The rich got richer

Recommended reading, economic debates, predictions and opinions.
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Shakespeare
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Re: The rich got richer

Post by Shakespeare »

Global capitalism leaving U.S. middle class behind
Here’s how Mr. Spence and Ms. Hlatshwayo put it: “The most educated, who work in the highly compensated jobs of the tradable and non-tradable sectors, have high and rising incomes and interesting and challenging employment opportunities, domestically and abroad. Many of the middle-income group, however, are seeing employment options narrow and incomes stagnate.”
Interestingly, I remember a similar point was made by the editors of a scientific journal in the 1970's. At that time, the journal shifted from linotype printing to computerized offset printing. The linotype operators - skilled craftsmen, highly paid - were replaced by lower-paid clerk-typists [and a couple of computer geeks].
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Re: The rich got richer

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Seems like Arnie's former kingdom is a good place for a retirement job.

California dreamin’

But when you do decide to retire from your place in the sun.
Newport Beach’s lifeguards can also retire at 50 with 90 per cent of their salary with 30 years of service, according to state data.
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Re: The rich got richer

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Nick Hanauer’s TED Talk on Income Inequality.


Note it's a Youtube link. The talk is not available on TED.com. It got censored.

Time Magazine:
Was Nick Hanauer’s TED Talk on Income Inequality Too Rich for Rich People?
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Re: The rich got richer

Post by Bylo Selhi »

Hanauer wrote:Anyone who’s ever run a business knows that hiring more people is a capitalist’s course of last resort, something we do only when increasing customer demand requires it. In this sense, calling ourselves job creators isn’t just inaccurate, it’s disingenuous.
This also flies in the face of Cons economic orthodoxy, i.e. that lowering corporate taxes will increase corporate spending and thus create jobs. They too are quick to silence anyone who dares to point out that the emperor (Steve) wears no clothes.

Proof (NSFW, little children and Cons sycophants):

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Sedulously eschew obfuscatory hyperverbosity and prolixity.
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Re: The rich got richer

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A few years ago, Miles Corak of the University of Ottawa published a chart he called the "Great Gatsby" chart. It showed a curve suggesting that greater income inequality is related to lower opportunity for intergenerational socio-economic mobility. The paper was given widespread publicity, first by Alan Krueger, then head of the U.S. president's Council of Economic Advisers, then by President Obama himself. During the past two years, liberals in the U.S. have used this as perhaps their most telling critique of growing income inequality and its harmful impacts.

Corak's study looked at difference in incomes and mobility across countries, i.e. each country was a separate data point. Critics suggested that this approach had weaknesses. For example, institutional structures would vary across countries and confound the results. I was at a debate between Miles Corak and Ron Haskins of the Brookings Institution, where Haskins showed that, if you controlled for size of country, the Great Gatsby effect disappeared. But all the criticism has had little impact, and the liberals have stuck to Corak's interpretation that he has found a causal relationship (or not -- Corak is pretty slippery in debate).

Now Scott Winship and Donald Schneider have a new piece on the topic. They use data gathered by Raj Chetty on income and mobility in various urban and rural areas of the United States. Income and mobility (or rather immobility) are essentially uncorrelated. The percentage of families headed by single mothers does a pretty good job of predicting mobility, however.

Perhaps, if liberals are really concerned by decreasing socio-economic mobility, they should concentrate resources, not on income inequality, but rather on "family values".

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Re: The rich got richer

Post by parvus »

Evidently, we're supposed to blame it all on the top 100 CEOs. Or perhaps the stock market?
The main driver of soaring CEO pay is grants of shares and stock options, the study says. The average share grant in 2012 was valued at $2.87 million, while the average stock option was valued at $2.17 million.
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Re: The rich got richer

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ghariton wrote:Perhaps, if liberals are really concerned by decreasing socio-economic mobility, they should concentrate resources, not on income inequality, but rather on "family values".
Charles Murray got there first.
The only thing that can make a difference is the recognition among Americans of all classes that a problem of cultural inequality exists and that something has to be done about it. That "something" has nothing to do with new government programs or regulations. Public policy has certainly affected the culture, unfortunately, but unintended consequences have been as grimly inevitable for conservative social engineering as for liberal social engineering.

