What Piketty Misses

By Herbert Grubel of Atlasone. Herbert Grubel is professor of economics (emeritus) at Simon Fraser University and Senior Fellow at The Fraser Institute in Vancouver, Canada. Excerpts:

"Piketty’s voluminous statistics are of limited relevance to his neo-Marxian conclusion about the inevitability of rising inequality, social unrest, and the collapse of existing market economies. The statistics he uses are snapshots of the distribution of income and wealth taken of a population whose composition changes with every picture taken.

What is more relevant to the assessment of the problems he foresees is information that traces the incomes of the same individuals through time."

"The Canadian data will surprise many: Out of 100 workers who were in the lowest income quintile in 1990, 87 had moved to higher income quintiles 19 years later, with 21 having reached the very top quintile. Income mobility also results in downward movements. Of 100 Canadians in the highest income quintile in 1990, 36 were in lower quintiles 19 years later."

"The same Canadian families who had inflation-adjusted average incomes in the lowest quintile in 1990, by 2009 had incomes 280 percent higher. During the same period families in the top quintile in 1990s experienced an increase of only 112 percent. The average incomes of the middle three quintiles rose by 153 percent. These data show that all Canadians have become richer, the poor more so than the rich, and the middle class has more than kept pace with the rich."

"The Forbes data on billionaires shows that only 10 percent of those on the 1982 list were still on the list in 2012, even after adjustment for inflation over the 30 years.

Most of the extraordinary recent growth in the income of top earners — the infamous 1 percent — is due to the growth in the market for their services, which has been driven by the introduction of new electronic media, globalization, and the growth in the incomes of audiences: professional athletes, creative artists, and entertainers now reach millions rather than the hundreds who used to fit into arenas or the thousand in movie theaters.

The globalization of commerce has increased the size of firms and raised the dollar value of the contributions managers can make to their bottom lines. A firm with domestic sales of $100 million can offer a top manager expected to raise sales by 1 percent less than it can pay after globalization raises this same firm’s sales to $10 billion. The earnings of Bill Gates and Steve Jobs and their top managers would have been much smaller if their innovations had been sold only in the United States rather than throughout the world.

Piketty used the wrong data in concluding that the rich are getting richer and the poor are getting poorer. Dynamic income statistics show that all are getting richer, the poor more so than the rich. He also wrongly attributes most of the growth in wealth inequality to excessive savings accruing to the rich when in fact it is due to recent technological revolutions and the globalization of business that benefits super-managers and innovators-entrepreneurs like Gates and Jobs."

Who’d a-thunk it? Following $15 per hour minimum wage in SeaTac, local businesses are adding ‘living wage surcharges’?

From Mark Perry of "Carpe Diem."

 

"Erin Shannon, Director of the Center for Small Business writes on The Washington Policy Center blog that “In SeaTac, Everyone Pays for the $15 Minimum Wage“:

Last week I blogged about SeaTac employers who have responded to the new $15 minimum wage law by reducing or eliminating the benefits workers receive.  Employees earning the new wage say they have lost benefits such as 401k, paid holidays, paid vacation, free food, free parking and overtime hours.  As one SeaTac worker put it, “It sounds good, but it’s not good.”
But workers aren’t the only ones paying for the high wage.  Consumers are also picking up the tab, in the form of increased prices.  Many SeaTac businesses have tacked on an additional fee to mitigate the increased cost of labor.  On the receipt pictured above, a $6.93 “living wage surchage” was added to a $84.00 parking charge.  That is the equivalent of a 8.25% tax.
Contrary to what supporters claim, increasing the minimum wage does not create jobs and stimulate the economy.  The higher wages are not free money.  The increased cost must either be absorbed by the employer, which is impossible for many who already operate on shoe-string profit margins, or it must be passed on to workers, in the form of reduced hours and benefits, and consumers, in the form of higher prices.  Either way, someone pays.

