Social and Educational Mobility: Denmark vs USA (James Heckman)

Despite generous social programs such as free pre-K education, free college, and massive transfer payments, Denmark is similar to the US in key measures of inequality, such as educational outcomes and cognitive test scores. 

While transfer payments can equalize, to some degree, disposable income, they do not seem to be able to compensate for large family effects on individual differences in development. 

These observations raise the following questions: 

1. What is the best case scenario for the US if all progressive government programs are implemented with respect to child development, free high quality K12 education, free college, etc.?

2. What is the causal mechanism for stubborn inequality of outcomes, transmitted from parent to child (i.e., within families)? 

Re #2: Heckman and collaborators focus on environmental factors, but do not (as far as I can tell) discuss genetic transmission. We already know that polygenic scores are correlated to the education and income levels of parents, and (from adoption studies) that children tend to resemble their biological parents much more strongly than their adoptive parents. These results suggest that genetic transmission of inequality may dominate environmental transmission.

  

See 

Genetic correlation of social outcomes between relatives (Fisher 1918) tested using lineage of 400k English individuals 

Game Over: Genomic Prediction of Social Mobility

The Contribution of Cognitive and Noncognitive Skills to Intergenerational Social Mobility (McGue et al. 2020)

Note: Denmark is very homogenous in ancestry, and the data presented in these studies (e.g., polygenic scores and social mobility) are also drawn from European-ancestry cohorts. The focus here is not on ethnicity or group differences between ancestry groups. The focus is on social and educational mobility within European-ancestry populations, with or without generous government programs supporting free college education, daycare, pre-K, etc.

Lessons for Americans from Denmark about inequality and social mobility 

James Heckman and Rasmus Landersø 

Abstract Many progressive American policy analysts point to Denmark as a model welfare state with low levels of income inequality and high levels of income mobility across generations. It has in place many social policies now advocated for adoption in the U.S. Despite generous Danish social policies, family influence on important child outcomes in Denmark is about as strong as it is in the United States. More advantaged families are better able to access, utilize, and influence universally available programs. Purposive sorting by levels of family advantage create neighborhood effects. Powerful forces not easily mitigated by Danish-style welfare state programs operate in both countries.

Also discussed in this episode of EconTalk podcast. Russ does not ask the obvious question about disentangling family environment from genetic transmission of inequality.

 

The figure below appears in Game Over: Genomic Prediction of Social Mobility. It shows SNP-based polygenic score and life outcome (socioeconomic index, on vertical axis) in four longitudinal cohorts, one from New Zealand (Dunedin) and three from the US. Each cohort (varying somewhat in size) has thousands of individuals, ~20k in total (all of European ancestry). The points displayed are averages over bins containing 10-50 individuals. For each cohort, the individuals have been grouped by childhood (family) social economic status. Social mobility can be predicted from polygenic score. Note that higher SES families tend to have higher polygenic scores on average -- which is what one might expect from a society that is at least somewhat meritocratic. The cohorts have not been used in training -- this is true out-of-sample validation. Furthermore, the four cohorts represent different geographic regions (even, different continents) and individuals born in different decades.

The figure below appears in More on SES and IQ.

Where is the evidence for environmental effects described above in Heckman's abstract: "More advantaged families are better able to access, utilize, and influence universally available programs. Purposive sorting by levels of family advantage create neighborhood effects"? Do parents not seek these advantages for their adopted children as well as for their biological children? Or is there an entirely different causal mechanism based on shared DNA?

 

The figure below appears in Low SES does not decrease heritability of cognitive ability (N=300k).

 

The Contribution of Cognitive and Noncognitive Skills to Intergenerational Social Mobility (McGue et al. 2020)

If you have the slightest pretension to expertise concerning social mobility, meritocracy, inequality, genetics, psychology, economics, education, history, or any related subjects, I urge you to carefully study this paper.

The Contribution of Cognitive and Noncognitive Skills to Intergenerational Social Mobility  

(Psychological Science https://doi.org/10.1177/0956797620924677)

Matt McGue, Emily A. Willoughby, Aldo Rustichini, Wendy Johnson, William G. Iacono, James J. Lee 

We investigated intergenerational educational and occupational mobility in a sample of 2,594 adult offspring and 2,530 of their parents. Participants completed assessments of general cognitive ability and five noncognitive factors related to social achievement; 88% were also genotyped, allowing computation of educational-attainment polygenic scores. Most offspring were socially mobile. Offspring who scored at least 1 standard deviation higher than their parents on both cognitive and noncognitive measures rarely moved down and frequently moved up. Polygenic scores were also associated with social mobility. Inheritance of a favorable subset of parent alleles was associated with moving up, and inheritance of an unfavorable subset was associated with moving down. Parents’ education did not moderate the association of offspring’s skill with mobility, suggesting that low-skilled offspring from advantaged homes were not protected from downward mobility. These data suggest that cognitive and noncognitive skills as well as genetic factors contribute to the reordering of social standing that takes place across generations.

