Monthly Archives: May 2014

I agree with Dean Baker most of the time, but find his oddly strong distaste for the “sharing economy” puzzling. The focus of his concern is the regulatory limbo under which many of the services in question (Uber, Airbnb, etc.) operate, and the taxes for which they are responsible.

Understanding the purpose of consumer regulation is in order. For one, most occupational licensing is a way to keep the rich richer, whether we’re talking about millionaire medics or medallion-owners. That is not to abdicate all purpose of sensible regulation. I think we are all happier knowing that the FDA ensures the safety of our drugs and that airlines are required to comply with a slew of safety features. 

But sometimes these regulations get onerous, and plain absurd. Baker worries about the safety of someone renting a house without facing a number of meaningless regulations:

Hotels are regularly inspected to ensure that they are not fire traps and that they don’t pose other risks for visitors. Airbnb hosts face no such inspections – and their neighbors in condo, co-ops or apartment buildings may think they have the right not to be living next door to a hotel (which is one reason that cities have zoning restrictions).

The argument he seems to be making is that these houses are safe for millions of people to live in for many days of a year, but not safe enough for a temporary visitor for a few days while the owner is gone; he similarly wants to argue that Uber cars are safe enough for the many that drive in them on a daily basis for a full-time job, but not for a temporary passenger!

It is fair to argue that perhaps the new era sharing services harm the old guard unfairly as they are beholden to a higher standard of regulatory oversight. The column then should have been militating against the many useless regulations that brings about a need for this sort of service in the first place. 

Consumers would not be using the wildly popular sites apps such as Uber and Airbnb is they were repeatedly unsafe.

In fact, their existence is a shining example of the failure that is the American regulatory system: over-regulate things that should be left alone (food trucks, marriages, and private property) and ignore the toxic weapons ready to blow up (guns and money markets, mostly). 

The irritating part of his post is the disdain towards the “scam-facilitators” and “rip offs” in the sharing story. It is peculiar for a liberal economist to think so. UberX is used by students and immigrants looking for flexible ways to facilitate a comfortable living in an era of stagnant wages. And it’s really bad economics to assume that these services don’t increase taxes. Even if no direct taxes are paid (and despite what the article would suggest, this is plain false) it gives a lot more spending power to those likely to spend it which, through the multiplier, is a key driver of local taxes in the urban areas where these services thrive.

Many of the more specific worries in this post are also highly improbable:

Others in the economy will lose by bearing an additional tax burden or being forced to live next to an apartment unit with a never-ending parade of noisy visitors, just to cite two examples.

In apartments where people have paid for a level of guaranteed quiet and comfort – usually fancier places with doormen and apartment associations – this behavior would not be tolerated. In the case that these safeguards do not exist, if the neighbors are actually loud and disruptive to an illegal extent, it is in the neighbor’s power to stop. If not, well you don’t get what you don’t pay for. That’s the moral part. More practically, the reason this matters in a hotel is that the whole building is filled with a constantly moving bunch of people. In the number of times I’ve stayed in an Airbnb, not only have I not hosted rowdy parties, I have not run into tenants on my way up and down. 

I would be happy to bet Baker, and anyone else, that were these services to vanish, tax revenues would fall.

The article boils down to just a number of platitudes:

If these services are still viable when operating on a level playing field they will be providing real value to the economy. As it stands, they are hugely rewarding a small number of people for finding a creative way to cheat the system.

Where is the evidence for this, I don’t see a single number. 

But what I do know is that while these services may be valued in the billions for its founders, the real value comes not just from convenience to the customer, but giving poorer people an easy way to supplement their income. It is beyond me how Baker feels bad for a millionaire with a medallion that finally has to more than grumble at this customer but not the many immigrants and lower-income Americans employed many hours a week because of this service.

The final moral victory of the sharing economy is something Baker touches on, but dismisses in one paragraph:

The good thing about the sharing economy is that it facilitates the use of underutilized resources. There are millions of people with houses or apartments that have rooms sitting empty, and Airbnb allows them to profit from these empty rooms while allowing guests a place to stay at prices that are often far less than those charged by hotels. […] Other services allow for items to be used productively that would otherwise be gathering dust.

