Macro Roundup

Justification for billionaires"...it is the effect on others that matters, and on their incentives to follow a path marked out by Bezos (or Edison or Ford) that justifies his billions. The market is saying, “Do more of this, for Lord’s sake!"..."

McCloskey’s perspective is especially apt at a time when so many politicians and pundits are sending the message, “Do less of that!”

In other words, it is the effect on others that matters, and on their incentives to follow a path marked out by Bezos (or Edison or Ford) that justifies his billions. The market is saying, “Do more of this, for Lord’s sake!”

Nice piece. I’d add this: Large “quasi-rents,” as economists call them, are signals from the market (which is to say, from people, the suppliers and demanders) that the activity should be imitated (as Bezos’ has been) and expanded (as Bezos did, books to everything). Your piece stresses only the incentive effects of his high income available for consumption, and on Bezos himself. Certainly there is something in it, as you argue, in the face of the great uncertainty of enterprise: most ideas fail.

But to emphasize the incentives in consumption is to fall into the rhetoric of the left, which notes correctly the low incentive effects of the last $1 out of billions, believes incorrectly that the price system has no function but as a tax by the bosses on the rest of us, and is enviously indignant about levels of luxury (no matter if Warren Buffett still lives in a modest house).

James Pethokoukis, "Deirdre McCloskey on why Jeff Bezos and billionaires, even superbillionaires, should exist," American Enterprise Institute, March 5, 2020, https://www.aei.org/economics/deirdre-mccloskey-on-why-jeff-bezos-and-billionaires-even-superbillionaires-should-exist/

Deirdre McCloskey on why Jeff Bezos and billionaires, even superbillionaires, should exist

Would Jeff Bezos have started Amazon even if he could have become only as rich as Bernie Sanders? That is, a modest millionaire rather than a superbillionaire? Doubtful, I wrote in a recent blog post. Bezos had a great job and fantastic future earning potential when he left it all to start Amazon. The journey to massive entrepreneurial success was a hard slog that could have easily failed — and plenty of smart people were sure it would. Indeed, Amazon’s greatest success came after Bezos was already a billionaire. We can all be glad he didn’t quit because there was a maximum limit on wealth back in 1999.

But there’s more to it than that, according to economist Deirdre McCloskey, author of the Bourgeois trilogy on how the modern world got rich and, most recently, Why Liberalism Works: How True Liberal Values Produce a Freer, More Equal, Prosperous World for All. (And here’s my interview with her about that latter book.) After reading my post, McCloskey sent me the following generous and insightful email:

Roslyn Layton, "New book on American dream suggests wage increases correlated with internet adoption," American Enterprise Institute, March 6, 2020, https://www.aei.org/technology-and-innovation/new-book-on-american-dream-suggests-wage-increases-correlated-with-internet-adoption/

New book on American dream suggests wage increases correlated with internet adoption

My AEI colleague Michael Strain’s new book, “The American Dream Is Not Dead,” offers proof that hard work pays off in higher wages and upward mobility. Strain argues that the hourly wages of regular workers have increased by one-third in real terms from July 1990 to today, a conclusion he supports with significant data and an explanation of the multifaceted notion of the American dream. Acknowledging continued problems in the decline in many communities, startups, manufacturing, and with the opioid epidemic, Strain offers a timely antidote to the election-year rhetoric of the dead American dream, a rigged economy, and purported growing inequality.

The book is not about the internet, but the role of technological adoption seems unmistakable: The last 30 years of increasing real wages coincides with the takeoff of the internet and the digitization of the American economy. As firms and households adopted digital technology through the internet, computers, smartphones, and broadband services, economic productivity rose and wages increased, an explanation supported separately by theliteratureon productivity and wages. Notably, high information-intensity industries have grown quickly, whilelow information-intensity industries have experienced slow productivity growth. This suggests that if we want more and higher wages, we need more digitization, not less.

As for wage increases, it is difficult to credit for either political party, as both controlled the presidency and Congress at different times over the decades. The internet is colloquially described as a bipartisan, free market success story, and there is some truth to that. The Telecommunications Act of 1996 emerged from a Republican Congress and was signed by a Democrat president. The bill noted that the internet should be free and unfettered from federal and state control; it did not dictate how digital technologies should be bought and sold; who could use them or how they should be used or at what speed, quality, or price. Nor was this question delegated to any administrative agency.

If there was a political success, it was a victory of permissionless innovation over central planning. Given this, the bipartisan attacks on Big Tech and the purveyors of technology — the very source of the economic gains of the past 30 years — seem misplaced. Both Republicans and Democrats like to take credit for the economy’s success, but never for its failures. When looking at the consistent rise in wages for ordinary workers, it is difficult to square the notion that America’s robust tech industry is hurting the economy, competition, and innovation. Strain observes how technology benefits Americans through medical and safety advances, and the “new middle class” characterized by tech-enabled jobs such as sales representatives, social workers, counselors, health care workers, personal service workers, and computer support specialists.