The "something" that I have in mind has to be defined in terms of individual American families acting in their own interests and the interests of their children. Doing that in Fishtown requires support from outside. There remains a core of civic virtue and involvement in working-class America that could make headway against its problems if the people who are trying to do the right things get the reinforcement they need—not in the form of government assistance, but in validation of the values and standards they continue to uphold. The best thing that the new upper class can do to provide that reinforcement is to drop its condescending "nonjudgmentalism." Married, educated people who work hard and conscientiously raise their kids shouldn't hesitate to voice their disapproval of those who defy these norms. When it comes to marriage and the work ethic, the new upper class must start preaching what it practices.
Oh well. I suppose cutting extended unemployment benefits, reducing food stamps and leaving Medicaid in the sewer will give an incentive to earn carried interest, deduct mortgages, set up personal corporations to recharacterize and/or shelter income, buy a farm endowed with crop subsidies, create a small business with a property tax abatement ... it's just a matter of IQ, innit? :wink:
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Re: The rich got richer

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Referring to the title of this thread - AND SO IT GOES - thank you !
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Re: The rich got richer

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Anybody critique this paper yet?
Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism.
pdf link.

Or is this just something we all believe?

newguy

add: a snip for Shakes.
A possible objection to populistic democracy is that average citizens are inattentive to politics and ignorant about public policy; why should we worry if their poorly informed preferences do not influence policy making? Perhaps economic elites and interest group leaders enjoy greater policy expertise than the average citizen does. Perhaps they know better which policies will benefit everyone, and perhaps they seek the common good, rather than selfish ends, when deciding which policies to support.
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Shakespeare
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Re: The rich got richer

Post by Shakespeare »

Perhaps they know better which policies will benefit everyone, and perhaps they seek the common good, rather than selfish ends, when deciding which policies to support.
Fat chance.
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Re: The rich got richer

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Re: The rich got richer

Post by parvus »

Thanks apater.

What I fear most people won't get is that this is systemic not personal. My partner insists that bosses lay off workers to confiscate their pay. When I suggest that there's a systematic imperative to boost profit, and that executive pay is dependent on that, she closes her ears. It's all about treating people fairly.

Well who said a capitalist economy was fair? Why should we expect maximal profit vis a vis other capitalists to also result in full employment as anything more than a byproduct? (But then, perhaps I've been reading too many non-Keynesian Marxists these days.)
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Re: The rich got richer

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parvus wrote: My partner insists that bosses lay off workers to confiscate their pay. When I suggest that there's a systematic imperative to boost profit, and that executive pay is dependent on that ..
I'm tempted to agree with your partner, to a certain extent. My reading of the reviews -as I haven't read the book- does not point to a corporate profit motive on the part of the new aristocracy. They are swallowing/inheriting a greater portion of income (not profits, as they are just as likely to run the business into the ground) as their birthright.
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Re: The rich got richer

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Re: The rich got richer

Post by ghariton »

I finished reading Piketty's book last week, and I was not convinced.

At the risk of greatly oversimplifying, I read his main argument as follows:

(1) The rate of return on capital has exceeded the growth rate of the economy for long stretches of time. The relationship reversed for some seventy years after the first world war, but has reverted since then and likely will continue into the future (low expected growth rates a la Tyler Cowen).
(2) As a result, returns on capital will increasingly outstrip the returns on labour. Since capital is currently concentrated in a few hands, the benefits of future growth will largely be captured by this capital-owning elite.
(3) The richest, coincidentally the largest owners of capital, will become increasingly rich. The sellers of labour services will increasingly fall behind.
(4) We are heading toward a rentier society, in which the rich will live off their rents (dividends, interest) and the others, deprived of capital and its rents, will have to work for a living, receiving mediocre compensation/
(5) Inequality will feed on itself as capital accumulates in a few hands, leading to ever-increasing inequality.