What a waste it is for a city to loose the value of empty apartments and unused cars. Surely in an economy where we can share more consumer durables is also one where we need produce fewer consumer durables: and thereby emit fewer greenhouse gases. The alternative to a sharing economy is a non-sharing economy: and any kindergarten teacher will tell you this is a bad idea.

So yes, if you think Uber and Airbnb get an unfair advantage by all means write about it. But ask Bill DeBlasio to get rid of archaic and stupid regulations rather than take away the livelihood and lifeblood of the thousands reliant on a better system. 

There’s a series of posts by Stephen Smith pondering Concorde’s premature death:

@MarketUrbanism: Isn’t it kinda crazy that there used to be regularly-scheduled supersonic passenger flight, but there no longer is?

@MarketUrbanism: Can’t think of any other instance where we made a huge leap in technology like that and then gave it up.

@MarketUrbanism: It’s a shame the Concorde didn’t live to see the rise of Dubai. I bet Emirates could’ve kept it afloat.

It’s a little tragic, really. Almost two decades ago you could travel between New York and London in under three hours. Today that figure is almost three times as high (no help from our friends at the TSA). Concorde had a number of problems, including noise and carbon pollution. These were or could be largely addressed. The chief problem was economic.

Tickets sold at a premium to standard first class, sometimes upwards of $10,000. In fact, the first class market was so thin that Air France (along with British Airways, the airline that flew Concorde) usually booked the flight commercially in only one direction, and chartered the way back to maximize profit. That was the structural issue. However, between a crash on one of the chartered flights and the post-9/11 crash in air traffic, it was clear that this technological marvel wasn’t profitable.

Take a brief history airplanes. The Concorde’s pilot flight was merely weeks after that of another 20th century marvel, the Boeing 747. The heyday of both were the three decades between 1970 and 2000. This was a period that realized huge gains in mass consumer purchasing power, deregulation of the airline industry, and an Anglo-American (upper) middle class ever ready to explore a previously unaffordable world. And the vehicle for this job was the 747.

Of course, inequality was increasing over this period, but not until the 2000s did it reach Gilded Age levels.

And that damned the Concorde. Part of running a luxurious service is consistent demand. The ideal clientele for Concorde is something akin to British Airway’s “Club World London City” – a business class only jet between JFK and Heathrow. And running twice-daily with only 32 seats, it’s as much a disaster to the environment as the Concorde.

But Concorde could never run that frequently, not with that price tag.

The problem wasn’t that Concorde cost between six and ten thousand dollars. It was that the people who could afford that back then, but not a full-time business jet, were too small in number. But what we’ve seen since the ’80s is a rapid growth in an affluent-elite: managing elite at corporations not rich enough to fly privately. More importantly, the affluent-elite have globalized around the world, with incredible (and consistent) demand to fly comfortably to and from Hong Kong, Shanghai, Dubai, Mumbai, and other international centers of new wealth.

This is why Etihad has something called a “residence” for its A380 flights between Abu Dhabi and London, priced over $20,000 each way. And if you think this is a little beyond the reach of the standard, top-business elite, look at the boom in “super” business-class arrangements that cost threefold what worked even a decade ago – a world where flatbed seats and French cuisine are considered necessary among a select, exceptionally-disconnected few.

More than anything, this is a reaction to inequality, and increasingly globalized inequality. Of course all these toys of the kinda-but-not-super rich fly on the coattails of a coach flying mass – but as the London City shuttle and massive growth in luxury travel in general tells us, it won’t be long before airlines realize a demand for scaled, exclusive travel. And when that day comes, a newer cousin of Concorde will be waiting.


A lot of people seem pretty sure that student loans are behind a slow economy. Elizabeth Warren got there first. Then Vox posted a few charts confirming that, yes, those with student debt are less likely to own homes. Today I read that Larry Summers and Joe Stiglitz endorse this idea. Rick Rieder from BlackRock agrees. 

Let me play devil’s advocate.

The facts are clear – home ownership among those with student loan debt is decreasing much quicker than for those without.


It is difficult to reach the conclusion, at least from this chart alone, that student loan debt decreases home ownership. For one, both lines are following the same trend over the same period of time, only one has a steeper slope since the financial crisis. Except this isn’t surprising, student debt is correlated with debt which is poison over a period of deflation (or lower than expected inflation). It is not unique to students.

