progressives worried about income inequality have long advocated.
The importance of wealth inequality boils down to this. It is difficult to argue, as I think Ezra does, that this matters in and of itself because wealth inequality has historically been around as high as it is, and few would have suggested this is a problem a few decades ago. Suggesting that high wealth inequality begets more wealth inequality is not just assuming the conclusion (that this is bad) but also is not empirically guaranteed (though I am less convinced of this, data show that the 1%/median wealth ratio has increased substantially).
The arguments that wealth inequality matter for other reasons go back to some form of income inequality, usually distribution of capital gains. These are central to debates about inequality of all stripes. Wealth is not at all irrelevant, though. Flows matter more than stocks but when we as a society realize that deeper safety nets and education for the poor are important, we’ll tax the flow of inheritance every year instead of income which is scarce relative to the flow of wealth.