MP: A $15 per hour minimum wage might sound good in theory, but ends up having many unintended, secondary, negative consequences in the form of less employment, reduced hours, reduced job and business creation, higher prices for consumers, etc. In the end, and maybe very soon, it will be evident that SeaTac’s $15 per hour minimum wage, like all government mandated price controls, are really an “economic death wish.” Milton Friedman pointed out years ago that, “Just as Freud pointed to the death wish in individuals as a fundamental psychological propensity, the appeal of socialism and the opposition to capitalism is really a form of an “economic death wish” for society on the part of intellectuals [progressives].”

Note: The company that issued the receipt above is MasterPark at the Seattle’s SeaTac Airport.  According to its website, the company now charges a $0.99 per day “living wage surchage.”  For a 7-day period that would add $6.93 and 8.25% to the base fee of $84. For a 30-day parking fee of $199, the $29.70 “living wage surcharge” would add a tax of almost 15% to the base rate."

Alex Tabarrok On Depreciating Capital & Piketty

Click here to read it

"Brad DeLong attacks Krusell and Smith for using in some of their thought experiments a depreciation rate of 10%, which is probably too high. Fair point but in my post I assumed a depreciation of just 5% and showed that Solow and Piketty give very different predictions about how the K/Y ratio will change with a change in g.

Furthermore, having read DeLong’s comment, I went to the BEA and compared gross and net domestic product which gives capital depreciation as a fraction of GDP of around 15% in recent decades. At a K/Y ratio of 4 that’s a depreciation rate of 3.75%. Similarly, Inklaar and Timmer in constructing capital stocks for the Penn World Tables estimate a depreciation rate for the U.S. of 4.1%. I reran my simple Excel chart with the lower number, 3.75%.

As you can see, the numbers are very similar to earlier and the key point is still that a decrease in g increases K/Y much more in the Piketty model than in the Solow model.

Krusell responds to DeLong here making the additional point that their thought experiments show that Piketty’s assumption about savings is implausible at any depreciation rate (see also Hamilton on this point).

First: if the net rate of saving remains positive as the economy’s growth rate falls toward zero, as Piketty assumes in his second fundamental law of capitalism, the gross saving rate in the economy must approach 100%. This observation is a way of illustrating how unreasonable the behavioral assumptions underlying his theory of saving really are.

Second: according to standard, and much more reasonable, saving theory (based either on the standard textbook Solow growth model or on the permanent-income model), the net saving rate must fall with the rate of growth, and become zero when growth is zero.

…These points are key because Piketty’s predictions are all about what happens as growth falls during the 21st century, as he argues it will.

…both of these results hold no matter what the depreciation rate is (so long as it is positive).

The heart of Piketty’s theory is his expression for the capital share of income in the long run, α = r × s/g with the prediction that if g falls the capital share will rise tremendously. This is a good opportunity to summarize some of the recent points about the theory.

There are no contradictions but many a slip ‘twixt the cup and the lip. Namely, will g fall? If g does fall, will K/Y increase? If K/Y increases will capital’s share of income increase? My answers:

Will g fall? Uncertain. Piketty’s forecast is as good as anyone’s. My own view is that at the global level g has been increasing for several centuries and that this will continue, especially because in this century we will see a massive increase in the number of scientists and engineers as China and then India devote increased human capital to the research frontier.

If g does fall, will K/Y increase? Yes, but probably less than Piketty estimates and more in line with Solow.

If K/Y increases will capital’s share of income increase? Uncertain but more likely no than yes. It depends on the elasticity of substitution between K and L and as Rognlie and Summers argue, the elasticity that Piketty needs is higher than current estimates suggest is the case."

