On German TV, stand-up comedian Dieter Nuhr exposes the contradictions of calls for justice and equality that characterize much of the German public debate. His hour-long performance could well serve as a lecture in economics and ethics.
… meanwhile, inequality in the US remains more of an issue.
On Alphaville, Kadhim Shubber summarizes a DB Global Markets Research study on US inequality:
- More than 30% of US households have zero or negative non-home wealth.
- Wealth is increasingly concentrated among the old, and among the wealthy.
Observers paint the picture of an increasingly dysfunctional society.
And they point to the relevance of inequality for political polarization and accountability.
In a paper, Reto Föllmi and Isabel Martínez document trends in income and wealth inequality in Switzerland over the last 100 years.
Daniel Hug reports in the NZZaS (figures below taken from NZZaS).
Data (World Wealth and Income Database, based on tax records).
- Income inequality has been rather stable and is modest …
- … although social mobility as reflected in educational attainment is low.
- Income inequality at the very top has increased.
- The top 1% of income recipients earn at least CHF 300 000 annually (net income before tax), the top 0.01% at least CHF 4 million.
- Wealth is distributed much more unequally. The top 1% own roughly 40%, slightly more than in the United States and twice as much as in France and the UK.
- The wealth distribution is more equal if retirement savings in the second and third pillar are accounted for. PAYG funded pensions (first pillar) also contribute towards reducing inequality after taxes and transfers, much more so than taxes.
High rates of tax evasion are not necessarily a consequence of high tax rates. In an NBER working paper, Annette Alstadsæter, Niels Johannesen, and Gabriel Zucman provide estimates of countries’ wealth holdings in “tax havens.” Based on BIS statistics the authors find that:
- Wealth on the order of 10% of global GDP is held offshore.
- In Scandinavia, the number is much smaller.
- In continental Europe, it equals roughly 15%.
- In some Gulf and Latin American countries, almost 60%.
- In Russia, the richest citizens hold the majority of their wealth abroad.
That’s what Gerald Auten and David Splinter argue in a paper from last year.
… new estimates of top income shares using two consistent measures of income. Our measure of consistent market income includes full corporate profits and adjusts for changes from TRA86, including changes to the tax base and increased filing by dependent filers. In addition, we include employer paid payroll taxes and health insurance and adjust for falling marriage rates. The effect of these adjustments on estimated top income shares are dramatic. Using a consistent measure of market income shows that the increase in income shares of the top one percent since 1979 is about half of the PS unadjusted estimate. The increase since 1960 is about one-quarter of the unadjusted estimate. Moreover, our measure of broad income that includes government transfers reduces the top one percent share increase to one-tenth of the unadjusted estimate.
But in an NBER working paper, Annette Alstadsaeter, Niels Johannesen, and Gabriel Zucman argue that tax evasion and offshore wealth holdings work in the opposite direction:
Because offshore wealth is very concentrated at the top, accounting for it increases the top 0.01% wealth share substantially in Europe, even in countries that do not use tax havens extensively. It has considerable effects in Russia, where the vast majority of wealth at the top is held offshore. These results highlight the importance of looking beyond tax and survey data to study wealth accumulation among the very rich in a globalized world.
The Economist reports about a study by Annette Alstadsæter, Niels Johannesen and Gabriel Zucman who matched leaked information from Swiss banks and Panamanian shell companies with Scandinavian wealth records. Their findings:
- Tax evasion is progressive. The average / top 1% / top 0.01% Scandinavian household paid 3% / 10% / 30% fewer taxes than it should.
- Accordingly, estimates of wealth inequality (based on tax data) likely underestimate the degree of inequality.
In a CEPR Discussion Paper, Sascha Becker, Thiemo Fetzer, and Dennis Novy argue that education and income mainly explain voting outcomes. In the abstract of their paper, the authors write:
We find that exposure to the EU in terms of immigration and trade provides relatively little explanatory power for the referendum vote. Instead, … fundamental characteristics of the voting population were key drivers of the Vote Leave share, in particular their education profiles, their historical dependence on manufacturing employment as well as low income and high unemployment. … within cities, we find that areas with deprivation in terms of education, income and employment were more likely to vote Leave.
