from Geoff Davies
I have read only reviews of Thomas Piketty’s Capital in the Twenty-First Century, but clearly it is valuable for documenting the nature and history of inequality over the past century or three, and for highlighting the excessive political power that flows from super-wealth. Yet he frames it in terms of capital and capitalism and, for all the quality of his diagnosis, his main prescription evidently is just to tax the wealthy, through income and inheritance taxes.
The trouble is, capital and capitalism are very ill-defined. To speak of capitalism is to invite an un-constructive shouting match. Capitalism has caused great harm to people and the world! Yes but capitalism is what has made us rich!
A more useful framing is that there have been, and can be, many ways to structure a market economy. When one looks into the mechanisms that have operated in market economies, one can readily identify mechanisms that pump wealth from the 99% to the 1%. One can then think of ways to stop or reverse these flows, so wealth flows more fairly to everyone involved in its generation. It will be much more effective to fix the problems at the source than just to apply traditional retro-active bandaids like taxes.
In my own book Sack the Economists, I identified seven fairly obvious such mechanisms. Below is an edited excerpt that summarises mechanisms identified in the course of the book’s analyses. (Dean Baker has also made lists, short and longer, which are a little more detailed and only partly overlapping with mine.) Read more…
from David Ruccio
According to the AFL-CIO’s latest “Executive Paywatch” report, the CEO-to-average-worker-pay ratio rose last year to 331:1. And the ratio of CEO pay to the minimum wage was much higher: 774:1.
That’s because, in both cases, workers’ wages remained more or less constant while the amount of surplus those workers created that ended up in the pockets of the CEOs of the nation’s largest corporations continued to rise.
As the AFL-CIO argues in their report: Read more…
form Lars Syll
Sweden is according to new statistics from Statistics Sweden in a state of deflation. The inflation rate was -0.6 percent in March.
To a large extent the deflation is caused by tight monetary and fiscal policies pursued by Sweden’s Central Bank and the government. With a very defensive fiscal policy and a targeted inflation rate set at a very low level, real inflation has during the last 2-3 years been very close to zero, and now even negative. Another consequence of the austere fiscal and monetary policies is that overall unemployment is still at almost 9 % and youth unemployment close to 26 %.
This is deeply worrying.
So yours truly thought he should give the Swedish Fed and the Swedish finance minister - Anders Borg – a suggestion for reading …
Zoltan Pozsnar and Paul McCulley have written an absolutely splendid essay on what a liquidity trap means and why mainstream neoclassical economics has nothing to offer in way of solving the problems that it brings along – and why it is so important to get hold of the insights that Fisher, Keynes, Minsky and Krugman have given us on debt-deflation processes and liquidity traps: Read more…
from Edward Fullbrook
Now Paul Krugman has gotten into the Piketty act. The just published issue of the New York Review of Books features a long review essay by Krugman (it’s open-access) on Capital in the Twenty-First Century. Here is how it begins.
Thomas Piketty, professor at the Paris School of Economics, isn’t a household name, although that may change with the English-language publication of his magnificent, sweeping meditation on inequality, Capital in the Twenty-First Century. Yet his influence runs deep. It has become a commonplace to say that we are living in a second Gilded Age—or, as Piketty likes to put it, a second Belle Époque—defined by the incredible rise of the “one percent.” But it has only become a commonplace thanks to Piketty’s work. In particular, he and a few colleagues (notably Anthony Atkinson at Oxford and Emmanuel Saez at Berkeley) have pioneered statistical techniques that make it possible to track the concentration of income and wealth deep into the past—back to the early twentieth century for America and Britain, and all the way to the late eighteenth century for France.
from Edward Fullbrook
Merijn is ahead of me as I have only just ordered Thomas Piketty’s Capital in the Twenty-First Century. The book is receiving masses of favorable media attention in the West, including from The New Yorker, the Financial Times, the Economist and The Observer where yesterday Piketty and his book occupied the cover of the newspaper’s review section. This attention is surprising given the book’s central message (one often expressed on this blog), that capitalism has now failed the world and that inequality is now accelerating at a very dangerous pace and that the rule of the ultra-rich over the everyone else is a form of gangsterism. The Observer’s feature writer went to the École d’économie de Paris to interview Piketty, and here are a couple of quotes.
from David Ruccio
This chart, from the work of Emmanuel Saez and Gabriel Zucman [pdf], illustrates the large increase in top 0.1% wealth share since the 1980s (top 0.1% = wealth above $20 million today. In other words, the inequality in the distribution of wealth in the United States is back to what it was just prior to the first Great Depression.
from Dean Baker
Brad DeLong and Paul Krugman are having some back and forth on the problem of secular stagnation and what it would have taken to avoid a prolonged period of high unemployment. I thought I would weigh in quickly since I have a better track record on this stuff than either of them.