Brad DeLong attacks Krusell and Smith for using in some of their thought experiments a depreciation rate of 10%, which is probably too high. Fair point but in my post I assumed a depreciation of just 5% and showed that Solow and Piketty give very different predictions about how the K/Y ratio will change with a change in g.
Furthermore, having read DeLong’s comment, I went to the BEA and compared gross and net domestic product which gives capital depreciation as a fraction of GDP of around 15% in recent decades. At a K/Y ratio of 4 that’s a depreciation rate of 3.75%. Similarly, Inklaar and Timmer in constructing capital stocks for the Penn World Tables estimate a depreciation rate for the U.S. of 4.1%. I reran my simple Excel chart with the lower number, 3.75%.
As you can see, the numbers are very similar to earlier and the key point is still that a decrease in g increases K/Y much more in the Piketty model than in the Solow model. Krusell responds to DeLong here making the additional point that their thought experiments show that Piketty’s assumption about savings is implausible at any depreciation rate (see also Hamilton on this point).

First: if the net rate of saving remains positive as the economy’s growth rate falls toward zero, as Piketty assumes in his second fundamental law of capitalism, the gross saving rate in the economy must approach 100%. This observation is a way of illustrating how unreasonable the behavioral assumptions underlying his theory of saving really are.
Second: according to standard, and much more reasonable, saving theory (based either on the standard textbook Solow growth model or on the permanent-income model), the net saving rate must fall with the rate of growth, and become zero when growth is zero.
…These points are key because Piketty’s predictions are all about what happens as growth falls during the 21st century, as he argues it will.
…both of these results hold no matter what the depreciation rate is (so long as it is positive).

The heart of Piketty’s theory is his expression for the capital share of income in the long run, α = r × s/g with the prediction that if g falls the capital share will rise tremendously. This is a good opportunity to summarize some of the recent points about the theory.
There are no contradictions but many a slip ‘twixt the cup and the lip. Namely, will g fall? If g does fall, will K/Y increase? If K/Y increases will capital’s share of income increase? My answers:
Will g fall? Uncertain. Piketty’s forecast is as good as anyone’s. My own view is that at the global level g has been increasing for several centuries and that this will continue, especially because in this century we will see a massive increase in the number of scientists and engineers as China and then India devote increased human capital to the research frontier.
If g does fall, will K/Y increase? Yes, but probably less than Piketty estimates and more in line with Solow.
If K/Y increases will capital’s share of income increase? Uncertain but more likely no than yes. It depends on the elasticity of substitution between K and L and as Rognlie and Summers argue, the elasticity that Piketty needs is higher than current estimates suggest is the case.

- See more at: http://marginalrevolution.com/marginalrevolution/2014/06/depreciating-capital.html#sthash.LCqrFUrj.dpuf

On Piketty and Capital

From Steve Landsburg

"Important disclaimer: I have not read Thomas Piketty‘s book on Capital in the Twenty-First Century, and therefore cannot possibly have given it a fair reading.

I do, however, trust Per Krusell and Tony Smith to have given it a fair reading, because Krusell and Smith have long track records as diligent and thoughtful scholars. And their analysis appears to devastate both Piketty’s model and his prediction that income inequality is destined to grow explosively over time.

Here’s why:

All of Piketty’s predictions depend on his assumptions about how much people save. The simplest respectable model (that is, a model that economists generally feel comfortable using for many purposes, and which fits fairly well with observations) says that we save a fixed percentage of our incomes — say 30%. (There are also more sophisticated models in which this percentage can change as economic conditions change.)

Piketty, by contrast, assumes that our net saving is a fixed percentage of our net incomes, where “net” means “after subtracting depreciation of our assets”. That’s a very different assumption, and, according to Krusell and Smith, not at all a plausible one. It’s implausible first because it has extremely odd implications. Most notably, it implies (though this is not immediately obvious) that if economic growth slows to zero, we will eventually choose to save 100% of our incomes(!!). Beyond that, Krusell and Smith argue in considerable detail that, compared to the more traditional models, Piketty’s does a poor job of fitting the last seventy years’ worth of data.

