
Economists Are Rethinking the Numbers on Inequality - tptacek
https://www.economist.com/briefing/2019/11/28/economists-are-rethinking-the-numbers-on-inequality
======
60654
This Economist article points out some of the many small academic works that
quibble over details with Piketty and Saez. But that's not anything new. The
major points of their work, and especially of Piketty's monumental _Capital
for the 21st century_ still stand: that capital is a positive feedback loop in
a way that labor is not; that mid-20th-century laws that put brakes on this
feedback loop have been removed; that a variety of data sources are confirming
growing inequality and market capture particularly in the UK and US; and that
the only reasonable solution for this is a tax on owned capital (not on income
or cap gains) and the political chances of this happening are slim, etc.

And in the end this article is another one in their house style: not
particularly informative in the details, they're not arguing openly or
forcefully against Piketty, but instead bring up enough different nitpicky
papers that it starts sowing doubt in the mind of a reader who hasn't actually
read the book.

But then again The Economist has had it out for Piketty (and Saez) for a long
time now, they very clearly hate Piketty's Capital and keep sniping at it, but
can't stop themselves from bringing it up all the time. :)

At least they are very open about their biases: they promote a view that the
solution to all ills is lower taxes and less regulation. However, Piketty's
analysis and proposed solution directly contradicts that.

~~~
Merrill
>that mid-20th-century laws that put brakes on this feedback loop have been
removed;

I don't believe that the purpose of mid-20th-century laws was to promote
equality. Things were more equal then because: a) World Wars I & II destroyed
huge amounts of capital, and b) fighting wars requires lots of money which
requires raising taxes on people who can pay, since borrowing cannot fully
fund general wars.

Economics are cyclical in the sense that in normal times people with power and
wealth accumulate more power and wealth. Then a general period of
war/revolution/epidemic/famine breaks out which disrupts power relationships
and consumes wealth. This is the pattern in Europe since the 1300s and it also
applies to dynastic changes in other societies, such as China.

~~~
kakwa_
It's a bit more than cycles.

The huge reduction in the XXth century was due to many factors.

You start in the XIXth century with the development of Anarchism, which, to
oversimplify, spawned various movements such as democratic socialism or
communism on the political side, but also syndicalism (anarcho-syndicalism).
The appearance of these forces started to change/influence things even before
WWI with a few laws regulating working conditions (ex: 6 days week in 1906 in
France voted after the Courrières mine disaster, or in Germany with a basic
form of social security put in place in the 1880ies).

The two World Wars, and specially the various states (France, UK, Germany
Russia) defaulting on their debts (either through inflation or complete un-
acknowledgment of the debt) basically killed the rentiers (previously it was
really nice for them, 5%, with an economic growth of 1 to 2% and practically
not inflation).

The rise of the legitimacy of the State also helped a lot. This is due to the
rise of Nationalism, the efforts of various states to build a common identity,
and also the technological developments which permitted for a state to reach
every corner of its population (transport and communication). This lead to the
legitimacy of states to raise taxes which would have caused revolts
previously.

WWI and specially WWII also shifted mentalities hugely, it's quite interesting
that countries either monetarily or literally in ruins created Social Security
systems.

Lastly the degree of technological development and its progressive deployment
between 1820 and 1980 (in Europe and North America) hugely improved material
condition for most people. The equation is a bit different when you are past
80% of the economy being subsistence farming.

