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Piketty on ‘Ricardian equivalence’ and representative agent models

June 3, 2014 2 comments

from Lars Syll

For far too long, economists have neglected the distribution of wealth … partly because of the profession’s undue enthusiasm for simplistic mathematical models based on so-called representative agents …

Thomas-Piketty-capitalBy totally avoiding the issue of inequality in the distribution of wealth and income, these models often lead to extreme and unrealistic conclusions and are therefore a source of confusion rather than clarity. In the case of public debt, representative agent models can lead to the conclusion that government debt is completely neutral, in regard not only to the total amount of national capital but also to the distribution of the fiscal burden. This radical reinterpretation of Ricardian equivalence … fails to take account of the fact that the bulk of public debt is in practice owned by a minority of the population … so that the debt is the vehicle of important internal redistributions when it is repaid as well

Nonlinearities of the sabotage-redistribution process (5 graphs)

May 22, 2014 2 comments

from Shimshon Bichler and Jonathan Nitzan

A recent exchange on capitalaspower.com, titled ‘Capitalizing Time’, suggests a possible confusion regarding our claims, so a clarification is in order. Over the years, we have argued that the relationship between sabotage and distribution tends to be nonlinear. Up to a point, sabotage redistributes income in favour of those who impose it; but after that point, sabotage becomes ‘excessive’ and the effect inverts. One illustration of this nonlinearity is given by the relationship between unemployment and the capital share of income.

In ‘Capitalizing Time’, Blair Fix plots this relationship, with the income share of capitalists on the vertical axis and the rate of unemployment on the horizontal axis. However, the low-pixel graphics of the chart are too crude to reveal the nonlinearity. Figure 1 corrects this shortcoming. It shows the same relationship, but with finer graphics that make the nonlinearity visible (the definitions and sources for all figures are given in the Appendix). Note that, unlike Blair, we use the capital share of domestic income rather than of national income. The reason is that the latter measure includes foreign profit and interest, which are unaffected by domestic unemployment. In practice, though, the two sets of data yield similar results.  Read more…

Categories: income redistribution

Profit from Crisis: Why capitalists do not want recovery, and what that means for America

April 30, 2014 15 comments

from Jonathan Nitzan and Shimshon Bichler

Can it be true that capitalists prefer crisis over growth? On the face of it, the idea sounds silly. According to Economics 101, everyone loves growth, especially capitalists. Profit and growth go hand in hand. When capitalists profit, real investment rises and the economy thrives, and when the economy booms the profits of capitalists soar. Growth is the very lifeline of capitalists.

Or is it?

What motivates capitalists?

The answer depends on what motivates capitalists. Conventional economic theories tell us that capitalists are hedonic creatures. Like all other economic “agents” – from busy managers and hectic workers to active criminals and idle welfare recipients – their ultimate goal is maximum utility. In order for them to achieve this goal, they need to maximize their profit and interest; and this income – like any other income – depends on economic growth. Conclusion: utility-seeking capitalists have every reason to love booms and hate crises.

But, then, are capitalists really motivated by utility? Is it realistic to believe that large American corporations are guided by the hedonic pleasure of their owners – or do we need a different starting point altogether? Read more…

21st century changes in the distribution of income in the USA

March 29, 2014 2 comments

from David Ruccio

P140327-2

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.

Read more…

Categories: income redistribution

Economic and social policy and the problems of the Eurozone and European integration

January 30, 2014 Leave a comment

Mark Weisbrot

The latest (February) issue of Harpers’ Magazine has an interesting discussion of Europe and the eurozone, “How Germany Reconquered Europe: the Euro and its Discontents.” Some of the big questions of European unity, democracy, and national sovereignty are debated in broad and direct terms not often seen in other analyses:

“The basic lesson of the past ten, twenty years – even of the past hundred years – is that the upper limit, not only of democracy but of political legitimacy, is the nation-state…” (John N. Gray, London School of Economics.)

Then there is the Franco-German relationship, which is central to the eurozone:  Read more…

Anything but. . .

January 29, 2014 1 comment

from David Ruccio

You have to give credit to mainstream economists: they’ll do anything to avoid talking about class.