In The Great Leveler, Walter Scheidel argues that over thousands of years, only mass violence and catastrophes have triggered significant reductions in inequality.
From the book’s introduction:
For thousands of years, civilization did not lend itself to peaceful equalization. … stability favored economic inequality. This was as true of Pharaonic Egypt as it was of Victorian England, as true of the Roman Empire as of the United States. … Four different kinds of violent ruptures have flattened inequality: mass mobilization warfare, transformative revolution, state failure, and lethal pandemics.
… there is no compelling empirical evidence to support the view that modern economic development, as such, narrows inequalities. There is no repertoire of benign means of compression that has ever achieved results that are even remotely comparable to those produced by the Four Horsemen.
In a CEPR discussion paper, Elhanan Helpman concludes that
trade played an appreciable role in increasing wage inequality, but that its cumulative effect has been modest, and that globalization does not explain the preponderance of the rise in wage inequality within countries.
In the NZZ, Thomas Fuster and Jürg Müller interview David Autor. Autor on polarization:
Der Arbeitsmarkt wird immer polarisierter. Auf der einen Seite haben wir viele gutbezahlte, hochqualifizierte und interessante Stellen. Auf der anderen Seite stehen schlechter entlöhnte und niedrigqualifizierte Stellen, bei denen es quasi darum geht, dem Wohl und Komfort der Wohlhabenden zu dienen. Das ist keine gesunde Entwicklung. Sie schlägt Stufen aus der Leiter des wirtschaftlichen Aufstiegs. Das hemmt die Mobilität.
In a Resolution Foundation report, Adam Corlett examines the “Elephant Curve.” The curve shows that between 1988 and 2008 income growth in the 70th to 95th percentile range of the world income distribution was much lower than for almost all other percentiles. Since the lower middle class of rich countries is situated around the 80th percentile of the distribution the Elephant curve has been interpreted as evidence for stagnating middle class incomes in the rich countries.
Corlett emphasizes that
- the country composition in 1988 and 2008 is not the same. Holding it constant the Elephant curve is less pronounced.
- “Population changes, rather than just income changes, have driven the income growth distribution in the elephant curve.” Holding the relative population size across countries constant the Elephant curve is less pronounced.
- There is lots of variation across developed economies. “[T]he weak figures for the mature economies as a whole are driven by Japan (reflecting in part its two ‘lost decades’ of growth post-bubble, but primarily due to likely flawed data) and by Eastern European states (with large falls in incomes following the collapse of the Soviet Union after 1988). Looking only at the remaining mature economies, far from stagnation we find average real income growth of 52 per cent with strong growth across the distribution, though slightly higher at the top. [But] there are great differences between these nations. US growth of 41 per cent was notably unequally shared, with low (but not zero) growth for poorer deciles meaning that the US comes closest to matching the stagnation and inequality narrative – despite international trade being much less important on a national level there than elsewhere [my emphasis]. But most people in most other rich countries experienced stronger growth.”
In the FT, Edward Luce writes about America’s class distinctions.
The real story, as depicted by historian Nancy Isenberg, author of White Trash, is that America was founded amid highly conscious class distinctions. African slaves were not the only group to be disenfranchised. …
It would be difficult to read America’s history — or decode the 2016 presidential election — without reference to the struggle between poor whites and the descendants of former slaves. Lyndon Baines Johnson, who became president a century after the civil war, vividly captured its political effects. “If you can convince the lowest white man he’s better than the best coloured man, he won’t notice you’re picking his pockets,” said LBJ. “Hell, give him somebody to look down on, and he’ll empty his pockets for you.”
In Taxing the Rich: A History of Fiscal Fairness in the United States and Europe, Kenneth Scheme and David Stasavage
explore the intellectual and political debates surrounding the taxation of the wealthy while also providing the most detailed examination to date of when taxes have been levied against the rich and when they haven’t. Fairness in debates about taxing the rich has depended on different views of what it means to treat people as equals and whether taxing the rich advances or undermines this norm. Scheve and Stasavage argue that governments don’t tax the rich just because inequality is high or rising—they do it when people believe that such taxes compensate for the state unfairly privileging the wealthy. Progressive taxation saw its heyday in the twentieth century, when compensatory arguments for taxing the rich focused on unequal sacrifice in mass warfare. Today, as technology gives rise to wars of more limited mobilization, such arguments are no longer persuasive. [Text from the Publisher’s website.]
