Piketty's Feast

Revealed preference speaks volumes. Admittedly, my hardcover version of Capital in the Twenty-First Century was delivered “for free” by the publisher of this periodical, but the opportunity cost of retaining it was extraordinary last spring when its publisher and distributors remarkably ran out of stock and the market for used copies was surging. I did more than retain it: I also purchased the electronic version so that I could search its contents readily and accurately and fit the 685-pager in a coat pocket.

More significantly, I read it, in some places carefully enough to dig into the appendices of its online appendices. The University of Chicago—my alma mater and employer—offered Thomas Piketty a faculty position in 1993, and to our disappointment he turned us down. For several years, Piketty’s (and Emmanuel Saez’s) inequality estimates have been used for teaching public economics at Chicago, and I have personally benefitted from his tutoring regarding the details therein. The students are hungry for data on inequality and its trends, and it is my privilege to help with the grocery shopping.

[read the rest at The Independent Review]

Professor Quiggin Could Learn a Lot from My Book

I recently criticized Paul Krugman's recent book for ignoring marginal tax rates, which were hiked by the stimulus law and would be further hiked by the bigger stimulus that he proposes in his book. Moreover, I asserted that high marginal tax rates are responsible for a lot of the U.S. labor market's recent depression, and that Krugman's plan would have depressed it further.

Although not the author I was criticizing, Professor Quiggin recently wrote that

1. I was obviously wrong because of what happened in other countries,
2. The very recent (last 6 months or so), withdraw of some of the 99 weeks of UI benefits proves that marginal tax rates don't matter, and
3. "As for food stamps, the expansion in the number of recipients is not due to changes in policy."

All of these points are addressed  in my book, before Professor Quiggin even wrote them.  Even if he had not read my book, a little investigation would have quickly shown him that his claims are incorrect. I take the points in reverse order.

3.  SNAP (aka, food stamps). Professor Quiggin has been repeatedly refuted by the US Department of Agriculture (it administers SNAP), most recently in its Sept 2011 report where it says "The continued growth in SNAP participation from 2009 to 2010 is likely attributable to the slow recovery from the recent economic recession, expansions in SNAP eligibility, and continued outreach efforts."  [emphasis added]  My book agrees that all three were a factor, provides estimates of their separate quantitative importance (Table 3.4), and discusses the academic literature on the subject.

One way to quickly see how Professor Quiggin is wrong about food stamps is to look at SNAP participation as a ratio to either (a) persons in poverty, (b) persons on Medicaid, (c) persons on SSI, or (d) persons on SSDI.  Of course a "bad economy" expands participation all of these things, but why would SNAP grow so much more than the others?  The answer is simple: SNAP policy changed, while the definition of poverty was constant and the policy rules for Medicaid, SSI, and SSDI were relatively constant.

2.  99 weeks no more.  As of October 2012, unemployed people could not collect 99 weeks UI, thanks to UI rule changes going into effect this spring.  But they still could collect 60+ weeks, not to mention remain on Medicaid, SNAP, and other programs indefinitely.  My book quantifies all of these factors, and finds that the difference between 60+ weeks and 99 weeks (actually, 96 weeks was the national average) is real but fairly small (extending UI from 26 to 52 weeks is a big deal).  So my model predicts that, adjusted for age and other factors, the labor market would rebound slightly during 2012, which is exactly what happened.  (There are also issues of timing here, which are discussed in my book).

3.  Austerity depresses the economy.  I agree (see also here) that European governments have typically failed to revive their economies, and probably further depressed them.  But austerity is not opposite of redistribution (ie, hiking marginal tax rates).  Think of how austerity might be implemented in the U.S.: we might cut Medicare and Social Security, but only for the more successful beneficiaries.  Regardless of whether redistribution is achieved by withholding benefits from families with high incomes, providing more subsidies to families with low incomes, or both, an essential consequence is the same: a reduction in the reward to activities and efforts that raise incomes.  Many kinds of austerity enhance redistribution, and that’s an important reason why austerity depresses the labor market.