From the paper:

We believe that a reasonable explanation of our findings is that the degree to which individuals are more or less skilled than their parents contributes to their upward or downward mobility. Behavioral genetic and genomic research has established the heritability of social achievements (Conley, 2016) as well as the skills thought to underlie them (Bouchard & McGue, 2003). Nonetheless, these associations may be due to passive gene–environment correlation, whereby high-achieving parents both transmit genes and provide a rearing environment that promotes their children’s social success (Scarr & McCartney, 1983). Our within-family design controlled for passive gene–environment correlation effects. Although offspring inherit all of their genes from their parents, they inherit a random subset of parental alleles because of meiotic segregation. Consequently, some offspring inherit a favorable subset of their parents’ alleles, whereas others inherit a less favorable subset. We found, as did previous researchers (Belsky et al., 2018), that the inheritance of a favorable subset of alleles was associated with an increased likelihood of upward mobility... 

...In summary, our analysis of intergenerational social mobility in a sample of 2,594 offspring from 1,321 families found that (a) most individuals were educationally and occupationally mobile, (b) mobility was predicted by offspring–parent differences in skills and genetic endowment, and (c) the relationship of offspring skills with social mobility did not vary significantly by parent social background. In an era in which there is legitimate concern over social stagnation, our findings are noteworthy in identifying the circumstances when parents’ educational and occupational success is not reproduced across generations.

See also Game Over: Genomic Prediction of Social Mobility (PNAS July 9, 2018: 201801238). Both papers provide out of sample validation of polygenic predictors for cognitive ability, specifically of the relationship to intergenerational social mobility.

Adam Tooze: American Power in the Long 20th Century

  

London Review of Books (LRB) lecture:

The history of American power, as it is commonly written, is a weighty subject, a matter of military and economic heft, of ‘throw-weight’, of resource mobilisation and material culture, of ‘boots on the ground’. In his lecture, Adam Tooze examines an alternative, counterintuitive vision of America, as a power defying gravity. This image gives us a less materialistic, more fantastical and more unstable vision of America’s role in the world.

The Q&A at 1h03min is probably the best (at least most concise) part of the talk. I don't find the Geithner anecdote quite as important / symbolic as Tooze does. Geithner is expressing the point that financial markets and economies are heavily affected by animal spirits, investor confidence, etc. Geithner understands well how much the power of central banks depends on purely psychological multiplier effects.

From a YouTube comment, this outline:

1:10 - Tim Geithner; U.S. Treasury: America had been “defying gravity" 

5:50 - U.S. was the “gravity” of world 

11:07 - U.S. is now also subject to the “gravity” of world 

13:28 - 100 years of 9 historic U.S. events; Overview 

14:44 - Adam Tooze; Historian “Ordering rather than Order, and the Disordering effects of efforts at Ordering.” 

16:28 - Start at the beginning of 1800’s 

17:12 - 1898 U.S. Imperialist power 

17:50 - 1916 U.S. Globalist power 

18:47 - Woodrow Wilson; U.S. President 

22:46 - 1920s Republican domestic priority of Financial Austerity and Tax cuts. 

25:59 - Great American Financial shocks/panics; 1857, 1873, 1893, 1896, 1907, 1920, 1929 26:49 - 1920s Great Depression 

27:18 - 1930s U.S. Hyper militaristic power 

31:51 - World War 2; One World, One War (1942) 

33:48 - Post World War 2, Bretton Woods economic conference. 

36:24 - Marshall Plan not the same as Bretton Woods... 

41:10 - Cold War: Asia 

43:30 - U.S. President Nixon abandons the Gold peg in 1971. Which results in inflation in G7 countries and Switzerland. 

44:10 - Keynesian era 50s to 60s. Start of Neoliberalism or the Paul Volcker shock 1979. 

45:07 - Cold War: Europe 1980s, Reagan & Gorbachev 

47:13 - Concluding phase of the talk 

1:01:56 - Challenges in 2019 and going forward; China and Climate Change 

1:03:20 - Q&A

Also recommended: Tooze on US-China geopolitical competition (August 6 2020 Sinica podcast). This discussion focuses more on the present and future than the past and may be of more interest to readers.

This conversation with Tyler Cowen is excellent, with more focus on Europe.