The hallmark of AEI is the competition of ideas, and Strain’s assessment is more powerful as he invites critique. The book’s second thesis is that populism, the depiction of politics as a conflict of the people versus the elite, endangers the American dream, noting the policies from the left and right he finds damaging. To Strain’s credit, he invites and responds to critiques from E. J. Dionne and Henry Olsen who argue respectively for progressive and conservative populism. At the book event at AEI, Richard V. Reeves of the Brookings Institution warned of the “intellectual glamor” of pessimism and polemicism in an election year and the “danger of the overstating the problem to justify (radical) solutions,” calling the book “reasonable, modulated, and responsible.” Strain provides a potent reminder of the value of long-term data when election fever is at its highest.

“…Notably, high information-intensity industries have grown quickly, whilelow information-intensity industries have experienced slow productivity growth. This suggests that if we want more and higher wages, we need more digitization, not less….”

. Krugman underwhelmed by Piketty"...For Piketty, rising inequality is at root a political phenomenon. The social-democraticframework that made Western societies relatively equal for a couple ofgenerations after World War II, he argues, was dismantled, not out ofnecessity, but because of the rise of a “neo-proprietarian” ideology. Indeed,this is a view shared by many, though not all, economists. These days,attributing inequality mainly to the ineluctable forces of technology andglobalization is out of fashion, and there is much more emphasis on factorslike the decline of unions, which has a lot to do with political decisions. Butwhy did policy take a hard-right turn? Piketty places much of the blame oncenter-left parties, which, as he notes, increasingly represent highly educatedvoters. These more and more elitist parties, he argues, lost interest inpolicies that helped the disadvantaged, and hence forfeited their support. Andhis clear implication is that social democracy can be revived by refocusing onpopulist economic policies, and winning back the working class. Piketty couldbe right about this, but as far as I can tell, most political scientists woulddisagree. In the United States, at least, they stress the importance of raceand social issues in driving the white working class away from Democrats, anddoubt that a renewed focus on equality would bring those voters back. Afterall, during the Obama years the Affordable Care Act extended health insuranceto many disadvantaged voters, while tax rates on top incomes went upsubstantially. Yet the white working class went heavily for Trump, and stayedRepublican in 2018...."Paul Krugman, "Thomas Piketty Turns Marx on His Head,"New York Times, March 8, 2020, https://www.nytimes.com/2020/03/08/books/review/capital-and-ideology-thomas-piketty.htmlThomas Piketty Turns Marx on His Head Seven years ago the French economist Thomas Pikettyreleased “Capital in the Twenty-First Century,” a magnum opus on incomeinequality. Economists already knew and admired Piketty’s scholarly work, andmany — myself included — offered the book high praise. Remarkably, the book also became a huge international best seller. In retrospect, however, what professionals saw in“Capital” wasn’t the same thing the broader audience saw. Economists alreadyknew about rising income inequality. What excited them was Piketty’s novelhypothesis about the growing importance of disparities in wealth, especiallyinherited wealth, as opposed to earnings. We are, Piketty suggested, returningto the kind of dynastic, “patrimonial” capitalism that prevailed in the late19th century. But for the book-buying public, the big revelation of“Capital” was simply the fact of soaring inequality. This perceived revelationmade it a book that people who wanted to be well informed felt they had to have. To have, but maybe not to read. Like Stephen Hawking’s “ABrief History of Time,” “Capital in the Twenty-First Century” seems to havebeen an “event” book that many buyers didn’t stick with; an analysis of Kindle highlights suggested that the typical reader got through only around 26 of its 700 pages. Still, Piketty was undaunted. His new book, “Capital and Ideology,” weighs in at morethan 1,000 pages. There is, of course, nothing necessarily wrong with writing alarge book to propound important ideas: Charles Darwin’s “On the Origin ofSpecies” was a pretty big book too (although only half as long as Piketty’slatest). The problem is that the length of “Capital and Ideology” seems, at least to me, to reflect in part a lack of focus. To be fair, the book does advance at least the outline ofa grand theory of inequality, which might be described as Marx on his head. InMarxian dogma, a society’s class structure is determined by underlying,impersonal forces, technology and the modes of production that technologydictates. Piketty, however, sees inequality as a social phenomenon, driven by human institutions. Institutional change, in turn, reflects the ideology that dominates society: “Inequality is neither economic nor technological; it is ideological and political.” But where does ideology come from? At any given moment asociety’s ideology may seem immutable, but Piketty argues that history is fullof “ruptures” that create “switch points,” when the actions of a few people cancause a lasting change in a society’s trajectory. To make that case, Piketty provides what amounts to ahistory of the world viewed through the lens of inequality. The book’sarchetypal case study is French society over the past two and a half centuries.But Piketty ranges very far afield, telling us about everything from the compositionof modern Swedish corporate boards to the role of Brahmins in the pre-colonialHindu kingdom of Pudukkottai. He describes four broad inequality regimes, obviouslyinspired by French history but, he argues, of more general relevance. First