According to Krusell and Smith, Piketty demonstrates correctly that under his assumptions, slowing economic growth must lead to massive inequality over time. But under the far more plausible assumptions found in modern textbooks and modern research papers, that conclusion goes away. In fact, after substituting those assumptions, Piketty’s arguments yield something like the opposite conclusion — as growth slows down, changes in inequality become pretty much negligible.

If this analysis is right — and given the identities of the authors I’ll be very surprised if it’s wrong — then there appears to be very little reason to buy into Piketty’s story. That doesn’t mean he’s wasted his time. We learn a lot by making a variety of different assumptions and figuring out where they lead us, even when the assumptions are ultimately unsupportable. But a serious intellectual exercise is not the same thing as a serious prediction."

The real culprit behind income disparity: the microprocessor

From Mark Perry of "Carpe Diem." Excerpts:

"From John Steele Gordon writing in today’s WSJ (“The Little Miracle Spurring Inequality“):

The great growth of fortunes in recent decades is not a sinister development. Instead it is simply the inevitable result of an extraordinary technological innovation, the microprocessor, which Intel brought to market in 1971. Seven of the 10 largest fortunes in America today were built on this technology, as have been countless smaller ones. These new fortunes unavoidably result in wealth being more concentrated at the top.

But no one is poorer because Bill Gates, Larry Ellison, et al., are so much richer. These new fortunes came into existence only because the public wanted the products and services—and lower prices—that the microprocessor made possible. Anyone who has found his way home thanks to a GPS device or has contacted a child thanks to a cellphone appreciates the awesome power of the microprocessor. All of our lives have been enhanced and enriched by the technology.

Today the microprocessor, the most fundamental new technology since the steam engine, is transforming the world before our astonished eyes and inevitably creating huge new fortunes in the process. The number of new economic niches created by cheap computing power is nearly limitless. Opportunities in software and hardware over the past 30 years have produced many billionaires—but they’re not all in Silicon Valley. The Walton family collectively is worth, according to Forbes, $144.7 billion, thanks to the world’s largest retail business. But Wal-Mart couldn’t exist without the precise inventory controls that the microprocessor makes possible.
The “income disparity” between the Waltons and the patrons of their stores is as pronounced as critics complain, but then again the lives of countless millions of Wal-Mart shoppers have been materially enriched by the stores’ staggering array of affordable goods. Just as the railroad produced many new fortunes, the Internet is producing enormous numbers of them, from the likes of Amazon, Facebook and Twitter. When Twitter went public last November, it created about 1,600 newly minted millionaires.

Any attempt to tax away new fortunes in the name of preventing inequality is certain to have adverse effects on further technology creation and niche exploitation by entrepreneurs—and harm job creation as a result. The reason is one of the laws of economics: Potential reward must equal the risk or the risk won’t be taken.

MP: By several statistical measures, it’s true that income inequality was lower in 1971 than in recent years. The Gini index of income inequality was 39.6% in 1971 and increased to 46.9% by 2010. The share of total income earned by the top 20% increased from 43.5% in 1971 to 51% in 2012. But would anybody give up all of the technological innovations that came from the microprocessor (GPS, smart phones, Internet, email, computers, calculators, iPods, iPads, iTunes, etc.), which naturally contributed to greater income inequality, to go back to income distribution of 1971 and live without the microprocessor-generated technological abundance that we all enjoy today?

I didn’t think so….."

The Veterans scandal shows where ObamaCare ends up

See The Government Health-Care Model. Editorial from the WSJ. Excerpts:

"As recently as November 2011, Paul Krugman praised the VA as a triumph of "socialized medicine," as he put it: "What's behind this success? Crucially, the V.H.A. is an integrated system, which provides health care as well as paying for it. So it's free from the perverse incentives created when doctors and hospitals profit from expensive tests and procedures, whether or not those procedures actually make medical sense.""

"the VA lacks the evil profit motive."