The basic story going into the crash was that we had an economy that was being driven by the housing bubble. This was both directly through residential construction and indirectly through the consumption that followed from $8 trillion of bubble generated housing equity. Residential construction expanded to a record high of more than 6 percent of GDP at a time when demographics would have implied its share would be shrinking. This led to enormous overbuilding, which is why construction hit record lows following the crash. (There was a smaller bubble in non-residential real estate that also burst in the crash.)
Consumption also predictably plummeted. This is known as the housing wealth effect. (I learned about this in grad school, didn’t anyone else?) Anyhow, when people saw their homes soar in value many spent in part based on this wealth. This might have meant doing cash out refinancing, a story that obsessed Alan Greenspan during the bubble years. It might mean a home equity loan, or it might just mean not putting money into a retirement account because your house is saving for you.
from David Ruccio
As Ed Dolan explains,
The chart [above] assigns a value of 100 to each component’s share in 2007, the year before the recession began. This chart shows that corporate profits were hit hard in the first months of the recession, but began to recover already by the end of 2008, when GDP was still falling. By the time the economy had officially entered the recovery phase in mid-2009, corporate profits were surging to new highs.
Compensation of employees and proprietors’ income behaved differently. During the downslope of the recession, the shares of those two components held fairly steady, that is, they decreased but only at about the same rate as GDI [Gross Domestic Income] as a whole. After mid-2009, when the economy began to recover, the two diverged. Proprietors’ income grew faster than GDI as a whole, so that its share increased. Compensation of employees grew less rapidly than GDI, so its share began to fall, and is still falling.
These trends in the shares of GDI components provide another view of the substantial changes in the distribution of income and wealth that are underway in the twenty-first century United States. The data shown in our charts are only indirectly related to the more widely publicized increase in the share of total income accruing to top earners, but they explain part of what is going on. It is true that some high earners receive the major part of their income in the form of salaries and bonuses, and that many middle-class families receive some corporate profit income through mutual funds and retirement savings accounts. Still, corporate profits are more unequally distributed and compensation of employees less unequally distributed than income as a whole. That means the rising share in GDI of the former and the falling share of the latter are two of the factors behind the rising fortunes of the super-rich and the relative economic stagnation of the middle class.
from Dean Baker
In the wake of the Russian takeover of Crimea, there havebeen a number of calls for weaning Europe from dependence on Russian natural gas. Some have suggested that Europe would abandon environmental restrictions on drilling for oil and gas to increase domestic production. To help, the U.S. would continue to massively increase production of oil and gas as well as its capacity to liquefy natural gas and transport it to Europe.
The weaners seem to have the impression that this is yet another case in which the United States has to come to the rescue of those weak Europeans. After all, while we were drilling everywhere, the Europeans were fiddling around with wind and solar energy, all the while making themselves vulnerable to Russian President Vladimir Putin’s machinations.
Reality-based fans of arithmetic see matters differently. The reality is that Europe, especially Germany, has done a huge amount over the last two decades to reduce its consumption of fossil fuels, including natural gas, from Russia. The reduction in fossil fuel use swamps the impact of the drill-everywhere strategy in the United States.
If Europe had not been aggressively pushing to reduce its energy use, there is no way that gas from Russia could be replaced by domestically fracked gas or imports from elsewhere. In addition, Europe’s efforts to reduce fuel consumption have the advantage of slowing global warming.
from Norbert Haering
A working paper published by the European Central Bank (ECB) shows that strong wage increases have not been the cause for the troubles of the euro zone’s crisis countries. Rather, capital flows have caused bloated house and asset prices and exaggerated construction activity and unsustainable economic activity in general, which in turn has pushed up wages. This diagnosis flies in the face of the of the story often retold by the ECB and other European policy makers that peripheral countries lost their competitiveness, because they did allow exaggerated wage increases for many years, and that declining wages are the appropriate cure for a crisis caused in this way.
Even countries not in crisis are expected to increase their competitiveness, according to the Euro Plus Pact, signed in March 2011 by 23 countries.
It is all the more embarrassing, that two members of the Competitiveness Research Network of the ECB and other central banks and international organizations have published a paper called “The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries” in the ECB’s working paper series, which shows that the focus on labor cost is mistaken, because the diagnosis behind it has it the wrong way round. Hubert Gabrisch of the German research institute IWH and Karsten Staehr of Estonia’s central bank find in their empirical analysis for the years 1995 to 2012 that increases in the current account deficit exerted a clear positive influence on subsequent wage increases, but not the other way round.
from Dean Baker
Apparently it was in large part, according to this WSJ article. The piece tells readers that Ireland’s economy shrank by 2.3 percent from the third to the fourth quarter, meaning that it dropped at a 9.2 percent annual rate, to use the normal terminology of people in the United States when talking about growth data. However the article later tells us that the story is not as bad as it first appears, since much of this decline is due to a major drug going off patent, which has reduced the income flows recorded in Ireland.