Note however the assumption that return on capital is likely to exceed the economy's growth rate going forward. This is based on historical observation. However, I can think of reasons why it won't happen, including technological innovation, ongoing low rates of return ("the new normal"). increasing scarcity of labour as the population ages and the corresponding upward pressure on labor income (and downward pressure on return to capital),

In addition I note that the recent increase in inequality has been largely driven, not by increasing dividends and interest returns, but rather by skyrocketing compensation packages. That does not look like the makings of a rentier society.

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Re: The rich got richer

Post by ockham »

Here's another review of Piketty's book. (I hope the link works).
http://chronicle.com/article/Capital-Man/146059

I'm not an economist, but the acclaim with which Piketty is being received is unsettling. It seems in large measure acclaim based on the fact that he's an economist who, imagine, has actually done some serious historical research in support of his theories. Wow.

(I recall the controversy of about a year ago when the "empirical research" work of two Harvard economists -- Rogoff and Rinehart, IIRC, their thesis being roughly that gov't debt > 90% of GDP causes economic stagnation -- was exposed by a graduate student as seriously shoddy. Their casual response to the exposure implied that they themselves saw the labour of gathering and analyzing empirical evidence as inconvenient and incidental to their work as economists.
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Re: The rich got richer

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ghariton wrote: However, I can think of reasons why it won't happen, including technological innovation, ongoing low rates of return ("the new normal"). increasing scarcity of labour as the population ages and the corresponding upward pressure on labor income (and downward pressure on return to capital),
technological innovation
But the income from those robots will go to the owners of the robots, not to the newly unemployed workers.
ongoing low rates of return ("the new normal")
and lower growth, so returns are still greater then growth.
increasing scarcity of labour as the population ages and the corresponding upward pressure on labor income (and downward pressure on return to capital)
Worldwide there are plenty of young people hungry for jobs. Jobs that the robots will be doing, causing downward pressure on labour income.

I don't know if any of that is true, but it is a counter arguement.
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Re: The rich got richer

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ghariton wrote:Note however the assumption that return on capital is likely to exceed the economy's growth rate going forward. This is based on historical observation. However, I can think of reasons why it won't happen, including technological innovation, ongoing low rates of return ("the new normal"). increasing scarcity of labour as the population ages and the corresponding upward pressure on labor income (and downward pressure on return to capital).
Yes. All good points. At the vanishing point, in the absence of economic growth, the returns to capital must disappear, since it is not the source of growth, only a means to growth. (I'm thinking out loud, but I'm sure this sounds Marxist.)
In addition I note that the recent increase in inequality has been largely driven, not by increasing dividends and interest returns, but rather by skyrocketing compensation packages. That does not look like the makings of a rentier society.
Yep. Boycott your local professional sports team. Stop watching TV. Don't go to Hollywood movies. Avoid travel -- do you know how much airline pilots make? You're only encouraging the 1%ers. Buy a book instead. Put your investments in a cheap index fund. Go for walk when you need a change of scenery. Write a letter instead of paying Nadir Mohammed $26m for access to cellphones through Rogers ...
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Re: The rich got richer

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newguy wrote:Anybody critique this paper yet?
Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism.
pdf link.

Or is this just something we all believe?
This fellow looked at the study and he basically says that:
Ramaz Naam wrote: This paper, however, demonstrates essentially nothing. The fundamental problem is that the mathematical models in the paper have almost no predictive power of reality.

Specifically: The mathematical model the researchers construct to see how the preferences of ordinary voters, affluent voters, and lobbyists influence the chance of a policy being enacted have an R-squared of 0.07.

What does that mean? Well, an R-squared of 1.0 means perfect fit of your model to the data. It means your mathematical model predicts reality perfectly (at least for the data points you have.)

An R-squared of 0 means (basically) that your model predicts nothing. That it has no better fit to the data than random chance.