But more importantly, those jumping at the correlation between student loans and home ownership over a few years of data are not paying enough attention to large, structural shifts in economic geography over the past fifty years. For nearly a century, suburban growth eclipsed urban. Millenials, the fraught group in question, are changing that. Two-thirds of young graduates now want to move to cities for a better job, compared to a fraction not too long ago. Not to mention the more than 80% that are willing to move to any city if needed.

Dad is no longer a company man, nor mom a housewife. Rather, graduates are likely to vie for shorter commitments focused on training and, in a number of cases, with a higher probability of relocation in the future. Not to mention the logistical, locational difficulty of maintaining a dual-income family (specifically outside of urban centers).

And that’s the demand side. Jobs that cater to college graduates are slowly disappearing from middle America toward coastal centers that capitalize on economies of scale and network effects. Vox notes that the age at which graduates first purchase a house is becoming later. True, but not necessarily relative to household formation itself – something happening later across the country driven by graduates. (Not to mention, as a commenter on Twitter mentions, the increasing necessity of a post-Baccalaureate degree).

Here’s the thing about those with “student debt” – they are much more likely to be “students” than those “without student debt”. In the latter group, you either don’t have a degree – in which case none of the above qualifications apply – or you’re wealthy enough to go through college without any debt. Neither is a representative group.

The bottom line is students increasingly want to live in areas where homeownership is unaffordable. (And it’s not like twenty-somethings even should be able to afford a place in New York City). There is increasing evidence that homeownership is probably not the best investment for many people. The returns on real estate are dwarfed by the stock market, and other carefully-orchestrated investment plans, especially without the (clearly excessive) boom years of the past decade. Maybe millenials are paying more attention and making smarter investments.

Of course, jubilees are almost always a good thing (and it’s not clear that lower rates as Elizabeth Warren wants, would even achieve lower debt – it may just encourage poorer people, or those who otherwise would not have, to borrow more). Deleveraging, especially in a time of low inflation, will improve the economy through simple wealth effects and encourage capital formation via higher savings rate (and perhaps investment in domestic equity).

But it does not strike me as a particularly equitable, or necessarily economically-optimal, use of our budget to help those who were, are, or would-be students. Or, in other words, near the top of the income distribution. An expansion of the EITC with the same money would be more equitable, more directly encourage job creation, and give more bang for the buck.

Of course, the best thing for debtors and the economy would be a inflation above expectations.


Brad DeLong notes that lack of consumption is not especially responsible for currently low levels of aggregate demand. I am not so sanguine. At first approximation, this is hardly surprising. There is some truth to the Austrian principle that recessions arise from a decline  in investment during the boom. (There are many flaws to this theory, not the least that spending on consumption goods increases only in relative, not absolute, terms). Since most consumers smooth their spending over time, to the extent liquidity is not a problem (and it was), what happened is exactly what you would expect.

Unfortunately, to the extent this stagnation is secular, we can’t ignore consumption. Take a stylized accelerator model which says that I/Y_r = (K/Y)g_r, where I/Y and K/Y are the investment and capital stock to potential income ratio respectively and g is the potential growth rate. Let’s state secular stagnation as the state where an economy is (for the foreseeable future) demand constrained and g as a function of r drops by some constant amount. (That is, the real interest rate necessary to maintain some level of growth is lower than it used to be).

So, for whatever reason, when the long-run potential growth of the economy falls, firms are not as driven to invest in future profits and therefore the level of investment has to fall. This must either be accompanied by a corresponding increase in consumption or decrease in total income.

The question we should be answering then isn’t whether consumption has increased as a share of GDP, but whether it has increased enough given a lower potential growth rate. Even under generous assumptions, this is probably not the case:


The growth in consumption as a share of GDP – which we will generously define as 1 – max_t(C)/min_t(C) – is just over 18%. Over the same period, real income grew by an average of 3.2%. Taking this as the former potential, and 2% as the new normal g has fallen by around 60%. Even with an optimistic assumption that the economy will grow at 2.5%, the fall in potential g still outweighs the increase in consumption. (This is all under the assumption that K/Y has and will remain fairly constant. Piketty says no. I don’t buy that this will be significant enough to outweigh everything else, but that is for another post). 