This is part 3 of a discussion at the Paris School of Economics. Thomas Piketty is on the panel and his remarks are in part 2, following Tooze's presentation in part 1. I recommend part 3 as the most interesting. Topics covered include MMT, inequality, central banks, current sources of systemic risk. Note this discussion took place before the Covid19 pandemic. Tooze mentions individual hedge fund compensation in the hundreds of millions or billions of dollars. Typically in such cases a big chunk of this compensation is really returns from the individual's own net worth which is co-invested with the fund. So it's not directly comparable to other forms of compensation, such as salary or bonus.

Silicon Oligarchs: Winner Take All?

Joel Kotkin is a Presidential Fellow in Urban Futures at Chapman University and Executive Director for the Center for Opportunity Urbanism.

What Do the Oligarchs Have in Mind for Us?

...This tiny sliver of humanity, with their relatively small cadre of financiers, engineers, data scientists, and marketers, now control the exploitation of our personal data, what Alibaba founder, Jack Ma calls the “electricity of the 21st century.” Their “super platforms,” as one analyst noted, “now operate as “digital gatekeepers” lording over “e-monopsonies” that control enormous parts of the economy. Their growing power, notes a recent World Bank Study, is built on “natural monopolies” that adhere to web-based business, and have served to further widen class divides not only in the United States but around the world.

The rulers of the Valley and its Puget Sound doppelganger now account for eight of the 20 wealthiest people on the planet. Seventy percent of the 56 billionaires under 40 live in the state of California, with 12 in San Francisco alone. In 2017, the tech industry, mostly in California, produced 11 new billionaires. The Bay Area has more billionaires on the Forbes 400 list than any metro region other than New York and more millionaires per capita than any other large metropolis.

For an industry once known for competition, the level of concentration is remarkable. Google controls nearly 90 percent of search advertising, Facebook almost 80 percent of mobile social traffic, and Amazon about 75 percent of US e-book sales, and, perhaps most importantly, nearly 40 percent of the world’s “cloud business.” Together, Google and Apple control more than 95 percent of operating software for mobile devices, while Microsoft still accounts for more than 80 percent of the software that runs personal computers around the world.

The wealth generated by these near-monopolies funds the tech oligarchy’s drive to monopolize existing industries such as entertainment, education, and retail, as well as those of the future, such as autonomous cars, drones, space exploration, and most critically, artificial intelligence. Unless checked, they will have accumulated the power to bring about what could best be seen as a “post-human” future, in which society is dominated by artificial intelligence and those who control it.

What Do the Oligarchs Want?

The oligarchs are creating a “a scientific caste system,” not dissimilar to that outlined in Aldous Huxley’s dystopian 1932 novel, Brave New World. Unlike the former masters of the industrial age, they have little use for the labor of middle- and working-class people—they need only their data. Virtually all their human resource emphasis relies on cultivating and retaining a relative handful of tech-savvy operators. “Software,” Bill Gates told Forbes in 2005, “is an IQ business. Microsoft must win the IQ war, or we won’t have a future.”

Perhaps the best insight into the mentality of the tech oligarchy comes from an admirer, researcher Greg Ferenstein, who interviewed 147 digital company founders. The emerging tech world has little place for upward mobility, he found, except for those in the charmed circle at the top of the tech infrastructure; the middle and working classes become, as in feudal times, increasingly marginal.

This reflects their perception of how society will evolve. Ferenstein notes that most oligarchs believe “an increasingly greater share of economic wealth will be generated by a smaller slice of very talented or original people. Everyone else will increasingly subsist on some combination of part-time entrepreneurial ‘gig work’ and government aid.” Such part-time work has been growing rapidly, accounting for roughly 20 percent of the workforce in the US and Europe, and is expected to grow substantially, adds McKinsey. ...

The economic roots of populism in developed countries

The figures below come from economist Branko Milanovic. He is the author of Global Inequality: A New Approach for the Age of Globalization.

One of the world’s leading economists of inequality, Branko Milanovic presents a bold new account of the dynamics that drive inequality on a global scale. Drawing on vast data sets and cutting-edge research, he explains the benign and malign forces that make inequality rise and fall within and among nations. He also reveals who has been helped the most by globalization, who has been held back, and what policies might tilt the balance toward economic justice.

Global Inequality takes us back hundreds of years, and as far around the world as data allow, to show that inequality moves in cycles, fueled by war and disease, technological disruption, access to education, and redistribution. The recent surge of inequality in the West has been driven by the revolution in technology, just as the Industrial Revolution drove inequality 150 years ago. But even as inequality has soared within nations, it has fallen dramatically among nations, as middle-class incomes in China and India have drawn closer to the stagnating incomes of the middle classes in the developed world. A more open migration policy would reduce global inequality even further.

See also this interview and his blog.

Middle 40% of income distribution saw their share of total income decline in recent decades.

In the US, income growth became heavily concentrated among the highest earners.

Global inequality declined significantly (largely due to China), even while within-country inequality increased (figures above).