Yes, some past events did change wealth distribution (the Plague for example),
but a change on that scale is not something ever seen before in History, the
XXth was pretty exceptional in that regard.

~~~
Merrill
Between the Plague and WW I&II there was the Reformation and following
religious wars until the Peace of Augsburg, The Thirty Years War, and the
French Revolution/Napoleonic Wars. These were periods of major conflict that
leveled European societies. Other wars were limited in geographic scope and/or
in their objectives and means used.

------
leto_ii
A lot of this article reminded me of the techniques used by climate change
deniers to sow doubt.

Take for example the following: > Another correction concerns the tax reforms
passed under Ronald Reagan in 1986. Apparent changes in top incomes around
this reform account for about two-fifths of the total increase between 1962
and 2015 in the pre-tax incomes of the top 1% in Messrs Piketty and Saez’s
estimates. Messrs Auten and Splinter say this is an illusion. Reagan’s tax
reform created strong incentives for firms to operate as “pass-through”
entities, where owners register profits as income on their tax returns, rather
than sheltering this income inside corporations. Since these incentives did
not exist before then, top-income shares before 1987 are liable to be
understated.

In essence this just says that it's possible the rich used to be
overwhelmingly rich even before the Reagan era reforms, hence inequality might
not have increased that much over the past decades. This is hardly comforting
for the average person.

Or take a look at the conclusive paragraph: > While that long and bloody
academic battle takes place it would be wise for policymakers to proceed
cautiously. Proposals for much heavier taxes on high earners, or a tax on net
wealth, or the far more radical plans outlined in Mr Piketty’s latest book,
are responses to a problem that is only partially understood.

Doesn't it smack of "the science is not in yet" argument used by climate
change deniers?

~~~
el_cujo
Looking at your methodology critically is crucial to all fields of science
though, as is changing your conclusions and interpretations as more findings
come forward. Dismissing someone outright for challenging something that has
become dogma is anti-scientific even if that dogma is based on facts. If it's
actually true, then it will stand up to scrutiny.

~~~
leto_ii
I absolutely agree. However I'm not at all sure Piketty's ideas are dogma. If
anything he's the challenger to the neoliberal dogma.

Secondly, the fact that there are diverging sides to an issue doesn't mean
those sides have the same likelihood of being true. To take a trivial example,
flat-earthers are challenging the dogma that the Earth is round (spherical to
be more precise) - should this mean that their position should be taken
seriously?

~~~
ikeboy
Yes, Piketty and co are the challengers. Therefore the burden of proof is on
them to convince people their ideas are true, and presenting their ideas
without pointing out how the rest of the field thinks of them would be the
analogue of your climate deniers in your comment above.

------
airstrike
Measuring income inequality in the US without looking at outsized wage gains
abroad feels remarkably inaccurate.

I'll copy-paste my reply to another thread from earlier this year:

> But, wages haven't improved in the last 40 years for the average person

...in the US.

Growing inequality in the US is driven by the fact that capital gains
_domestically_ have improved dramatically alongside wage gains _abroad_ ,
while wage has been essentially stagnant within the US due to globalization /
offshoring / outsourcing

The solution, in my humble immigrant opinion, is to train Americans to take on
service jobs that cannot be easily automated / performed by cheap labor
overseas. But that requires taking an honest look at the country's education
system and neither side of the aisle seems to be able to do that without
resorting to anger and vitriol

~~~
tkyjonathan
Could you point out the graph that shows that wages haven't improved in the
last 40 years?

~~~
airstrike
It's an often-touted claim. In this particular instance I was replying to this
comment:
[https://news.ycombinator.com/item?id=20384390](https://news.ycombinator.com/item?id=20384390)

------
devurand
Sign-up wall prevents reading the article. Here is an outline.com link for
this article:

[https://outline.com/4MwGTX](https://outline.com/4MwGTX)

------
harimau777
It seems to me that income is in effect an abstraction of a person's social
class. Therefore, I wonder if it might be more effective to look at the
factors that actually separate different social classes.

For example:

What percentage of a population is self employed and/or employed in a role
with significant autonomy?

What percentage of a population owns their own house? Of those who own a
house, how much control over their house do they have (e.g. you cannot add an
extension to a multi-unit house even if you own it and you likely cannot put
in a workshop due to noise)? How do these measures change based on how
desirable the location is (e.g. top tier cities, suburbs, etc.)?