This is, of course, a simplistic assumption. The accelerator model is naturally stylized and investment may not fall nearly as much as suggested. Increased consumption of capital (“wear and tear”) may be one such reason, though that seems ever unlikely in an economy increasingly-oriented towards investments in intellectual property and information rather than coal mines. So if it is not the case that increasing consumption is necessary to maintain a certain level of income, it is certainly interesting to see the assumptions and model under which that is so.

The United States is simultaneously too much like China, and not enough like China. On the one hand, falling potential growth in both countries necessitate a decreasing reliance on private investment. On the other hand, unlike China, there is much the United States can and should do to increase public investment in green technology, basic research, and stronger infrastructure. 

Larry Summers has one of the more careful reviews on Piketty’s Capital. His two central objections (in an otherwise glowing review) focus on Piketty’s assumptions that:

  1. The elasticity of substitution between capital (K) and labor (L) is greater than 1. In other words, the decrease in capital income caused by an increase in the underlying stock (diminishing returns) is outweighed by the broader base, thereby decreasing labor share of income. (A point highlighted by Krugman, too).
  2. All capital returns are reinvested. (That is, the s in the s/is at least constant and possibly growing).

I have nothing novel to say about the veracity of either claim. In fact I’d go a little bit farther than Summers in my skepticism of the former claim. As Summers notes:

But I think he misreads the literature by conflating gross and net returns to capital. It is plausible that as the capital stock grows, the increment of output produced declines slowly, but there can be no question that depreciation increases proportionally. And it is the return net of depreciation that is relevant for capital accumulation. I know of no study suggesting that measuring output in net terms, the elasticity of substitution is greater than 1, and I know of quite a few suggesting the contrary.

I would forget empirical studies for once and appeal to common sense. On top of Summers’ own skepticism regarding the elasticity of substitution accounting for depreciation (which is certainly lower than the gross figure) Piketty seems to glide over the challenge that this elasticity is also important in ensuring that as $g$ falls $r-g$ does not. (Naturally, they must both tend to zero together). Therefore, one must be convinced that the elasticity of substitution is substantially greater than one. Like Summers, I am not aware of many credible studies suggesting that this is the case (though, unlike Summers, my ignorance doesn’t mean much).

However – and I think this is a worry to which Summers is very sensitive – I am not sure that what we consider to be “accepted” elasticities today must hold in the near future. Here’s Summers:

Even where capital accumulation is concerned, I am not sure that Piketty’s theory emphasizes the right aspects. Looking to the future, my guess is that the main story connecting capital accumulation and inequality will not be Piketty’s tale of amassing fortunes. It will be the devastating consequences of robots, 3-D printing, artificial intelligence, and the like for those who perform routine tasks. Already there are more American men on disability insurance than doing production work in manufacturing. And the trends are all in the wrong direction, particularly for the less skilled, as the capacity of capital embodying artificial intelligence to replace white-collar as well as blue-collar work will increase rapidly in the years ahead.

What I read into this is that your good old Y = F(K,L) production function will no longer capture the key themes of economic growth. The robotic future is better modeled with income as Y = F(K, G(K_r, L)) where K_r is modern technology like “robots, 3-D printing, artificial intelligence, and the like” which is very easily substitutable with labor. If you take F = K^{\alpha}G^{1-\alpha} and G as another constant elasticity function what you notice is that as $K$ and $K_r$ tend to perfect substitutability, the \sigma grows without bound. (Predicated on the assumption that robots and labor are theoretically substitutes which holds if, but not only if, that elasticity is greater than the elasticity between capital in general and the G). In any case, the elasticity that Summers doubts is very high is exponentially amplified by his own concerns of substitutable labor.

This analysis risks boiling town the tome of the decade into another trite debate about robots (though I think it is worthwhile to parse the internal contradictions of those making Summers’ argument something not uncommon in Piketty criticism). I would rather avoid that in arguing it really doesn’t matter much whether, qualitatively, returns to capital are diminishing quickly or whether savings are being reinvested. So let’s assume that neither of the two assertions Summers argues Piketty needs are true.