American and Chinese Oligarchies

Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens

Martin Gilens and Benjamin I. Page

Each of four theoretical traditions in the study of American politics—which can be characterized as theories of Majoritarian Electoral Democracy, Economic-Elite Domination, and two types of interest-group pluralism, Majoritarian Pluralism and Biased Pluralism—offers different predictions about which sets of actors have how much influence over public policy: average citizens; economic elites; and organized interest groups, mass-based or business-oriented.

A great deal of empirical research speaks to the policy influence of one or another set of actors, but until recently it has not been possible to test these contrasting theoretical predictions against each other within a single statistical model. We report on an effort to do so, using a unique data set that includes measures of the key variables for 1,779 policy issues.

Multivariate analysis indicates that economic elites and organised groups representing business interests have substantial independent impacts on US government policy, while average citizens and mass-based interest groups have little or no independent influence.

From the paper:

... When a majority of citizens disagrees with economic elites and/or with organised interests, they generally lose. Moreover, because of the strong status quo bias built into the US political system, even when fairly large majorities of Americans favour policy change, they generally do not get it.

... Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association and a widespread (if still contested) franchise. But we believe that if policymaking is dominated by powerful business organisations and a small number of affluent Americans, then America's claims to being a democratic society are seriously threatened.

Interview with Gilens:

Let's talk about the study. If you had 30 seconds to sum up the main conclusion of your study for the average person, how would you do so?

I'd say that contrary to what decades of political science research might lead you to believe, ordinary citizens have virtually no influence over what their government does in the United States. And economic elites and interest groups, especially those representing business, have a substantial degree of influence. Government policy-making over the last few decades reflects the preferences of those groups -- of economic elites and of organized interests.

You say the United States is more like a system of "Economic Elite Domination" and "Biased Pluralism" as opposed to a majoritarian democracy. What do those terms mean? Is that not just a scholarly way of saying it's closer to oligarchy than democracy if not literally an oligarchy?

People mean different things by the term oligarchy. One reason why I shy away from it is it brings to mind this image of a very small number of very wealthy people who are pulling strings behind the scenes to determine what government does. And I think it's more complicated than that. It's not only Sheldon Adelson or the Koch brothers or Bill Gates or George Soros who are shaping government policy-making. So that's my concern with what at least many people would understand oligarchy to mean. What "Economic Elite Domination" and "Biased Pluralism" mean is that rather than average citizens of moderate means having an important role in determining policy, ability to shape outcomes is restricted to people at the top of the income distribution and to organized groups that represent primarily -- although not exclusively -- business.

See also Fukuyama and Zhang on the China Model, and Daniel Bell's The China Model: political meritocracy and limits of democracy.

W-2's don't lie

These numbers are derived from aggregate W-2 incomes for 158 million working Americans (see link for full table).

The "raw" average wage, computed as net compensation divided by the number of wage earners, is $7,050,259,213,644.55 divided by 158,186,786, or $44,569.20. Based on data in the table below, about 67.2 percent of wage earners had net compensation less than or equal to the $44,569.20 raw average wage. By definition, 50 percent of wage earners had net compensation less than or equal to the median wage, which is estimated to be $28,851.21 for 2014.

Some rough earnings thresholds by percentile: 90th ~ $95k , 95th ~ $125k , 99th ~ $275k , 99.9th ~ $900k , 99.99th ~ $3.5M.

Our Kids and Coming Apart

Nick Lemann reviews Our Kids: The American Dream in Crisis by Robert D. Putnam. At the descriptive level, Putnam's conclusions seem very similar to those of Charles Murray in Coming Apart.

Of course, description is much easier to obtain than causality.

NYBooks: ... By the logic of the book, access to social capital ought to be strongly associated with going to college and doing well there—otherwise, why stress it so strongly? The syllogism would be: social capital leads to educational attainment, which leads to mobility. But for his classmates, Putnam reports, academic achievement was the factor most predictive of college attendance, and the link between such achievement and parental encouragement (of the kind he has copiously praised in the main body of the book) was only “modestly important,” and “much weaker” than the link between class rank and college attendance. Not only that:

No other measure of parental affluence or family structure or neighborhood social capital (or indeed anything else we had measured)—none of the factors that this book has shown are so important in producing today’s opportunity gap—had any appreciable effect on college attendance or other educational attainment.

In the methods appendix, Putnam refers readers to his website for more detail on his findings about his classmates. There, he writes:

No measure of parental resources adds any predictive power whatsoever—not parental occupational status, not parental unemployment, not family economic insecurity during high school, not homeownership, not neighborhood characteristics, and not family structure…. Parental education, parental encouragement, and class rank were all modestly predictive of extracurricular participation, but holding constant those variables, extracurricular participation itself was unrelated to college-going.