Due to its low corporate tax rate, many multinational companies book income in Ireland even though it was actually generated elsewhere. These phantom income flows have little to do with the state of the Irish economy. To avoid this problem it is more useful to look at gross national income. If we look at the OECD data on Irish national income we find that the number for 2012 (the most recent year available) was still 8.6 percent below the 2008 level. In fact, it was 2.3 percent below the 2005 level. Obviously Ireland is yet another one of those great success stories from the economic whizzes at the European Commission.
from Norbert Haering
Outstanding credit to the private sector in the euro area has been shrinking for a while now. It is shrinking fast in several peripheral countries and the European Central Bank (ECB) seems unable or unwilling to do anything about it. Given that the economy of the euro area is barely crawling out of recession and that inflation is predicted to be significantly below the central banks’ target rate for the next two years at least, this seems troublesome. Two economists of the Bank for International Settlements (BIS) help out with a study called “Credit and Growth After Financial Crises”: The authors claim: „We find that declining bank credit to the private sector will not necessarily constrain the economic recovery after output has bottomed out following a financial crisis.” So if there should be a problem, it is not because of a credit crunch or anything like that, we learn. To obtain their result, BIS-economists Előd Takáts and Christian Upper examine data from 39 financial crises, which were preceded by credit booms. “In these crises the change in bank credit, either in real terms or relative to GDP, consistently did not correlate with growth during the first two years of the recovery”, they write.
Thus, against the consensus, deleveraging need not hold back the upswing, is their contention. By extension, this means that even if all sectors of the economy are deleveraging, government may also reduce the deficit or pay down debt, without necessarily causing trouble.
The trouble is, the BIS-economists use an entirely inadequate method for coming to their conclusion, and they even seem to do so knowingly. Read more…
from Lars Syll
Inequality continues to grow all over the world — so don’t even for a second think that this is only an American problem! Read more…
from David Ruccio
from Dean Baker
The collapse of the housing bubble and the subsequent devastation to the economy caught almost the entire economics profession by surprise. Federal Reserve chair Alan Greenspan, along with other people in top policy positions, were left dumbfounded. They didn’t think a prolonged downturn was possible. They were wrong in a really big way.
The current group of central bank chairs and other top policymakers would like us to believe that they’ve learned their lesson and now everything is under control. They want us to think they actually have a clue about how the economy operates. There is good reason to believe otherwise. The European Central Bank (ECB) recognizes that inflation has been running below its 2% inflation target and is likely to stay below that target for several years to come. But the ECB has reassured the public that’s prepared to act, making sure that the eurozone doesn’t see deflation. That the bank cares about the inflation rate crossing zero and turning negative is a sign that it has no clue about how the economy works.
The point here is incredibly simple Read more…
from Dean Baker
Washington politicians like to hyperventilate about the budget deficit. However changes in the budget deficit are overwhelmingly a response to economic conditions rather than the result of deliberate policy. In other words, politicians didn’t have much to do with the changes. Furthermore, since the budget is responding to economic changes, it is not giving us new information about the economy.
On the other hand the trade deficit is a direct measure of the amount of demand that is going overseas rather than being spent here. This represents income generated in the United States that is not creating demand in the United States. By definition, this lost demand must be made up by other borrowing, either by the public sector (i.e. budget deficits) or the private sector. Currently the trade deficit is running at an annual rate of around $480 billion (@ 3.0 percent of GDP), which means that the sum of net borrowing in the public and private sector must be equal to $480 billion. Read more…
from Lars Syll
As we’ve been aware of lately there isn’t much trickle-down going on in the USA. Unfortunately we can also see the same pattern developing in many other countries. Take for example Sweden. The figure below shows how the distribution of mean income and wealth (expressed in year 2009 prices) for the top 0.1% and the bottom 90% has changed in Sweden for the last 30 years: Read more…
from Peter Radford
I am preparing a talk on inequality here in America, and so have been re-reading the Piketty and Saez work. Amongst the more eye-opening facts I have come across is the assertion, by Saez, that the surge in the top 1% incomes is so large that the growth of the bottom 99% amounts to only half the average [mean].
Think about that for a moment.
It would be like walking into a room full of people two feet tall with one thirty footer in the corner. The mean average is meaningless in such circumstances. We are all taught that in statistics class, but to come across such an egregious example in a dataset as large as all US tax returns is astonishing. Read more…
from Thomas Palley
Larry Summers (HERE) and Paul Krugman (HERE) have recently identified the phenomenon of stagnation. Given that they are giants in today’s economic policy conversation, their views have naturally received enormous attention. That attention is very welcome because the issue is so important. However, there is also a danger that their dominance risks crowding out other explanations of stagnation, thereby short-circuiting debate.
Krugman has long emphasized the liquidity trap – zero lower bound to interest rates which supposedly prevents spending from reaching a level sufficient for full employment. Summers has added to this story by saying we have been in the throes of stagnation for a long while, but that has been obscured by years of serial asset price bubbles.
That is a good start to the conversation, but there are other views that dig deeper regarding the causes of stagnation. Read more…