Summary by Bryan Caplan:
Democracies have no inherent tendency to “soak the rich.”
Instead, democracies adopt high, progressive taxation in the face of compelling “compensatory” arguments for redistribution.
Only major wars of mass mobilization make compensatory arguments compelling.
Modern military technology has made majors wars of mass mobilization obsolete.
Therefore, tax the rich policies are a thing of the past, at least for developed countries. They won’t be coming back
Like Mr Piketty, he begins with piles of data assembled over years of research. He sets the trends of different individual countries in a global context. Over the past 30 years the incomes of workers in the middle of the global income distribution—factory workers in China, say—have soared, as has pay for the richest 1% (see chart). At the same time, incomes of the working class in advanced economies have stagnated. This dynamic helped create a global middle class. It also caused global economic inequality to plateau, and perhaps even decline, for the first time since industrialisation began. …
Mr Milanovic suggests that both [Kuznets and Piketty] are mistaken. Across history, he reckons, inequality has tended to flow in cycles: Kuznets waves.
In the FT, Martin Wolf argues that a significant part of the (British) welfare state is about insurance rather than redistribution:
Evidence for this comes from another IFS study … This examined the effects of the tax and benefit systems on people born between 1945 and 1954 …
First, income is far less unequal over lifetimes than in any given year. This is because a big proportion of inequality is temporary … Second, largely as a result, more than half of the redistribution achieved by taxes and benefits is over lifetimes rather than among different people. Third, in the course of adult life, only 7 per cent of individuals receive more in benefits than they pay in taxes, even though 36 per cent of people receive more in benefits than they pay in taxes in any given year. Finally, in-work benefits are just as good as out-of-work benefits at helping people who remain poor throughout their lives but they do less damage to incentives to work. Higher rates of income tax, meanwhile, target the “lifetime rich” relatively well because mobility at the top is relatively modest.
Marcel Fratzscher also wrote a book on the topic, focusing on Germany. He argues that the “Verteilungskampf” (redistributive struggle) intensifies and that equality of opportunity is being lost. In the FAZ, Jan Hauser summarizes a critique of the book by another Berlin based professor, Klaus Schroeder, who argues that the text is very short on substance.
In a New Republic blog, Alan Auerbach and Larry Kotlikoff discuss lifetime spending inequality. Due to taxes and income variability over the life cycle, this is much smaller than wealth or income inequality.
Auerbach and Kotlikoff write:
The top 1 percent of 40-49 year-olds face a net tax, on average, of 45 percent. … For the bottom 20 percent, the average net tax rate is negative 34.2 percent. …
Our standard means of judging whether a household is rich or poor is based on current income. But this classification can produce huge mistakes. … For example, only 68.2 percent of 40-49 year-olds who are actually in the third resource quintile using our data would be so classified based on current income.
The website Verteilungsmonitor provides an overview.
The movie Inside Job portrays as
- evil: Feldstein, Hubbard, Paulson, Rubin, Summers, Wall Street, … ;
- clueless or not convincing: Bernanke, Campbell, Geithner, Greenspan, Mishkin, Portes, … ;
- aware (at least ex post): Buiter, Johnson, Lagarde, Lo, Partney, Rogoff, Roubini, Strauss-Kahn, Tett, Wolf, … .
Economics and economists are considered part of the problem rather than the solution. While the movie
- depicts Ragu Rajan as the hero,
it is silent about the fact that Rajan is one of the most prominent economists.
In an online book published by the Institute of Economic Affairs, Nima Sanandaji argues not only that the Scandinavian success story predates the welfare state but also that the welfare state actually undermined the success story. From the book’s summary:
Many analyses of Scandinavian countries conflate correlation with causality. It is very clear that many of the desirable features of Scandinavian societies, such as low income inequality, low levels of poverty and high levels of economic growth, predated the development of the welfare state. It is equally clear that high levels of trust also predated the era of
high government spending and taxation. All these indicators began to deteriorate after the expansion of the Scandinavian welfare states and the increase in taxes necessary to fund it.