With that said, I am very much in favor of cross-country comparisons.  I would love it if Professor Quiggin or anyone else measured marginal tax rate time series for any country that we could compare to my series for the U.S.  But Professor Quiggin has failed to do that, and instead  claims without evidence that marginal tax rates were constant (or falling) everywhere outside the U.S.

Finally, if marginal tax rates were found to be constant in Estonia (the only specific country that Professor Quiggin points to), does that mean that marginal tax rates do not matter in the U.S.?  Please let me know so I can notify American economists that Estonia is our ideal laboratory, and notify policymakers that they can safety hike marginal tax rates to 100 percent without noticeable consequences.

Added: I have heard the claim that the ratio of SNAP to Medicaid increased so sharply because Medicaid was cut sharply, rather that SNAP changing its rules.  The claim ignores the help that Medicaid got from ARRA and, more important, that Medicaid spending and participation per person in poverty was pretty flat.  Why don't the allegedly sharp Medicaid cuts result in sharply less Medicaid per person in poverty?  The answer is simple: Medicaid cuts, if any, where nowhere near the magnitude of SNAP expansions.  For more on SNAP expansions, see The Redistribution Recession.

WSJ reviews The Redistribution Recession!!

“What if Keynesian economics is a bankrupt theory and the massive "stimulus" bill in 2009 made the economy worse, not better? Those are among the questions that Casey Mulligan asks in "The Redistribution Recession," a biting analysis of our current economic malaise.”

Click here for Stephen Moore's favorable review

http://online.wsj.com/article/SB10001424052970204712904578093021310711016.html

Summary and Highlights of End This Depression Now!

Despite the fact that DeepenEnd This Depression Now! arrives at exactly the backwards conclusion, it has a number of highlights and interesting observations. First an editorial-free summary:

Chapter 1: There are lots of unemployed people and they are suffering.  Unemployed people are hurting and are not happy.

Chapter 2: Because the structural theory is wrong, insufficient demand is the only explanation for what has happened.

Chapters 4 and 5: Because the mortgage mess was not exclusive to low-income borrowers, the mortgage crisis was primarily inequality gone wild.  Government was not an independent force, except perhaps in lending a bit too much to low-income borrowers.

Chapter 6: All about economists, nothing about the economy

Chapter 7: The stimulus should have been bigger.

Chapter 8: The deficit is over-rated.

Chapter 9: He was right about inflation.

Chapter 10: About the euro and why European countries should have remained more independent

Chapter 11: “Austerity” has depressed economies, not expanded them.

Chapter 12: Spend like crazy, and the economy will fully and quickly rebound.

-----------
[editorial starts here]

Chapter 10 could stand by itself as a very nice mini book.  One quibble: it could benefit by discussing what happens to unemployment benefits, from a household point of view, during a currency devaluation.

Chapters 4 and 5 arrive at many incorrect conclusions, but I totally agree that social scientists interested in just about any social change in the last thirty years have to look at growing inequality as one of the potentially key driving forces.  That's the point of my 2008 QJE paper (with Yona Rubinstein) about how growing inequality may be the single biggest factor transforming the women's labor market (transforming for the better, from the "progressive" point of view).  That's also the point of Chapter 10 of The Redistribution Recession.  Growing inequality has produced some "bad" results too, and it's worth looking over Krugman's list.

I agree that the government budget deficit gets way too much attention, and thereby distracts from the real issue (incentives faced by individuals and businesses).  But after that basic insight, Chapters 7 and 8 are confused, and misleading.  They engage in the usual trick of conceptual flip-flopping between government purchases and government transfers to individuals, without ever noting the distinction and how different the economic effects of these are.

Those chapters claim that Democrats did not expand government spending, the recession did.  When scoring the effect of Democrats on government spending, Krugman says, you have to exclude the "income security" components.  But Chapter 3 of The Redistribution Recession shows how safety net program spending grew primarily through legislation changes -- usually Democrats (esp. Obama and Pelosi) putting their signatures on new laws.  Income security spending would have grown much less if the laws had been constant and the programs merely reacted to the growing number of unemployed.  Krugman might say that the recession necessitated law changes, but then his claim becomes tautological: government expansion that Krugman deems as needed is not government expansion.