are“ternary” societies divided into functional classes — clergy, nobility andeveryone else. Second are “ownership” societies, in which it’s not who you arethat matters but what you have legal title to. Then come the social democraciesthat emerged in the 20th century, which granted considerable power andprivilege to workers, ranging from union representation to government-providedsocial benefits. Finally, there’s the current era of “hypercapitalism,” whichis sort of an ownership society on steroids. Piketty tries to apply this schema to many societiesacross time and space. His discussion is punctuated by many charts and tables:Using a combination of extrapolation and guesswork to produce quantitativeestimates for eras that predate modern data collection is a Piketty trademark,and it’s a technique he applies extensively here, I’d say to very good effect.It is, for example, startling to see evidence that France on the eve of WorldWar I was, if anything, more unequal than it was before the French Revolution. But while there is a definite Francocentric feel to“Capital and Ideology,” for me, at least, the vast amount of ground it coversraises a couple of awkward questions. The first is whether Piketty is a reliable guide to sucha large territory. His book combines history, sociology, political analysis andeconomic data for dozens of societies. Is he really enough of a polymath topull that off? I was struck, for example, by his extensive discussion ofthe evolution of slavery and serfdom, which made no mention of the classic workof Evsey Domar of M.I.T., who argued that the more or less simultaneous rise ofserfdom in Russia and slavery in the New World were driven by the opening ofnew land, which made labor scarce and would have led to rising wages in theabsence of coercion. This happens to be a topic about which I thought I knewsomething; how many other topics are missing crucial pieces of the literature? The second question is whether the accumulation of casesactually strengthens Piketty’s core analysis. It wasn’t clear to me that itdoes. To be honest, at a certain point I felt a sense of dread each timeanother society entered the picture; the proliferation of stories began to seemlike an endless series of digressions rather than the cumulative constructionof an argument. Eventually, however, Piketty comes down to the meat ofthe book: his explanation of what caused the recent surge in inequality andwhat can be done about it. For Piketty, rising inequality is at root a politica lphenomenon. The social-democratic framework that made Western societiesrelatively equal for a couple of generations after World War II, he argues, was dismantled, not out of necessity, but because of the rise of a“neo-proprietarian” ideology. Indeed, this is a view shared by many, though notall, economists. These days, attributing inequality mainly to the ineluctableforces of technology and globalization is out of fashion, and there is much more emphasis on factors like the decline of unions, which has a lot to do with political decisions. But why did policy take a hard-right turn? Piketty places much of the blame on center-left parties, which, as he notes, increasingly represent highly educated voters. These more and more elitist parties, heargues, lost interest in policies that helped the disadvantaged, and henceforfeited their support. And his clear implication is that social democracy canbe revived by refocusing on populist economic policies, and winning back the working class. Piketty could be right about this, but as far as I can tell, most political scientists would disagree. In the United States, at least,they stress the importance of race and social issues in driving the white working class away from Democrats, and doubt that a renewed focus on equalitywould bring those voters back. After all, during the Obama years the Affordable Care Act extended health insurance to many disadvantaged voters, while tax rates on top incomes went up substantially. Yet the white working class went heavily for Trump, and stayed Republican in 2018. Maybe the political science consensus is wrong. What I can say with confidence, though, is that until the final 300 pages “Capital andIdeology” doesn’t do much to make the case for Piketty’s views on modernpolitical economy. The bottom line: I really wanted to like “Capital andIdeology,” but have to acknowledge that it’s something of a letdown. There areinteresting ideas and analyses scattered through the book, but they get lost inthe sheer volume of dubiously related material. In the end, I’m not even surewhat the book’s message is. That can’t be a good thing.

David Splinter looks at poverty and finds that while younger American are more likely to be poor, their poverty is short term, older Americans are less likely to be poor but poverty in that cohort is persistent. He also founds that share of population experiencing poverty at some point is large“…A large share of the population will experience poverty at some point. While 11 to 13 percent of people are in poverty in any single year based on after-tax income, 4 in 10 people spent at least one year in poverty over the 12-year period from 2007 through 2018. Among those who were in poverty at any point during this period, the average time spent in poverty is about 3 years (not necessarily continuously), or one fourth of the time….... Using an after-tax household income measure, we estimate that over 4 in 10 people spent at least one year in poverty between 2007 and 2018. Those that experienced at least one year of poverty spent an average of one-fourth of the 12-year period in poverty. There is substantial mobility in and out of poverty. For example, 41 percent of those in poverty in 2007 were out of poverty in the following year. However, many of those who are poor spend multiple years in poverty or escape poverty only to fall back into it. Of those who were in poverty in 2007, one-third are in poverty for at least half of the years through 2018...."