So is it really the case that Putnam has shown that strong social capital once produced individual opportunity—let alone that the deterioration of social capital has produced what he calls the opportunity gap? The passages I just quoted seem to indicate that the strong association between social capital and opportunity that is Putnam’s core assertion has not been proven. Putnam doesn’t define “social capital” precisely enough to rigorously test its effects, even on as small and unrepresentative a sample as the one in his survey, and he doesn’t attempt to test its effects precisely in the present. It could even be that, rather than social capital generating prosperity, prosperity might generate social capital, which would mean Putnam has been showing us the effects of inequality, not the causes.

It seems possible to me that:

1. American society has become increasingly meritocratic in the last 50 years, with advancement more and more dependent on largely heritable attributes such as cognitive ability, conscientiousness, future time orientation, etc. Consequently, gaps between different SES groups have become more and more difficult to remediate.

2. External forces, such as automation and global economic competition, have placed a larger and larger premium on attributes such as those listed above, leaving Americans of below average ability at a severe disadvantage.

The consequences of these observations are exacerbated by an increasingly winner take all economic system.

If these points are correct, then Our Kids and Coming Apart are documenting consequences, not causes.

See also Income, Wealth and IQ , US Economic Mobility and Random microworlds: the mystery of nonshared environment.

Earnings by educational attainment 1990-2013

This graphic is from today's NYTimes: Why American Workers Without Much Education Are Being Hammered.

Aside from the human capital (education) point the figure makes, I'm a bit puzzled by the following: real per-capita GDP is probably up at least ~50% (e.g., ~2% x 23 years) over the 1990-2013 period. Where did those gains go? Into the pockets of a small invisible group that doesn't show up in the graph (note use of medians, not averages)? It seems that everyone except the members of this small group were "hammered" over the last two decades ...

Note added (with better data): This source has 2013 GDP at $16 trillion versus $9 trillion in 1990 (both figures in 2009 dollars). Total US population went up 26% (316 million from 249 million). The percentage of the population with college degrees went from about 20% to 30%. It still appears to me that much of GDP increase during the period did not go to workers or ordinary people.

If you annualize any of the real income changes in the graph over 23 years, the change is small -- less than 1% per year. Yet real GDP grew at about 3% per year on average during the period. The graph below (from this 2007 post) might shed some light on the mystery (even the top quintile saw little income appreciation):

More here.

Multigenerational mobility: does the Son Also Rise?

The working paper below on multigenerational mobility arrives at smaller intergenerational correlations than Greg Clark obtained (e.g., 0.4 vs 0.7). I found Clark's results hard to explain, at least in genetic terms, because estimates of assortativity in mating are much lower than required.

Related posts here and here. From the second link:

Correlations as high as 0.7 -- 0.8 are implausible from genetic factors alone without highly assortative mating. Traits such as height and IQ have narrow sense heritabilities as large as h2 ~ 0.6, so fraction of variance accounted for is ~ 60%, and midparent-child correlation as high as ~ 0.8, but under even somewhat random mating the parental midpoint is significantly closer to average than the phenotype of the more exceptional parent. This would cause children to regress to the mean much faster in height and IQ than in social status as indicated in Clark's data. It's also important to note that social status itself is only imperfectly correlated to observable phenotypes such as IQ, Conscientiousness or Extraversion. See Intergenerational mobility: Bowles, Gintis, Clark for more.

Solon's results seem to be consistent with Bowles and Gintis.

What Do We Know So Far about Multigenerational Mobility?

Gary Solon
Michigan State University

Abstract
“Multigenerational mobility” refers to the associations in socioeconomic status across three or more generations. This article begins by summarizing the longstanding but recently growing empirical literature on multigenerational mobility. It then discusses multiple theoretical interpretations of the empirical patterns, including the one recently proposed in Gregory Clark’s book The Son Also Rises.


... contrary to Clark’s prediction, most group-average studies other than his own – including the surnames-based work by Chetty et al. – have estimated much smaller intergenerational associations.

Clark was recently interviewed on KQED Forum. Michael Krasny was willing to entertain Clark's Social Darwinistic perspective ;-)

The rich (and powerful) are different

Discussions at the meeting I just attended are off the record, so I have nothing to report. But I will link to some previous posts of relevance:

Creators and Rulers

How the World Works

Educational background of US elites

A word cloud produced from the collective bios would feature: Harvard, Stanford, Goldman Sachs, Rhodes, Marshall, Venture, Private Equity, Acquired, IPO, Technology, Energy, SEALs, Family Office, White House, Society of Fellows, ...

My wife looked at the book of bios and concluded "You don't stand out."  8-/

See also Status-Income Disequilibrium.

CBO Against Piketty?