Summers says that returns are not reinvested since the most common form of return, imputed rent, is definitionally consumed. Yet this ignores the gaping wealth inequality that already exists (not one, granted, that I am very concerned about). While a quick read on Piketty suggests the central problem is “r>g”, the more dangerous problem is the inequality of returns itself. The distribution of stock ownership – the only real source of long-run returns – is far more skewed than that of wealth ownership. The bottom 95% own all of their wealth in two forms:

  • Explicitly: Home ownership which forces saving over a period of thirty years.
  • Implicitly: Social security which acts as a claim on America’s future GDP.

Each of these are invested in low-return (real estate and government bonds, respectively) securities. Diminishing marginal returns for the many are real. But if you’re a billionaire, you have access to the stock market, cleverly managed funds and, most importantly, the right information to make the right investments. One can reach the same conclusion as Piketty when wealth accessible to the broad middle-class is consumed and does face diminishing returns whereas that available to a percent reaching escape velocity does not.

While the wealth effect, suggesting that increases in wealth decrease savings, is certainly true for those who borrow on home equity loans and are liquidity-constrained (most of America), it certainly does not for those who are benefitting from wealth inequality, the top percent of a percent. Does anyone seriously think a multimillionaire is more likely to go on a fancy vacation to Europe – a minuscule fraction of his income and wealth – just because the S&P grew a little faster than he expected? I would imagine Summers does not think so, as his consistent calls for higher taxes on high income labor and capital gains would suggest otherwise. (And if it were the case that the superrich were inclined to consume more given higher capital returns, the case for progressive taxation of dividends and carried interest sours non-negligibly).

The Forbes 400 list cited in his review, while interesting, is hardly informative of the dynamics of our economy. The same list also suggests that equal opportunity has increased substantially over the past thirty years. (Not to mention that many on the list in the ’80s are not longer interested in chasing capital gains, but in finding meaningful ways to spend their amassed fortune – no mean task).

Ultimately, I think Summers’ analysis falls short in assuming that all wealth and all returns are the same. That there is one $r$, when there are many:

I am much less sure. At the simplest level, consider a family with current income of 100 and wealth of 100 as opposed to a family with current income of 100 and wealth of 500. One would expect the former family to have a considerably higher saving ratio. In other words, there is a self-correcting tendency Piketty abstracts from whereby rising wealth leads to declining saving […] The general conclusion of the research is that an increase of $1 in wealth leads to an additional $.05 in spending. This is just enough to offset the accumulation of returns that is central to Piketty’s analysis.

Of course, this argument would seem a lot less compelling if “a family” was replaced with “Bill Ackman”, even though that is precisely where wealth is increasing most readily and extraordinary returns are most ubiquitous. Unfortunately, sensible assumptions ensure that Piketty’s analysis is theoretically contestable until there are some massive changes in our social security and home ownership programs. And that’s assuming Google doesn’t triple the elasticity of substitution single-handedly in the next ten years.

I’ve been thinking a bit about why wealth inequality really doesn’t matter – but I think the argument is a little more nuanced than I presented. In particular, what I wrote yesterday is concerned largely with the positive, but in reality this debate is intimately connected with normative action. In the wake of Piketty’s book (which I have not finished) a number of people are talking about taxes on global capital.

I don’t have a very strong opinion on that (other than a negative gut reaction). But there are things we can do closer to home – appealing to both conservatives and liberals – that would be more feasible and possibly more effective. In this debate we are faced with a slurry of terms that are sometimes used to describe the same underlying phenomenon but are each different: wealth, capital, returns on capital, and capital share of income.

While I am unconvinced that just the inequality of net worth (“wealth”) really does much harm to a nation’s socioeconomic fiber – indeed I think concentrated wealth is probably a necessary consequence of capitalism – it is clear that skill-biased technological change, and what that portend’s for labor’s share, is probably an important concern (if nothing else in the discussion of income inequality itself).

And here’s the problem. Government programs, the way they are currently structured, are largely to blame for gaping disparities like this:


(Before I go on, it is worthwhile noting this picture, yet again, confirms my previous point that wealth inequality per se isn’t increasing and was never a problem).

What we see isn’t surprising. The bottom 90% of Americans are basically excluded from the stock market – the most important source of long-run returns for pretty much everyone else. What’s striking here is that this inequality is far worse than inequality of wealth itself. So not only do the rich own more capital, they own the best capital.