"a government system contains its own "perverse incentives," such as rationing that leads to treatment delays and preventable deaths,"

"inherent in a system that allocates resources by political force"

"All veterans are entitled to free preventative screenings, immunizations, lab services and EKGs. Most are required to pay little to nothing out of pocket"

"the only way the VA can provide universal, low-cost health care is by rationing. At the VA, this means long waiting lists"

"So it's no surprise that allegations are spilling out that VA facilities keep secret waiting lists to hide queues that exceed the government's targets. A retired doctor at a veterans hospital in Phoenix last month charged that staff concealed months-long delays for as many as 1,600 veterans, allegedly resulting in 40 preventable deaths."

"The VA has consistently boasted in its performance reviews that more than 90% of patients receive appointments within 14 days of their "desired date." Yet according to the IG's 2012 report, the measures "had no real value" because the VA "does not have a reliable and accurate method of determining whether they are providing patients timely access" to care."

"VA officials claim backlogs are due to difficulty hiring and retaining staff, but that's another problem endemic to government health care. Compensation is often too low to attract doctors,"

"Last year the IG reported that the VA had given $1.02 million in September 2011 to a medical center in Columbia, South Carolina, for private colonoscopies to address a backlog of 2,500 patients. But in January 2012—by then the wait list had grown to more than 3,800"

"The Columbia VA referred only 100 patients between January and March 2012 to outside physicians and spent just $275,000 of the $1.02 million on private colonoscopies. Yet in-house colonoscopies decreased."

"Maintaining long backlogs can help VA centers procure more funding."

"The inevitable liberal defense—it's coming, we guarantee it—will be that Congress isn't spending enough money. Yet as the nearby charts show, funding soared by 106% to $57.3 billion in 2013 from $27.7 billion in 2003. Yet over the same period the number of VA patients has increased by only 30%."

Skilled Foreign Workers a Boon to Pay, Study Finds

Research Shows Immigration Benefits for U.S.-Born, College-Educated Employees

Click here to read the WSJ article by Josh Zumbrun and Matt Stiles. Excerpts:

"cities seeing the biggest influx of foreign-born workers in science, technology, engineering and mathematics—the so-called STEM professions—saw wages climb fastest for the native-born, college-educated population."

""A lot of people have the idea there is a fixed number of jobs," said one of the authors, Giovanni Peri of the University of California, Davis. "It's completely turned around.""

"Immigrants can boost the productivity of the overall economy, he said, "because then the pie grows and there are more jobs for other people as well and there's not a zero-sum trade-off between natives and immigrants.""

"a one-percentage-point increase in the share of workers in STEM fields raised wages for college-educated natives by seven to eight percentage points and wages of the noncollege-educated natives by three to four percentage points."

"Opponents of the H-1B program say that immigrants may not be needed to fill many STEM jobs and that wage gains in these fields could be stronger in the absence of immigrants.

"The argument that we have a shortage is hard to sustain when you look at how many people have STEM degrees," said Steve Camarota, director of research for the Center for Immigration Studies, a nonprofit group that wants to reduce the flow of immigrants to the U.S. "Most people who get STEM degrees don't get STEM jobs."

The research attempts to isolate the cause and effect of a shift in the supply of immigrants—rather than increased demand by employers—by tallying how the number of skilled workers changed over time in each area."

"The findings suggest an influx of foreign workers wouldn't hurt wages for the existing workforce, and would raise pay in many cases. The study follows a long line of research supporting the argument that skilled immigrants would boost the U.S. economy."

""Even for computer programmers, immigration of more computer programmers can be a good thing," said Madeleine Sumption, a senior policy analyst at the Migration Policy Institute, a nonpartisan think tank in Washington. "Their skills are complementary. Clusters of highly skilled people can do better together than in isolation."

But the latest research doesn't resolve the debate for lower-skilled natives and immigrants. Previous research has suggested "immigration is better for high-skilled people than for lower-skilled people," Ms. Sumption said. "It's a very consistent finding that there's more risk of competition for jobs at the low-skilled level.""