This report using CBO  (Congressional Budget Office) data claims that income inequality did not widen during the Great Recession (table above compares 2007 to 2011). After government transfer payments (taxes, entitlements, etc.) are taken into account, one finds that low income groups were cushioned, while high earners saw significant declines in income.

... The CBO on the other hand defines income broadly as resources consumed by households, whether through cash payments or services rendered without payments.2 Its definition of market income includes employer payments on workers (Social Security, Medicare, medical insurance, and retirement) and capital gains. On top of market income, CBO next adds all public cash assistance and in-kind benefits from social insurance and government assistance programs to arrive at “before-tax income.” Finally, the CBO’s last step is to subtract all federal taxes including personal income taxes, Social Security payments, excise taxes and corporate income taxes to arrive at “after-tax income” or what other government series call disposable income.3 ...


CONCLUSION: It is now widely held that inequality increased dramatically in the decades prior to 2007. For example, Piketty and Saez’s research shows that 91 percent of economic growth between 1979 and 2007 went to the wealthiest 10 percent. But when comparing the CBO’s more comprehensive definition of income (including employer benefits, Social Security, Medicare, and other government benefits), 47 percent of growth of after-tax income went to the richest 10 percent.14

Consequently, both methodologies reveal a real income inequality problem.15 But this paper once again shows that the IRS data give a misleading impression of what has happened with income inequality (not growing as fast in the period from 1979 to 2007 and decreasing, not increasing in the years after 2007). While many on the left were unhappy with the first ITIF paper and my earlier work criticizing Piketty and Saez, it is less clear how they will react to this paper.16 On the one hand, the paper argues that inequality doesn’t always rise and that it didn’t since the onset of the Great Recession. On the other hand, it argues for the efficacy of robust income-support and growth policies and ultimately provides a refutation to a critique that Republicans have made of President Obama.

Almost no increase in US Gini coefficient since 1979 once transfer payments are accounted for:

Is it possible that nameless government employees at CBO have done a better job on this problem than the acclaimed economists Piketty and Saez? (What kind of serious statistical researcher uses Excel?!?)

See also Piketty on Capital and Piketty's Capital.

Piketty on Capital

Piketty on EconTalk (podcast) -- a lively discussion between Russ Roberts and guest Thomas Piketty. See earlier post here.

Piketty: ... to summarize very quickly our conclusion, we feel that the theory of marginal productivity is a bit naive, I think for this top part of the labor market. That is to say when a manager manages to get a pay increase from $1 million a year to $10 million a year, according to the textbook based on marginal productivity, this should be due to the fact that his marginal contribution to the output of his company has risen from 1 to 10. Now it seems a bit naive. It could be that in practice individual marginal productivities are very hard to observe and monitor, especially in a large corporation. And there is clearly strong incentives for top managers to try to get as much as they can.

... Now, when the top tax rate is 82%, now of course you always want to be paid $1 million more, but on the margin when you get a pay increase of $1 million, 82% is going to go straight to the Treasury, so your incentive to bargain very aggressively and put the right people in the right compensation committee are going to be not so strong. And also your shareholders, your subordinates, maybe will tend to tell you, look, this is very costly. Whereas when the top tax rate goes down to 20, 30% or even 40%, so you keep 2/3rds or 60% of the extra $1 million for you, then the incentives are very, very different. Now, this model seems to explain part of what we observe in the data. In particular, it's very difficult to see any improvement in the performance of managers who are getting $10 million instead of $1 million. When we put together a data base with all the publicly traded companies in North America, Europe, Japan, trying to compare in the companies that are paying their managers $10 million instead of $1 million, it's very difficult to see in the data any extra performance.

... But let me make clear that I love capital accumulation and I certainly don't want to reduce capital accumulation. The problem is the concentration. So let me make very clear that inequality in itself is of course not a problem. Inequality can actually be useful for growth. Up to a point. The problem is when inequality of wealth and concentration of wealth gets too extreme, it is not useful any more for growth. And it can even become bad, because it leads to high perpetuation of inequality over time, so it can reduce social mobility. And it can also be bad for the working or for the democratic institutions. So where is the tipping point--when is it that inequality becomes excessive? Well, I'm sorry to tell you that I don't have a formula for that.

... In the United States right now, the bottom 50% of the population own about 2% of national wealth. And the next 40% own about 20, 22% of national wealth. And this group, the middle 40%, the people who are not in the bottom 50% and who are not in the top 10%, they used to own 25-30% of national wealth. And this has been going down in recent decades, as shown by a recent study by Saez and Zucman and now is closer to 20, 22%. Now, how much should it be? I don't know. I don't know. But the view that we need the middle class share to go down and down and down and that this is not a problem as long as you have positive growth, I think is excessive. You know, I think, of course we need entrepreneurs. I'm not saying, look, if it was perfect equality the bottom 50% should own 50% and the next 40% should own 40. I am not saying that we should have this at all. I'm just saying that when you have 2% for the bottom 50 and 22 for the next 40, you know, the view that we cannot do better than that [[ because ]] you won't have entrepreneurs any more, you won't have growth any more, is very ideological.