To some extent this is unavoidable. Rich, well-connected elite have far better access to the best investment opportunities like secondary private markets and hedge funds that provide alpha. (Chances are if a hedge fund is doing well accounting for management fees, they don’t want you as a client). But the people that benefit from this are the extremely wealthy percent of a percent not even demarcated above, not simply affluent Americans who are still extremely well-represented in stock markets as a whole.

And the reason for this? Perhaps poor government policy.

The real wealth of most Americans is their claim on social security in the future. Social security has been an incredible source of, well, security for many citizens and pretty much the reason many are not in poverty today. But the Social Security Trust, which actually handles all of this money, is basically forcing you to invest in low-return government debt.

This becomes a source of inequality as social security as a portion of total implied wealth (here defined as your claim on future GDP) is far higher for the bottom 95% of Americans, who can barely save, than anybody else. On the other hand, for people that actually manage to save (even if just a little bit) the stock market is a source of real, long-term prosperity.

Furthermore, misguided government programs encouraging homeownership – something many economists have come to agree isn’t a good thing for poorer people – once again distorts private investment choices to relatively low-return stores of wealth like residential real estate. When the productivity growth is coming from financial, informational, and social capital, what value is owning a home in Podunk, Missouri?

Again, mortgages are the primary – and possibly only – source of explicit wealth for middle-class Americans.

Many conservative economists have reached the conclusion that we should probably privatize social security. As a purely financial matter, I am inclined to agree – the justification for our current program is fully predicated on the dangerous assumption that government bonds are the best long-term investment when, in fact, Vanguard Target Retirement 2045 is the way to go.

In fact, what we need is something akin to a Sovereign Wealth Fund that allocates payroll tax receipts in a more productive way. This should have great appeal to conservatives as well as liberals. For conservatives, it frees an immense source of domestic equity away from relatively inefficient projects furnished by the national government to more entrepreneurial and productive ventures in private markets. Indeed the cost of capital (in normal times) would probably fall. For liberals, it is the most logical extension of the welfare state, designed in a way complementary, not opposed, to modern capitalism.

This would solve what I see is the heart of the problem Ezra Klein and others are getting to when they worry about wealth inequality. It isn’t the disparity of wealth itself (which is background noise), but the changing structure of the returns. It is a tragedy that over the past thirty years, the stock distribution was so much more skewed than wealth distribution.

The government is ultimately a bank that can print its own money. What it should be doing is guaranteeing a minimum return in future receipts, as it does today, as well as investing in the option for more explosive growth. If the stock market performs so poorly as to not provide the returns necessary for to meet the obligation (and there’s a very low chance this would happen over the long run) the government can always finance the difference with a deficit. In fact, since returns would be far higher, chances are in a financially-driven recession, the increase in deficits would be lower.

This is probably not enough, but does more to solve inequality than a meaninglessly small increase in capital gains taxes would accomplish. More importantly, it achieves this without further harming private interests, and yet greatly increases capital redistribution. It would also unleash an incredible amount of capital for the investment the private sector desperately needs.

Here’s the short and sweet argument for privatized, but guaranteed, security. Rich people should give poor people equity in their companies rather than taxes to the government to solve issues of capital return disparity. The only role government should play is effectively guaranteeing a minimum return, in other words purchasing a barrier put on the S&P in the event valuations fall below what is promised. That is cheaper, more efficient, and the principle we ought to work on.

Ezra Klein has a nice segment on Vox explaining why wealth inequality is dangerous for America. And worse than its oft-mentioned cousin, income inequality. Given my political biases, it is very easy for me to accept this claim, and I’d probably favor most normative conclusions Ezra may reach. That said, the numbers in this argument just don’t work out. I think two diagrams make this point perfectly clear.



What you notice here is that wealth inequality isn’t really a problem of the top 10%. Or 1%. Or even really 0.1%. It’s the tippy-top 0.01% that are driving the trend. Or just over 30,000 individuals. And from what we know about this group, most (61%) are bankers or other high-rung executives, with a few doctors and lawyers mixed in.