In a book dedicated by an economist to the unemployed, it is funny to find Chapter 6.  Krugman is no expert on psychology, or the personal lives of economists.  Even if he were, telling the truth about the economY creates enough enemies -- how does it help the unemployed to add to the enemy list with stereotypes of and personal attacks on economISTS?  I could speculate, but I'm no psychology expert either ....

Krugman takes credit, largely deserved, in Chapter 9 for being basically right about inflation in the short and medium term.  Does that qualify him as an expert on the labor market?  What about as a predictor of the next Superbowl's winner?  I doubt it.

The term “austerity” is too imprecise for my taste -- I'd like to see at least something about marginal tax rates and the distinction between purchases and transfers -- but I basically agree (see Q6 here) with Chapter 10's conclusion that austerity has failed to expand the economy. 

Here are a couple of other memorable quotes from the book that are inspiring for Keynesians and non-Keynesians alike:

Chapter 5/page 85: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”  (quoting Upton Sinclair)

Chapter 6/page 94: “there are valuable human activities which require the motive of moneymaking and the environment of private wealth-ownership for their full fruition” (quoting Keynes)

Chapter 8/page 146: “it follows that the level of debt matters only if the distribution of net worth matters, if highly indebted players face different constraints from players with low debt.”

Are Keynes and Sectoral Shifts Mutually Exclusive?

Copyright, The New York Times Company

The decline of home construction is not the primary reason that our labor market remains depressed: Keynesian policies are.

If we accept that the housing sector was overbuilt by 2006, then it might seem inevitable that a recession would follow as the housing sector downsized, workers shifted from construction to other industries and workers moved from overbuilt regions to other places in America.

But as Paul Krugman points out in his “End This Depression Now!” the recession of 2008-9 did not have many industries that were growing, let alone growing as a consequence of reallocation away from home construction.

Moreover, transitions between industries and regions have happened before, but happened gradually as demographic and other trends slowly but powerfully altered the composition of economic activity. By comparison, this recession came on suddenly.

To put it another way: for every worker that construction lost between 2007 and 2010, the rest of the economy lost at least another five workers, rather than gaining workers. I agree with Professor Krugman and other opponents of the “sectoral shifts theory” that something must have happened — in less than a year or two — that profoundly affected practically all industries and practically every region.

But just because sectoral shifts are at best a small part of what happened does not mean that huge government subsidies would take the labor market back to what it was before the recession. A Keynesian-style demand collapse is not the only aggregate event that could happen or did happen.

In my new book, I explain how, in the matter of a few quarters of 2008 and 2009, new federal and state laws greatly enhanced the help given to the poor and unemployed — from expansion of food-stamp eligibility to enlargement of food-stamp benefits to payment of unemployment bonuses — sharply eroding (and, in some cases, fully eliminating) the incentives for workers to seek and retain jobs, and for employers to create jobs or avoid layoffs.

Economists normally think that eroding incentives (as they call it, raising marginal labor income tax rates) depresses the labor market rather than expanding it, and that it would be tough for the labor market to get back to its 2007 form without returning incentives to what they were back then.

Yet Professor Krugman asserts that he would end this depression now with an even bigger stimulus — with more help for the poor and unemployed — that would further erode incentives and further penalize success.

Remarkably, “End This Depression Now!” says nothing about marginal tax rates or incentives to work, either as they actually evolved or as they would appear in Professor Krugman’s ideal stimulus. Nor does the book explain why economists or anyone else should ignore sharp marginal tax-rate increases, or why paying people for not working would have nearly the expansionary effect of military buildups and the like. (These absences are conspicuous to economists who are familiar with Professor Krugman’s academic work on how excessive debts harm debtor incentives.)

“DeepenEnd This Depression Now!” is full of interesting and relevant observations, but don’t expect its author to mention, let alone appreciate, a non-Keynesian explanation for any of them.