What does an R-squared of 0.07 mean? It means the model has almost no predictive value. That it’s just barely better than random chance.
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His conclusion is, "This doesn’t mean that the US isn’t an oligarchy or that lobbyists and elites don’t have too much power. We don’t know that from this paper." So we're back to our anecdotal opinions.

His full critique can be found here.
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Re: The rich got richer

Post by ghariton »

Yes.

A couple of weeks back I got into trouble on an economics blog for laughing at economists' mastery of statistical technique. (I was being "harsh", they told me.) Turns out that political scientists are even worse.

For the record, I can produce R^2 of 0.2 by regressing random variables against random variables. To get an R^2 of less than 0.05 must take real work.

It's not the statisticians who give statistics a bad name. It's all the others misusing statistical tools.

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Re: The rich got richer

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Well we'd have to see the data. I've never understood r^2 anyway. I can calculate it, just never know when to use it. It's supposed to show predictive power yet it has no way to predict it's own predictive power.
SC00027.png
SC00027.png (6.1 KiB) Viewed 1175 times
You see the same sort of thing on the graphs in the paper.

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Re: The rich got richer

Post by parvus »

ghariton wrote:It's not the statisticians who give statistics a bad name. It's all the others misusing statistical tools.

George
Yes. More fromPiketty:
“My Ph.D. is mostly about pure economic theory because that was the easiest thing to do, and I was hired at M.I.T. as a young assistant professor doing economic theory,” he said. “I was young and successful at doing this, so it was an easy way. But very quickly I realized that there was little serious effort at collecting historical data on income and wealth, so that’s what I started doing.”

Academic economics is so focused on getting the econometrics and the statistical interpolation technique correct, he said, “you don’t really think, you don’t dare to ask the big questions.” American economists too often narrow the questions they examine to those they can answer, “but sometimes the questions are not that interesting,” he said. “Trying to write a real book that could speak to everyone meant I could not choose my questions. I had to take the important issues in a frontal manner — I could not escape.

He hated the insularity of the economics department. So he decided to write large, a book he considers as much history as economics, and one that is constructed to lead the general reader by the hand.


Where I'm having problems is with this:
The reason that postwar economies looked different — that inequality fell — was historical catastrophe. World War I, the Depression and World War II destroyed huge accumulations of private capital, especially in Europe. What the French call “les trentes glorieuses” — the roughly 30 postwar years of rapid economic growth and shrinking inequality — were a rebound. The American curve, of course, is less sharp, given that the fighting was elsewhere.

A higher than normal rate of population and economic growth helped reduce inequality, along with higher taxes on the wealthy. But the professional and political assumption of the 1950s and 1960s, that inequality would stabilize and diminish on its own, proved to be an illusion. We are now back to a traditional pattern of returns on capital of 4 percent to 5 percent a year and rates of economic growth of around 1.5 percent a year.
If GDP = COE + GOS + GMI + TP & M – SP & M

or wages + corp profit + other profit +taxes - subsidies
how can returns to capital outstrip returns to labour except by assuming that labour is dispensable? Does that imply relative immiseration?

It would seem so (depending on the role of savings and pensions).

Or does it imply something else: that despite Keynes, capital can reproduce itself sucsessfully in the absence of full employment. Standard marginalist economic theory would suggest that rates of return would entice new capitals to enter the market, and so soak up new labour but at perhaps something less than the prevailing wage rate.

But what if there are structural barriers to entry, e.g., monopoly, regulation, lack of skilled labour?
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Re: The rich got richer

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parvus wrote:If GDP = COE + GOS + GMI + TP & M – SP & M

or wages + corp profit + other profit +taxes - subsidies
how can returns to capital outstrip returns to labour except by assuming that labour is dispensable? Does that imply relative immiseration?
The problem is that you're working with a static model rather than a dynamic one. You have to look at equilibrium (or disequilibrium) between rates of change, not the quantities themselves.