How easy is it for a given population to acquire the means of production? E.g.
if someone doesn't like the products that the corporations are making, how
difficult would it be for them to try to make an alternative?

What level of political office could a member of a given population
realistically run for?

~~~
_jal
> It seems to me that income is in effect an abstraction of a person's social
> class.

That's not how class works. There are multimillionaires running their own
blue-collar businesses and farms whom a bankrupt real estate developer would
look down on.

~~~
harimau777
I think that actually supports my core point: income doesn't always map
directly to a person's role in society.

Even if the 99% has roughly the same portion of the income that they did in
the past they still might have less of the things that actually determine
lifestyle such as autonomy.

------
tkyjonathan
I would rather focus on reducing absolute poverty than reducing inequality
(gini-coefficient).

~~~
tsimionescu
Unfortunately, you can't have a real democracy with too high income
inequality, and it is hard to reduce absolute poverty if the poor don't have a
political voice.

~~~
bhupy
This is an often used argument, but can you elaborate how exactly that's the
case?

In most western democracies (the US included), the only way to elect a
politician is for a human being to go to the polls and check the box next to
the candidate's name.

This opportunity is present regardless of whether one is a billionaire, a
millionaire, a member of the upper-middle class, or a blue collar worker.

A real world example of this is Sweden, which has the highest per capita
population of billionaires. The country doesn't seem to care because the
minimum standard of living is high enough. It's not even paid for by taxing
the billionaires, it's paid for by high taxes on the middle class and a VAT.

~~~
leto_ii
Well, in the US, as possibly in other places, elections are usually won by the
candidate who receives the most corporate support. On top of this, a bipartite
political system can quite easily keep out candidates with views that are
unpalatable to the rich and powerful (e.g. see how Bernie Sanders was treated
by the Democratic establishment in 2016). Individuals mostly rubber-stamp one
of the two mainstream candidates.

~~~
bhupy
> Well, in the US, as possibly in other places, elections are usually won by
> the candidate who receives the most corporate support

Again, this is orthogonal to the point about inequality. Insofar as
corporations or money are involved in politics in America, it's for
campaigning — buying TV ads, flyers, etc. While it's true that this makes it
_easier_ for richer people to get their message out there, the fact of the
matter is that the message still needs to resonate with a broad enough polity
capturing working class, college educated, non-college educated, urban, rural
voters etc (see: the Electoral College).

Just to give you some numbers, in the 2016 election, Hillary Clinton outspent
Donald Trump $132M vs $92M.

In the ongoing Democratic Primary for the upcoming 2020 election, the TV ad
spending through 12/3/2019 is as follows. The candidate's polling percentage
at the same time is included in parenthesis.

Steyer: $63.4 million (1%)

Bloomberg: $37 million (<1%)

Sanders: $6.7 million (15%)

Buttigieg: $5.1 million (13%)

Yang: $2.9 million (4%)

Biden: $1.7 million (25%)

Klobuchar: $1.3 million (3%)

Bennet: $1 million (<1%)

Gabbard: $1 million (1%)

Warren: $926k (18%)

Delaney: $662k (<1%)

> On top of this, a bipartite political system can quite easily keep out
> candidates with views that are unpalatable to the rich and powerful (e.g.
> see how Bernie Sanders was treated by the Democratic establishment in 2016)

You're right about this, but the Democratic Primaries are not a good example
of a democratic institution (ironically) — it's a private club and they can
make their own rules, for better or for worse. During the general election,
the opposite happened; the rich and powerful overwhelmingly supported Hillary
Clinton, and yet she still lost.

> Individuals mostly rubber-stamp one of the two mainstream candidates.