Ben Bernanke argues in his blog that it is not clear whether monetary policy fosters inequality. And if it did, other policy instruments should be used to address the resulting problems.
In a Vox column, Ken Rogoff argues that the world economy experiences a “debt supercycle” rather than the onset of secular stagnation in the West.
Rogoff argues that macroeconomic developments since the financial crisis are in line with historical experience, as documented in his book “This Time is Different” (with Carmen Reinhart): A large fall in output followed by a sluggish recovery; deleveraging; protracted higher unemployment; and a strong rise of the government debt quota are typical after a boom and bust of house prices and credit.
According to Rogoff, policy makers should have implemented more heterodox policies including debt write-downs; bank restructurings coupled with recapitalisations; and temporarily higher inflation targets. Rogoff supports the (in his view, orthodox) fiscal policy responses that were adopted but criticizes that many countries tightened prematurely.
Rogoff acknowledges that secular forces shape the macroeconomy, in particular population ageing; the stabilization of the female labor force participation rate; the growth slowdown in Asia; and the slowdown or acceleration (?) of technological progress. But
[t]he debt supercycle model matches up with a couple of hundred years of experience of similar financial crises. The secular stagnation view does not capture the heart attack the global economy experienced; slow-moving demographics do not explain sharp housing price bubbles and collapses.
Rogoff doesn’t accept low interest rates as an argument in favor of the secular stagnation view. Rather than reflecting demand deficiencies, low interest rates (if measured correctly—Rogoff expects a utility based interest rate measure to be higher) could reflect regulation (favoring low-risk borrowers and “knocking out other potential borrowers who might have competed up rates”) and to some extent central bank policies.
Rogoff argues that the global stock market boom poses a problem for the secular stagnation view. He proposes changed perceptions about the likelihood and cost of extreme events (Barro, Weitzman) as factors to explain both low real interest rates and the stock market boom (after an initial asset price collapse during the crisis).
Regarding policy prescriptions to expand public investment in light of the low interest rates, Rogoff notes that
it is highly superficial and dangerous to argue that debt is basically free. To the extent that low interest rates result from fear of tail risks a la Barro-Weitzman, one has to assume that the government is not itself exposed to the kinds of risks the market is worried about, especially if overall economy-wide debt and pension obligations are near or at historic highs already. [Moreover] one has to worry whether higher government debt will perpetuate the political economy of policies that are helping the government finance debt, but making it more difficult for small businesses and the middle class to obtain credit.
Rogoff considers rising inequality to be problematic (and a possible factor for higher savings rates):
Tax policy should be used to address these secular trends, perhaps starting with higher taxes on urban land, which seems to lie at the root of inequality in wealth trends
He concludes that the case for a debt supercycle is stronger than for secular stagnation:
[T]he US appears to be near the tail end of its leverage cycle, Europe is still deleveraging, while China may be nearing the downside of a leverage cycle.
A new report by the Paritätische Gesamtverband argues that income inequality in Germany is on the rise. The data source is a micro census.
Roughly 16% of the population are poor—living in a household with adjusted income of less than 60% of the median household income. For a family of four, the threshold income value amounts to 1873 Euros per month. The share of poor people among the unemployed is roughly 60%, among single parents roughly 40%, and among children roughly 20%. Only 15% of retirees are poor according to the above definition, but this share is rising rapidly. Differences between poverty quotas in more and less poor areas are rising.
The Economist argues that with the importance of intellectual capital “privilege has become increasingly heritable.” As contributing factors the newspaper lists
- assortative matching
- more stable homes of highly educated parents
- more stimulation of children of highly educated parents: “children of professionals hear 32m more words by the age of four than those of parents on welfare”
- high cost of higher education
- teachers’ unions
- a school system that aggravates disparities
In an NBER working paper, Charles Jones discusses Piketty’s famous r-g term in light of several simple and transparent macroeconomic models. Jones emphasises the role of the Pareto distribution and the difference between partial and general equilibrium reasoning. Importantly,
… exponential growth that occurs for an exponentially-distributed amount of time leads to a Pareto distribution.