Jeff Larrimore, Jacob Mortenson and David Splinter, "Presence and Persistence of Poverty in U.S. Tax Data," Federal Reserve Board and Joint Committee on Taxation, February 2020, http://www.davidsplinter.com/LMS_PersistencePoverty_2020.pdf

"...This paper provides insight into poverty trends and persistence of poverty among U.S. households since the Great Recession. We construct a new, one percent panel of individuals and household-level incomes using the population of individual income tax returns and information returns. These data extend the usefulness of tax data to the bottom tail of the income distribution, which had previously been neglected due to the high prevalence of non-filing (almost 15 percent of adults) and the inability to link non-filers and tax units into households. We produce tax-based estimates of poverty trends from 2007 through 2018, taking advantage of the high-quality income reporting in the tax data and the accurate reporting of tax liabilities and credits. Additionally, utilizing of the panel nature of these data, we estimate the individual-level persistence of poverty over this period. When looking at annual poverty rates, the household-level tax data confirm observations from the CPS that poverty rates based on pre-tax income are substantially higher for children than for older age cohorts. On an after-tax basis, while poverty rates remain higher for children, the age-gap closes substantially. This reflects the substantial child-based tax credits available, including the Earned Income Tax Credit and Child Tax Credit. We also observe that despite the onset of the Great Recession in 2008, there remained high rates of mobility out of (and into) poverty in that year. Of people who were in poverty in 2007, more than 40 percent were no longer below the poverty line the following year. This transition rate out of poverty is nearly the same as the rate of transition out of poverty in subsequent years— indicating that while the Great Recession increased overall poverty rates, it did not dramatically change the likelihood that those in poverty in one year would exit poverty the next year. Recognizing that many people move in and out of poverty each year, the share of people in poverty at any point over several years far exceeds the share in poverty in any single year. While annual after-tax poverty rates range from about 11 to 13 percent, three to four times more people (42 percent) spent at least one year between 2007 and 2018 in poverty. Those who were poor at any point during this 12-year period spent an average of 3 years in poverty during this time. The share who were poor at any point between 2007 and 2018 varies by demographic characteristics. One-quarter of people living in married households with no children in 2007 were ever in poverty during this period, while over half of those living in single-parent households spent at least one year in poverty. While many people experience transitory poverty, we also find high rates of more persistent poverty. Of those who were in poverty in 2007, almost one-third of those in poverty in 2007 were also in poverty eight years later, and over one-fourth were in poverty ten years later—although they may have escaped poverty for one or more years in between. Hence, many who experience poverty either spend several consecutive years in poverty or escape poverty only to fall back into it in a future year. Consequently, while there are substantial benefits to policies that alleviate economic hardships from short transitory poverty spells, there remains a need for programs that assist individuals experiencing chronic poverty over many years.

FRBNY, two points, first btw 2010-2016 AHE of college workers grew by 7.8% annually versus 6.5% for non-college workers however, “…. average hourly earnings at the bottom of the wage distribution have been consistently growing faster than those at the top of the distribution. This pattern is partly driven by the fact that it is more common for low-wage workers to receive large wage increases in percentage terms than for high-wage workers, even though such increases are not that large in absolute terms. As a consequence, it is worth noting that these results are still consistent with increasing income inequality as measured by the variance of earnings….”

René Chalom, Fatih Karahan, Brendan Moore, and Giorgio Topa, "Is the Tide Lifting All Boats? A Closer Look at the Earnings Growth Experiences of U.S. Workers," Federal Reserve Bank of New York, March 4, 2020, https://libertystreeteconomics.newyorkfed.org/2020/03/is-the-tide-lifting-all-boats-a-closer-look-at-the-earnings-growth-experiences-of-us-workers.html

“…While there is some evidence that workers at the bottom of the earnings distribution may be catching up with those at the top of the distribution, we also find some indications that the returns to higher education may be increasing, with hourly earnings growth of college graduates outpacing that of high school graduates. Finally, we also find some evidence that—at least in recent years—hourly earnings of minority workers may be starting to catch up with those of white workers. This, together with the fact that the unemployment rate for African American workers has reached record lows, is an encouraging sign for the broadening of the current economic expansion….”

Second earnings of Hispanic and blacks are converging with those of whites (though Asians are growing fastest)