Take the current discussion about inequality. Right now, eyes are clearly focused on two major trends: the share of national income going to the top 1 percent (and therefore the gap between them and the other 99 percent) and the share of profits and wages in national income (and therefore the growing gap between capital and labor). The issues are on the agenda, the data are easily accessible, and the charts are dramatic.

Here’s what the share going to the top 1 percent looks like (from the World Top Incomes Database):

chart

And here are the profit and wage shares (from FRED, the Economic Research unit of the St. Louis Fed, where blue represents the profit share and red the wage share): Read more…

Categories: income redistribution

Economic winners and losers in the US since 2007

from David Ruccio

1230-sub3-rattner-1

As Steven Rattner explains, Read more…

Two American epochs: Growing Together 1947-1979 and Growing Apart 1979-2012 (charts)

October 16, 2013 3 comments

from David Ruccio

1947-1979 Read more…

The decline in real wages in the USA 2009 – 2012 (2 charts)

from David Ruccio

wages-quintiles

According to the National Employment Law Project [pdf], for the period from 2009 to 2012: Read more…

Sweden’s 30 years of income redistribution

from David Ruccio

swedengini1980to2011

source

Sweden, which has long been the shining example for liberal economists of what we should be aiming for, seems to be losing its luster. Read more…

Categories: income redistribution

Destroying the lair of the budget-balancing cretins

May 13, 2013 2 comments

from Dean Baker

By now almost everyone knows of the famous Excel spreadsheet error by Harvard professors Carmen Reinhart and Ken Rogoff. It turns out that the main conclusions from their paper warning of the risks of high public sector debt were driven by miscalculations.

When the data are entered correctly, this hugely influential paper can no longer be used to argue that the United States or other wealthy countries need fear a large growth penalty by running deficits now. There is no obvious reason that governments can’t increase spending on infrastructure, research, education and other services that will both directly improve people’s lives and foster future growth.

With the advocates of austerity on the run this is a great time to pursue the attack. The public should understand that the often expressed concerns about long-term growth, the future, and the well-being of our children are simple fig-leafs for inhumane policies that deny people (a.k.a. the parents of our children) work and redistribute income upward. Read more…

Robert Samuelson finds economics is way too complicated (2 graphs)

April 26, 2013 5 comments

from Dean Baker

That is quite literally what he told us in his column. His second paragraph tells readers:

“Among economists, there is no consensus on policies. Is “austerity” (government spending cuts and tax increases) self-defeating or the unavoidable response to high budget deficits and debt? Can central banks such as the Federal Reserve or the European Central Bank engineer recovery by holding short-term interest rates near zero and by buying massive amounts of bonds (so-called “quantitative easing”)? Or will these policies foster financial speculation, instability and inflation? The public is confused, because economists are divided.”

See, we don’t know what to do, so we just can’t do anything. All those suckers who are unemployed or seeing stagnant wages, well we just don’t know. And the fact that those on the top are getting rich with 60-year high shares of national income, well what can we do about that? It’s just too confusing. Read more…

Score card: 16% vs. 288%

January 29, 2013 9 comments

From Edward Fullbrook 

David Ruccio‘s post yesterday on the 34-year (and still continuing) period of radical income redistribution in the United States featured a graph from a new report from the Economic Policy Institute. Below, from the same EPI report, is a table no less shocking than yesterday’s graph.  Read more…

Up, up, and away (the 1% and .1% in the USA)

January 28, 2013 1 comment

from David Ruccio

FigureA

Just as we expected: the incomes of those at the very top have rebounded in dramatic fashion.

According to calculations by the Economic Policy Institute (pdf),  Read more…

Inequality, the Second Great Depression, and mainstream economics

January 22, 2013 22 comments

from David Ruccio

This morning, we’re faced with the extraordinary spectacle of two left-of-center, Nobel Prize-winning economists stumbling all over themselves trying to make sense of the role of inequality in creating and sustaining the Second Great Depression.