This isn’t exclusive to wealth. The pristine echelons of the one percent dominate the income distribution more than Occupiers would have you believe. But there is a startling difference between the two, the income share of affluent Americans – top 10% without the 1% – hasn’t markedly declined either.

So when you consider wealth inequality it’s important to note that you’re really talking about a problem that concerns fewer people. As a motivating example, consider the ratio of wealth between the richest man and median man. Would this figure yield any insight into the nuances of the sociopolitical power structure? Hardly. No one would say Bill Gates is the beneficiary of inequality, that he is so wealthy is an independent phenomenon.

That isn’t the case for the relative salary of an investment banker to a plumber, which (in no negligible part) is a result of changes made the tax and regulatory code in favor of top earners. In that sense, income inequality is actual a tangible phenomenon. We can identify winners and losers of the Gini map over the past thirty years.

Is the mind-blowing wealth of 30,000 Americans absurd? Sure. But it would be difficult to say, as the video suggests, these elite are beneficiaries of any inequality other than owning the right capital at the right time. (Indeed it is capital gains in the stock market that drive the income of this group).

And therein lies the problem of arguing wealth inequality is uniquely more worrisome than income inequality. The bankers and, more likely, executives we’re talking about are so rich because of income inequality. With many corporate boards effectively subservient to managerial executives, C-suite officers have the ability to more or less set their own income, independent of productivity and marginal value added (which, granted, is tough to measure for highly skilled people).

The key forces driving income inequality are driving wealth inequality. And while Piketty’s book is in vogue right now (disclaimer: I’ve read only 100 pages so far), there is nothing especially bad about the current distribution of wealth relative to income.

Now one may argue that, of course, wealth and income inequality are correlated – but the real thing to worry about is wealth. While that may be true in some specific circumstances, political donations for one, in general it is very false. We’re told the richest hundred (or so?) people control as much wealth as the bottom 50% of the planet. Or, as Ezra cites in his video, the Walton family is richer than the bottom 30% of Americans combined.

That sounds scary, but it’s also a rather meaningless statistic. A middle-class homeowner with a mortgage in a bad housing market isn’t as wealthy as an Indian slum dweller without access to credit markets. But has an infinitely higher income. Many poorer and lower-middle class Americans are in debt which, sometimes, exceeds their assets. Hence ratios of wealth make little sense. You may want to argue that indebtedness of our poor is a really big problem – and I would be inclined to agree – but that’s a different conversation.

Nor is it clear that wealth plays an especially central role, vis-a-vis income, in political control. It is important to caveat this point (and, really, this entire post) nothing that wealth engenders income engenders wealth, and therefore distinguishing between the effects of either is difficult. However, as proxy consider these two tables from the Sunlight Foundation. 

Cycle Corporate Lawyer/Lobbist Ideological
1990 56.5% 14% 15.1%
1992 57.8% 14% 15.5%
1994 54.2% 15.7% 18.2%
1996 54.6% 15.6% 17.8%
1998 54.6% 16.4% 17.8%
2000 54.3% 15.8% 18.7%
2002 53.6% 15.8% 18.8%
2004 54.7% 15.8% 18.3%
2006 54.6% 15.5% 19.3%
2008 54.5% 15.8% 18.5%
2010 54.8% 15.7% 18.1%
More than $500K $100,001-$500,000 $50,001-$100,000 $25,001-$50,000 $10,000-$25,000
# of The One Percent of One Percent 17 995 2,468 4,907 18,305
Amount Given $27,761,319 $135,925,304 $172,008,627 $169,265,649 $266,124,661
% of Political 0.0% money 3.6% 17.6% 22.2% 21.9% 34.4%
% who are corporate 47.1% 47.7% 55.2% 54.4% 58.7%
% who are lawyer/lobbyists 0.0% 15.7% 17.2% 18.7% 14.8%
% who are ideological 52.9% 33.4% 22.8% 19.0% 14.6%
% given to independent expenditure groups 92.4% 13.4% 7.4% 7.2% 7.7%
% given to candidates 2.7% 30.4% 34.4% 42.3% 49.6%
% given to parties 4.9% 58.1% 59.5% 49.8% 31.9%

Here’s the important theme. In the second figure, there’s a discrete break between the individuals of the top 0.01% giving more than $500k and those not. Specifically, the amount given the “independent expenditure groups” increases from around 10% of more moderate donors to 90% of all deep donors. The proportion of donors identified as “ideological” also increases very quickly.