... I am actually a lot more optimistic than what some people seem to believe. I'm very sorry some people feel depressed after they read my book because after all this is not the way I wrote it. In fact, I think there are lots of reasons to be optimistic. For instance, one good news coming from the book is that we've never been as rich in terms of net wealth than we are today in developed countries. And we talk all the time about our public debt, but in fact our private wealth as a fraction of GDP has increased a lot more than our public debt as a fraction of GDP, so our national wealth, the sum of private and public wealth, is actually higher than it has ever been. So our countries are rich. It is our governments that are poor, which is a problem; but it raises issues of organization and institution but that can be addressed.

Measuring Wealth Inequality

Recent increases in wealth inequality mainly due to top 0.01%, not top 1%? See this article (The Atlantic) and also here.

The method used to obtain these results is not without uncertainties. From these slides by Saez and Zucman. (Using flows to estimate accumulations.)

We develop a new technique to estimate the distribution of wealth

We capitalize income tax returns

Use IRS data on individual dividends, interest, rents...
Compute rates of return by asset class (Flow of Funds / NIPA)
Combine income and rates of return to obtain wealth

The capitalization method works for foundations
For which we observe both income and wealth

See also Inside the 1 percent:

Net worth distribution within the population of top wealth holders (assets > $2M; about top 1% of adult population): having $10M puts you in the 90th percentile (so, top 0.1% of total population) and $50M puts you in the 99th percentile (top 0.01% of total population).

Piketty's Capital

One of the jarring figures in Piketty's book Capital in the Twenty-first Century shows the population fraction over time that inherited more money than the average laborer earns in a lifetime. This fraction is larger than I expected -- roughly 5-10 percent in France.

Piketty's grande idée is very simple: if returns to capital r exceed GDP growth g, and if ownership of capital is concentrated, then runaway inequality will result. He argues that throughout most of history, r > g. His solution: redistribution via a wealth tax. (Don't most countries already have inheritance taxes? Perhaps they just need to be tightened up.)

See also The Normaliens.

New Yorker: ... Piketty, who teaches at the Paris School of Economics, has spent nearly two decades studying inequality. In 1993, at the age of twenty-two, he moved to the United States to teach at M.I.T. A graduate of the élite École Normale Supérieure, he had recently completed his doctorate, a dense mathematical exploration of the theory behind tax policies. Plenty of bright young European scholars move across the Atlantic, of course, and many of them end up staying. Piketty was not to be one of them. “It was the first time I had set foot in the United States,” he recalls in the introduction, “and it felt good to have my work recognized so quickly. Here was a country that knew how to attract immigrants when it wanted to! Yet I also realized quite soon that I wanted to return to France and Europe, which I did when I was twenty-five. Since then, I have not left Paris, except for a few brief trips.”

... much of the economics that Piketty encountered at M.I.T. seemed arid and pointless. “I did not find the work of U.S. economists entirely convincing,” he writes. “To be sure, they were all very intelligent, and I still have many friends from that period of my life. But something strange happened: I was only too aware of the fact that I knew nothing at all about the world’s economic problems.”

... Eventually, Piketty says, we could see the reëmergence of a world familiar to nineteenth-century Europeans; he cites the novels of Austen and Balzac. In this “patrimonial society,” a small group of wealthy rentiers lives lavishly on the fruits of its inherited wealth, and the rest struggle to keep up. For the United States, in particular, this would be a cruel and ironic fate. “The egalitarian pioneer ideal has faded into oblivion,” Piketty writes, “and the New World may be on the verge of becoming the Old Europe of the twenty-first century’s globalized economy.”

... Some people claim that the takeoff at the very top reflects the emergence of a new class of “superstars”—entrepreneurs, entertainers, sports stars, authors, and the like—who have exploited new technologies, such as the Internet, to enlarge their earnings at the expense of others in their field. If this is true, high rates of inequality may reflect a harsh and unalterable reality: outsized spoils are going to go to Roger Federer, James Patterson, and the WhatsApp guys. Piketty rejects this account. The main factor, he insists, is that major companies are giving their top executives outlandish pay packages. His research shows that “supermanagers,” rather than “superstars,” account for up to seventy per cent of the top 0.1 per cent of the income distribution. ...