Really?! Now, they may have missed the trend of growing inequality over the course of the past three decades. Still, with all the talk of obscene levels of inequality in the last five years and mainstream economists, even the best and the brightest, are still having a hard time formulating a theory about the impact of that inequality in producing the conditions for the crash of 2007-08 and sustaining the recovery that never was.

First, Joseph Stiglitz argued that “Inequality stifles, restrains and holds back our growth.” Then, Paul Krugman responded by telling us he’s not convinced “that this particular morality tale is right.”  Read more…

Job polarization in the 2000s? (two graphs)

January 19, 2013 3 comments

from John Schmitt

In a recent post at Wonkblog, Dylan Matthews takes a fairly dim view of a new paper that Larry Mishel, Heidi Shierholz, and I have written on the role of technology in wage inequality. Matthews raises several issues, but I want to focus right now on a key point that he missed: proponents of the “job polarization” view of technological change provide no evidence that the framework actually works in the 2000s.

In his piece, Matthews focused on our criticisms of the ability of the job polarization approach to explain wage developments in the 1990s. I’ll leave the discussion of the 1990s for another day, but the more important issue for contemporary policy discussions is whether the framework is helpful at all for the last decade.

Since the occupation-based “tasks framework” that lies behind the academic research on job polarization is widely considered in the economics profession to be the best available technology-based explanation for wage inequality, Larry, Heidi, and I take the lack of evidence for this framework in the 2000s as support for our view that other policy-related factors are what is really driving inequality. We also think that if this purportedly unified framework doesn’t work well for the 2000s, that it is likely not helpful for earlier periods either.

But, even if you still think technology is the main or even an important culprit, we would argue that you need a new theory of technology that actually fits the facts of the 2000s.

This is a fairly long post and starts with some necessary background –necessary because there is a sizeable gap between the way economists talk formally about “job polarization” and the way most of the public talks about the same issue.   Read more…

Chart of the day: real wages and labour productivity in developed economies 1999-2011

December 11, 2012 4 comments

from David Ruccio

According to a new report from the International Labor Organization, Global Wage Report 2012/13: Wages and Equitable Growth,

Between 1999 and 2011 average labour productivity in developed economies increased more than twice as much as average wages (see figure 11). In the United States, real hourly labour productivity in the non-farm business sector increased by about 85 per cent since 1980, while real hourly compensation increased by only around 35 per cent. In Germany, labour productivity surged by almost a quarter over   Read more…

Categories: income redistribution

Percentage distribution of U.S. aggregate household income, by income tier, 1970-2010 (Graph)

August 24, 2012 3 comments

from David Ruccio

In the below chart, the middle tier is defined as those living in households with an annual income that is 67 percent to 200 percent of the national median; the upper tier is made up of those in households above the 200 percent threshold, and the lower tier is made up of those below the 67 percent threshold.

What the Pew Research Center analysis finds is that upper-income households accounted for 46 percent of U.S. aggregate household income in 2010, compared with 29 percent in 1970. Middle-income households claimed 45 percent of aggregate income in 2010, compared with 62 percent in 1970. Lower-income households had 9 percent of aggregate income in 2010 and 10 percent in 1970.  Read more…

“The average income of the bottom 90 percent fell 13.5 percent.”

August 13, 2012 1 comment

from David Ruccio

David Leonhardt, in an otherwise interesting post on slow economic growth and increasing inequality in the United States, “which has concentrated the economy’s modest gains among a small share of the population,” actually underestimates the increase in inequality over the course of the past three decades.  Read more…

Spain’s government and European authorities bent on dismantling welfare state

May 31, 2012 8 comments

from Mark Weisbrot

MADRID — I have argued for some time now that the recurring crisis in the eurozone is not driven by financial markets’ demands for austerity in a time of recession – as is commonly asserted. Rather, the primary cause of the crisis and its prolongation is the political agenda of the European authorities – led by the European Central Bank and European Commission. These authorities — which if we included the IMF constitute the so-called “Troika” that runs economic policy in the eurozone — want to force political changes, and particularly in the weaker economies, that people in these countries would never vote for.

This is becoming more obvious here in Spain, where the government – run by the right-wing Popular Party (PP) – shares the political agenda of the European authorities, perhaps even more than the IMF does.  Read more…

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