This is true, but has nothing to do with economic inequality. The two-party
system is an artifact of the first-past-the-post voting system. Since ~1860,
there have only been two mainstream candidates, and inequality has varied
wildly in that time period: i.e. no correlation.

~~~
leto_ii
In a society there are may levers (official or not, transparent or not) that
the powerful can pull to get politics to lean their preferred way. This is
true of all places and all times. The more power is concentrated, the easier
it is for a very small group of individuals to have a very large impact on
decision making.

All the billions poured in campaign funding, lobbying etc. do actually buy a
lot of influence albeit not in a direct, transparent way.

The same billions can also sway public opinion through deliberate and
persistent propaganda in support of certain view points and against others.

Nowadays (and probably throughout most of modern history) you have to be
highly committed and quite fanatical if you want to develop well grounded
opinions that are not very much affected by propaganda. Most people don't have
the time and resources for this -> most people are easily swayed by corporate
propaganda.

~~~
bhupy
Unless you provide data or empirical evidence, it's just a vague intuition.
There's more than enough evidence to the contrary (as I've provided).

At the end of the day, people act as individuals, and they have their beliefs
and biases. For example, a small group of wealthy individuals can pour as much
money as they want into pro-abortion propaganda, but it's unlikely that it
will sway pro-lifers' opinions (especially evangelical Christians).

Money doesn't influence opinions directly, it just affords you a platform to
_try_ and change someone's mind. The only way to change one's mind is if the
message is compelling, and because the US requires broad buy-in for any
democratic action, the message needs to be compelling to a broad audience, not
just a small group of wealthy people.

~~~
leto_ii
You hardly provided more than enough evidence on the contrary. I can however
point you to the work of Thomas Ferguson for example:
[https://en.wikipedia.org/wiki/Investment_theory_of_party_com...](https://en.wikipedia.org/wiki/Investment_theory_of_party_competition)

~~~
bhupy
I'm familiar with Ferguson's work. As with most economic work based on
theoretical models, the empirical facts are more than enough to disprove them.

The famous IMF rebuttal of Piketty was an exercise in exactly the same. "rich
in data, [but] the book provides no formal empirical testing for its
theoretical causal chain". The same applies to the Investment Theory of Party
Alignment. You can make an argument that poor people will follow rich people
ideologically, but you can't 1) draw a causal line between the wealth and the
influence, and 2) most importantly, you can't prove that poor people would
ideologically follow rich people against their own self-assessed interests.

[1]
[https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf](https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf)

------
el_cujo
This is kind of a touchy subject. I feel like a lot of people would balk at
the idea of the top 1% not doing better and better, not because they have any
extra insight into the topic but because to say this seems like you're
defending the ultra-rich (and by extension attacking everyone else). In
reality, even if the rich aren't getting even richer at quite the rate we
thought, it doesn't mean you really need to have any more sympathy for them,
it just means you tweak a few lines of your rhetoric.

~~~
koheripbal
Conflating the top 1% with the ultra-rich is another big problem.

If we assume that most people achieve peak earning years between 45-50 years
old, then about 30% of people end up in the top 1% at some point in their
lives.

~~~
chipotle_coyote
As I replied to someone else in this thread branch, the threshold for entering
the 1%, at least in terms of income, is nearly $330K a year annually. The
plain reading of your last sentence is that about 30% of people make that at
some point in your life, which... doesn't strike me as very plausible.

Are you talking about net worth instead? That's still an argument that 30% of
people have over $10M in assets (in 2019 dollars) at some point in their
lives, and that... also strikes me as a stretch, honestly.

~~~
Mirioron
In US terms. What if we look at the same numbers in global terms? Suddenly
many of the people complaining about the 1% are the 1% themselves. According
to the global rich list website if you earn above $33k a year you're in the
top 1% globally by income.

------
sjg007
Whenever I play monopoly I imagine I feel like Jeff Bezos when the other
players land on my properties and pay me rent. There’s something seductive
about that income stream. You don’t even have to be prudent about what you buy
so long as you buy early enough.

------
RickJWagner
I read an article this week that makes a strong argument that inequality
really isn't the problem.

[https://www.realclearmarkets.com/articles/2019/12/03/inequal...](https://www.realclearmarkets.com/articles/2019/12/03/inequality_is_decidedly_not_the_problem_in_the_us__103991.html)

------
FernandoTN
[https://archive.md/OmZMP](https://archive.md/OmZMP)

------
WalterBright
Instead of taxing productive things, taxes should be applied to things that
are environmentally destructive.

------
Pfhreak
Isn't this one of the thesis of Marx's Capital? That there's a loop in the
flow of commodities, money, and labor that generally results in capital
extracting more capital from the economy. (Typically from wage labor.)

It seems to me that without someone applying the brakes to that loop and
changing the way distribution or production is done, we're just going to keep
riding this positive feedback loop.