The basic models go back to Domar and Harrod and to Robert Solow, although we have slightly better models now (DSGE anyone?). The basic split between returns to various factors (capital, labour, land) depend on the relative productivity of each factor. So as capital deepens or improves (due to technical progress) its compensation increases. Similarly as labour becomes more productive (better education, but also better processes for using labour) its compensation increases. The question is then which of the two increases faster. Right now, the machines seem to be winning, but that may be quite temporary.

That means that the way national income is shared out changes with time. It doesn't mean that any factor's share falls to zero.

(See Race Against the Machine by Brynjolfsson and McAffee. See also The Second Machine Age by the same authors. I recommend it highly -- much more insightful than Piketty in my opinion).



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Re: The rich got richer

Post by parvus »

ghariton wrote:
parvus wrote:If GDP = COE + GOS + GMI + TP & M – SP & M

or wages + corp profit + other profit +taxes - subsidies
how can returns to capital outstrip returns to labour except by assuming that labour is dispensable? Does that imply relative immiseration?
The problem is that you're working with a static model rather than a dynamic one. You have to look at equilibrium (or disequilibrium) between rates of change, not the quantities themselves.
That why I said relative immiseration. Imagine a flat or diminishing share -- it's not actually that hard to imagine since it is historical fact. So what does a 5% increase in return on capital mean when the economy is growing at 1.5% a year?
The basic models go back to Domar and Harrod and to Robert Solow, although we have slightly better models now (DSGE anyone?). The basic split between returns to various factors (capital, labour, land) depend on the relative productivity of each factor. So as capital deepens or improves (due to technical progress) its compensation increases. Similarly as labour becomes more productive (better education, but also better processes for using labour) its compensation increases. The question is then which of the two increases faster. Right now, the machines seem to be winning, but that may be quite temporary.
Yes, but what is technology? Is it not dead (stored-up and depreciable labour)? At a certain point (we're far from that) one could imagine a fully automated society. What then would be the source of profit? Tading claims amongst capitalists with no net economic growth? Would this be as rentierisme, or capitalists selling capital to goods to others?
That means that the way national income is shared out changes with time. It doesn't mean that any factor's share falls to zero.

(See Race Against the Machine by Brynjolfsson and McAffee. See also The Second Machine Age by the same authors. I recommend it highly -- much more insightful than Piketty in my opinion).
Thank you. Will keep them in mind.
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Re: The rich got richer

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parvus wrote:So what does a 5% increase in return on capital mean when the economy is growing at 1.5% a year?
Well, simplistically it means that capital is receiving all of the growth in the economy. Labour income is stagnant. That more or less corresponds to what is happening today. But the 5% is just a symptom, not a cause. The cause is the rapid increase in automation.

If you believe that people will demand more and more of the things (goods and services) that can be easily automated, then the trend will continue and labour income will stagnate. But if you believe that demand will diversify into things that humans can produce better than machines, the trend may reverse.
Yes, but what is technology? Is it not dead (stored-up and depreciable labour)?
Yes, technology is ultimately past labour, in that someone innovated at some time. But that is usually not a useful way to think about it. More useful is technology embodied in machines and other forms of capital (e.g. the Internet), technology embodied in humans (e.g. new skills or understandings), and technology that is neither (e.g. new business processes). Depending on the form technological progress takes, the consequences on income distribution can be quite different.
At a certain point (we're far from that) one could imagine a fully automated society. What then would be the source of profit
Presumably at that point all income would be income from capital and resources such as land. There would be new social arrangements to distribute this income, probably in ways we cannot imagine today. Perhaps governments would nationalize everything and we would all be on welfare. Incomes and prices would be set so as demand just equaled (state-run) production.

But I don't see this happening in any imaginable time frame. We humans will always want personalized services that only other humans can provide, with the accompanying flow of funds. (For example, prostitution will always be with us.) And we will always innovate, creating stuff that other people want, but that the state is too unresponsive to supply.

Meanwhile, we need to work at ways to break, or at least weaken, the link between income on one hand and productive labour on the othe, while preserving incentives for the work that is still necessary to society. EITC anyone?

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