You might say that that these ideological donors are a product of wealth independently of income. But corporate donations are usually motivated by more specific (not to say benign) interests geared towards income. Now going back to the first graph, it’s clear that even though the 0.01% more than doubled their share of national income over the time period considered, ideological donations didn’t increase all that much, and corporate donations have remained steady.

There might be a sense in which corporate interests are driven by wealth, but that’s not the argument proposed by the Vox video. Instead we are told to worry about the political influence of heirs bathing in a pool of their parents dough. No – you can always trust corporations to focus on one thing, and that’s profit, not wealth.

Of course, a number of assumptions were made in this highly indirect argument. But regardless, no one (to my knowledge) has actually made the statistical case that wealth inequality, as a phenomenon emerging independently of income inequality, is responsible for the “doom loop of oligarchy”.

Let’s conclude by discussing the dynamic between the two inequalities. Theoretically, there is a strong correlation. Higher income inequality leads to higher incomes at the top leads to higher marginal propensities to save at the top leads to substantially higher savings at the top leads to wealth inequality leads to capital income inequality leads to income inequality. In fact, by first approximation, wealth inequality should increase even if income inequality remains constant by simple virtue of savings differentials between top and bottom. And if income inequality is increasing, wealth inequality should rise that much more rapidly. And yet the time series of percentile shares of total wealth/income do not reflect this argument:



Sure the bottom 95% are doing a little worse and the top 5% a little better today, but the changes are nothing near the drastic increase in income inequality in the same time period. This suggests policy has changed favoring high income over low income in a much clearer fashion than high wealth over low wealth. This isn’t surprising given that much of the richest 0.01% are executives and bankers, not heirs to mounds of wealth. After all, it is the group of affluent-but-not-rich people for whom we subsidize housing (indeed more than we do food for the poor!) It is for the doctors we protect the medical market. It is for the middling executives and partners at law firms nobody has heard of we decrease taxes on those earning more than $200k. It is for the top 15(- top 2)% of Americans who couldn’t afford frequent flights to Florida without Spirit or Southwest we refuse to tax carbon emissions from airplanes the way they should be!

And that’s clear in the way the wealth inequality argument is presented. The top 0.01% make about 25% of all campaign contributions, control about 12% of total wealth, and earn about 7% of the nation’s output. The top 1%, to that end, control about 40% of total wealth and earn about 25% of all income. But, for the 1% (minus the top), it’s only income that’s been going up!

That wealth inequality in America is as low as it is, given the income distribution, is remarkable. In fact, the role inherited wealth plays at the top seems to be diminishing:

…the percent [of the Forbes 400] that grew up wealthy fell from 60 to 32 percent while the percent that grew up with some money in the family rose by a similar amount.  The percent who grew up with little or no wealth remained about flat. 


Overall, Figures 5 and 6 show a trend in the Forbes 400 list away from people who grew up wealthy and inherited businesses towards those who grew up with more modest wealth in the family and started their own businesses.  These changes largely occurred between 1982 and 2001.

If you read the whole paper, what you learn is that the a key driver of success for these stalwarts was growing up in a middle-class to mass affluent family with access to good education at an early age. Good education, note, means motivated teachers and up-to-date technology: something you’re as likely to find in a nice suburb as you are in Phillips Exeter.

And that takes us back to the point about income and wealth. Wealth inequality has always been pretty bad. There’s a reason the Vox video shows a time series of income shares but not wealth shares. Wealth, by definition of how it is constructed, will always be more concentrated. The burden is on those arguing that wealth inequality is a key concern to explain why the relative increase (if it even exists) is bad.

In the mean time, I would rather worry about something that actually concerns most of America, like income inequality. I’m talking about meth addicts in “white trash” neighborhoods that are overworked with two jobs. Or the inability for so many parents to furnish their children with good technology and educational enrichment. Or the shitty healthcare they probably have. Or about the total stagnation of incomes for the bottom two-thirds of the income distribution.

These people will never have any real wealth. And, frankly, if we can find a way to get them jobs, higher wages, and a steady retirement, I can’t even begin to see why it matters.