~~~
nwah1
Failure to distinguish land from capital is an enormous possible pitfall for
those trying to fight poverty.

Land titles, and all other types of access rights to natural opportunities,
are means by which "rent-seeking" occurs. Rent=seeking is any type of of zero-
sum extractive activity that adds nothing to the economy, and simply serves to
make the rich richer.

Examples include: holding a prime piece of real estate idle, while waiting for
others to add value to that land. Or acquiring a patent just to sue anyone who
unknowingly violates it. Or manipulating the rules to your favor through
lobbying.

Productive activity, however, must be rewarded since that is the engine of
wealth. We can't have a high standard of living if production isn't rewarded.
Solving inequality by making everyone poor is not going to get you very far.

This distinction is essential.

~~~
Pfhreak
For sure. I'm a big advocate for removing the benefits of holding land in this
way. Especially in cities, where the land could productively house people
rather than be empty or have a surface lot on it.

> Solving inequality by making everyone poor is not going to get you very far.

For sure. I'd like to see more wealth equality, and I'd like to see it done by
raising the amount of wealth of the working class.

------
cjjuice
Why when we talk about inequality we never talk about the tide of economic
progress that capitalism produces.

If the rich get richer but the middle class has a better quality of life than
what the rich had 200 years ago, is strict inequality still the only thing
that matters?

~~~
dwiel
How do you measure quality of life though? People say this kind of thing all
the time "the poor are better off now than rich of the past". My guess is that
most poor of today would switch places with the rich of the past in a
heartbeat.

My point is just that "quality of life" is more complex than just longer
expected lifetime, or has access to faster internet, as nice as those things
are.

~~~
bhupy
Great question.

Check out [1] and scroll down to Table A-7 (it's an Excel file). It's the real
earnings data (in 2018 dollars), by gender, from 1960 to 2018 (though it's
kind of spotty before 1967). What sticks out:

* For men (looking at Total Workers), real earnings are currently around 10% higher than they were in the 70s (moving from low-$40K's to recently just past mid-$40K's, with some peaks and valleys along the way). Doesn't sound like much, but...

* For women, earnings have roughly doubled in that timespan

* The number of men in the workforce has increased by almost 50%

* The number of women in the workforce has increased by almost 100%

From a certain perspective, it's kind of amazing that real earnings haven't
gone down significantly.

In the last 20 years, median earnings, in real terms (adjusted for inflation),
are up. Unemployment is at its lowest, and that's at the broadest definition
of "unemployment" (U6) [2].

As for poverty, check out [3] from the US Census Bureau and scroll down to
Table 6 (it’s an Excel file). It’s the percentage of people in America that
are below 125% of the poverty line (I.e. near poor to absolutely poor) between
1959 and 2018. That percentage has gone down from 31% to 16%.

The median number of years to recoup the cost of a Bachelors degree in
America, adjusted for inflation, has gone down since the 1980’s, from about 22
years to about 10 years. [4]

[1]
[https://www.census.gov/library/publications/2019/demo/p60-26...](https://www.census.gov/library/publications/2019/demo/p60-266.html)

[2]
[https://twitter.com/jmhorp/status/1201903269095698432](https://twitter.com/jmhorp/status/1201903269095698432)

[3] [https://www.census.gov/data/tables/time-
series/demo/income-p...](https://www.census.gov/data/tables/time-
series/demo/income-poverty/historical-poverty-people.html)

[4] [https://libertystreeteconomics.newyorkfed.org/2014/09/the-
va...](https://libertystreeteconomics.newyorkfed.org/2014/09/the-value-of-a-
college-degree.html)

~~~
jopsen
Nice work!

