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Wednesday, December 14, 2016

Bernstein: Important new work on inequality and immobility [feedly]

More on the breakthrough work in economics on inequality

Important new work on inequality and immobility

I wrote about some of the findings from this new paper for a WaPo post this AM, but there's a ton more to be said about it, as the authors have created a very rich data set on US income.

My point this AM was that these data–and more about the data in a moment–strongly support the case that, while I'm all for faster growth, that alone will not reverse the post-1980 trend in inequality.

The second figure in my piece provides a very simple, rough decomposition of the impact of slower growth and inequality on the average income of the bottom half of adults, showing that about two-thirds of the stagnation is attributable to the growth of inequality.

One complaint about that finding, as I note in the piece, is that the income slowdown could be demographically driven, as the increased shared of retirees over this period is putting downward pressure on income growth.

The figure below, from Piketty et al's paper, challenges that suspicion by breaking out the income trends of various age groups. In fact, the only group whose income is up over the period is the >65 folks. Of course, their incomes are below average over most of the period, so there could still be a composition effect here, but there's no questioning, at least based on these data, that working-age adults faced seriously stagnating incomes over this period.

Source: Piketty et al.

Regarding the data, the compilation of this information, which distributes aggregate, national income to individual adults, is a Promethean task for which I give the authors tremendous credit. There's no way to complete this exercise without many, many assumptions, and as is always the case in economics, every assumption can be questioned.

They have to make assumptions about the incidence of taxation–whose income gets dinged–about government spending–who benefits from spending on infrastructure or defense–about how income is shared in families, and many other gnarly questions.

So far, I've seen little to which I'd object, and to their credit, far more than almost anyone in our business, they provide a) the underlying data, so you can see for yourself how some assumptions play out, and b) various tabulations based on alternative assumptions.

My one question thus far is how they treat budget deficits (my bold):

"Government revenue usually does not add up to total government expenditure. To match national income, we impute the primary government deficit to individuals. We allocate 50% of the deficit proportionally to taxes paid, and 50% proportionally to benefits received. This effectively assumes that any government deficit will translate into increased taxes and reduced government spending 50/50. The imputation of the deficit does not affect the distribution of income much, as taxes and government spending are both progressive, so that increasing taxes and reducing government spending by the same amount has little net distributional effect. However, imputing the deficit affects real growth, especially when the deficit is large. In 2009-2011, the government deficit was around 10% of national income, about 7 points higher than usual. The growth of post-tax incomes would have been much stronger in the aftermath of the Great Recession had we not allocated the deficit back to individuals."

I don't have a better way to do it, but this seems off to me. It seems to assume that deficits get fully paid off–through higher taxes and lower spending–in the year they occur. I understand the assumption in the accounting sense of hitting their national income target, but it's a) unrealistic, and b) much more importantly, can have a significant and unrealistic negative impact on incomes in periods of large deficits (and vice versa for surpluses).

My intuition would be to leave it out and punt on hitting national income. To do so wouldn't make a ton of difference outside of periods when the deficit grows a lot, periods when their current method, I'd argue, returns a result that doesn't really show up in adult incomes.

That said, they'd give up a lot conceptually and in terms of simple presentation if they gave up on hitting national income, so there's a trade off. I will noodle on this further as should the authors, whose noodles are far stronger than mine.

Much more to come on this–I'm saying nothing here on the new Chetty et al work as I haven't yet spent as much time with that relative to this Piketty et al paper. I will say this about Chetty et al. Many of us hypothesized that as inequality increased sharply, it would create barriers to upward mobility. The number of kids stuck in neighborhoods without inadequate investments, barriers to quality educational access, and so on, would grow. This, we thought, might slow the rate of mobility as those children aged.

Earlier work by Chetty et al suggested that the rate of relative mobility had not, in fact, slowed over time. This new work suggests that at least by the metric cited in my WaPo piece, it slows considerably. That's a very important and interesting finding which I'll be looking into more carefully in coming days.

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