We often forget that things are no actually so bad.

------
averros
Just don't mention the elephant in the room: the Cantillon effect which is
primary reason for the wealth flowing from working classes and savers to the
bankers and the managerial class. Entirely courtesy of artificially low
interest rates created by central banks and lax controls on monetary emission
(i.e. fractional reserve shenanigans) by private banks.

~~~
aguyfromnb
> _artificially low interest_

Interest rates are driven by the supply and demand of credit. Supply outstrips
demand now.

There are two sides to every transaction; low rates are good for borrowers and
bad for lenders. What makes you think the lenders are entitled to a greater
return on their savings? Do you think we should force people to borrow at
higher rates for this purpose?

> _wealth flowing from working classes and savers to the bankers and the
> managerial class._

The working class in America are debtors and have no savings. Outside of low
rates contributing to driving housing prices higher in some communities, how
are the working class harmed by lower payments on their debt?

~~~
citilife
> Interest rates are driven by the supply and demand of credit. Supply
> outstrips demand now.

While that's somewhat true, its also largely dictated / controlled / heavily
influenced by government. This means the overnight lending rate, U.S. bond
rate, etc.

~~~
aguyfromnb
> _This means the overnight lending rate, U.S. bond rate, etc._

The overnight lending rate is set by the Fed, yes.

Treasuries are sold in the market. Although an initial auction price is set,
the rates will fluctuate based on demand for the bonds.

I don't deny the Fed are a major influence on rates, as it's a major component
of their mandate now. However, the market can "agree" or "disagree" with those
rates and set corresponding rates however they choose.

~~~
0x445442
But your missing the key part. Sometimes if the Fed sets rates too low and
there's not enough demand for the bonds the Fed buys the bonds thus keeping
the interest rates artificially low.

~~~
aguyfromnb
> _Sometimes if the Fed sets rates too low and there 's not enough demand for
> the bonds the Fed buys the bonds thus keeping the interest rates
> artificially low._

Yes, it's how the Fed conducts monetary policy. Can you name the last time
that US treasuries were under-subscribed? Greek bonds have lower rates to US
treasuries; which would you rather own? On a relative basis, how can one claim
that US interest rates are "too low"?

~~~
AnimalMuppet
> Can you name the last time that US treasuries were under-subscribed?

Yes, a couple of months ago.

------
StacyRoberts
I read Piketty's capital. It's very long.

My current best solution to the problem of capitalism is this: once a year the
richest n people must divest themselves of all assets minus the median annual
salary and start over.

~~~
StacyRoberts
Explanations for the down votes are appreciated. I've put a lot of thought
into this.

~~~
SgtBastard
For any arbitrary n, those clustered at the top will arrange their affairs to
maintain the n-1 wealthiest person in society to avoid the reset. Giving away
100s of millions to keep billions makes rational sense - especially if you can
arrange it to flow to your spouse/children/trust/charity you control.

In fact, you could game such a system by spiking a competitors net-worth right
before the reset i.e. by suddenly buying a small, but significant chunk of
their shares to move the market value on their shares.

What exactly have you thought about?

~~~
StacyRoberts
Those are games within with the current system as well. The difference is that
once you begin to approach the top your incentive becomes altruistic, because
you are thinking about increasing the wealth of other people more than
yourself.

That's the key. Capitalism only rewards greed. There is no altruistic
component. What I suggest rewards altruism after the game is won. There is
currently no end to the increasing gap, except violent revolt, which has
always been the solution.

Violent revolt is not a good solution to the wealth gap.