... Defenders of big pay packages like to claim that senior managers earn their vast salaries by boosting their firm’s profits and stock prices. But Piketty points out how hard it is to measure the contribution (the “marginal productivity”) of any one individual in a large corporation. The compensation of top managers is typically set by committees comprising other senior executives who earn comparable amounts. “It is only reasonable to assume that people in a position to set their own salaries have a natural incentive to treat themselves generously, or at the very least to be rather optimistic in gauging their marginal productivity,” Piketty writes.

... Income from capital has always played a key role in capitalism. Piketty claims that its role is growing even larger, and that this helps explain why inequality is rising so fast. Indeed, he argues that modern capitalism has an internal law of motion that leads, not inexorably but generally, toward less equal outcomes. The law is simple. When the rate of return on capital—the annual income it generates divided by its market value—is higher than the economy’s growth rate, capital income will tend to rise faster than wages and salaries, which rarely grow faster than G.D.P.

... Piketty takes some well-aimed shots at economists who seek to obfuscate this reality. “In studying the eighteenth and nineteenth centuries it is possible to think that the evolution of prices and wages, or incomes and wealth, obeys an autonomous economic logic having little or nothing to do with the logic of politics or culture,” he writes. “When one studies the twentieth century, however, such an illusion falls apart immediately. A quick glance at the curves describing income and wealth inequality or the capital/income ratio is enough to show that politics is ubiquitous and that economic and political changes are inextricably intertwined and must be studied together.” ...

See figures here and here.

Apples and Trees

From Planet Money.

See also US economic mobility data and Not (all) in our genes?

$alaries in the City

New York magazine on what people make in the Big Apple. Doctors, financiers, escorts, drivers, editors, cops, attorneys, etc. If the figures are correct for PR/Communications people, we are overpaying at the university ...

NYmag: ... It was in the spirit of this financial glasnost that we began an exhaustive survey of New York's most important professions. We studied doctors, dog walkers, bankers, baristas, headhunters, advertising honchos, prostitutes -- just about anyone who does anything in this town to make a buck. And surprisingly, most of them -- in the strictest of confidence, of course -- spilled the beans. ...

... P.R. maven Lizzie Grubman presides over a staff of 30 and says she gets 100 résumés a week from aspiring public-relations professionals. That's about all you need to know to understand why P.R. starting salaries seldom get over the $30,000 hurdle. Young P.R. people often find themselves where the action is -- but they're definitely not getting rich. "Public relations is just not a tremendous moneymaker," Grubman says. "You have to own the business to make money." Needless to say, Grubman, who's 29 years old, owns the business.

Before you set up your own shop, however, you'll want to score a few clients in an established firm. Win an account and you'll move up to be an account executive. If you're successful, you'll manage people and be a senior AE making $45,000 to $55,000. After five years, you'd start looking to be made a VP in a smaller agency or an account supervisor in a larger one. In either place, you'd bring home $75,000 to $100,000.

Some P.R. professionals end the infighting and maneuvering that come with the territory at certain agencies by going to corporations that regularly hire media specialists. Someone doing marketing communications at a big company, for a salary in the neighborhood of $60,000, has more control over the strategy. "You may still pick up the phone for the press calls," says Bill Heyman, a P.R. and corporate-communications recruiter, "but you'll also be putting together the press plan." ...

There is a tide

This novel reminds of recent dystopian movies and books such as Elysium, The Road, Never Let Me Go and Cloud Atlas. Our zeitgeist recognizes the ever accelerating gap between haves and have-nots, and these novels and films reflect that collective consciousness. The gap always existed between the rich and poor worlds, but now it exists within developed countries like the US, threatening broad swathes of the former middle class.

Leonard Lopate Show: Chang-Rae Lee talks about his new novel, On Such a Full Sea, set in a future, when a long-declining America is strictly stratified by class. Abandoned urban neighborhoods have become high-walled, self-contained labor colonies. The members of the labor class work to provide quality produce and fish to elite villages. In this world lives Fan, a female fish-tank diver, who leaves her home in the B-Mor settlement (once known as Baltimore), when the man she loves mysteriously disappears.

Interestingly, the wealthy dwellers of the Charters allow the top 1 percent of children from the labor colonies to ascend in class. The main character Fan's brother was adopted by a Charter family, and she seeks him out for help. The genomic angle manifests in the disappearance of Fan's love, who is dispatched (for study?) because of a rare mutation that makes him resistant to the still-deadly "C-diseases" (cancer?).

An excerpt from the book.

... When our ancestors were first brought here—the archival vids and pix show them rolling in on fleets of shiny silver company buses—the air was to them fresh and clear, just like in the image of the roofless row house, and when they stepped out, they must have been entranced by the scant briny notes of the harbor waters, breathing them in deep. And think of how startled they might have been by the strange brand of tidiness in this place (once known as Baltimore) and other abandoned cities that settlers were sent to in other eastern and midwestern states, this preservation by dint of absence, such that after they gathered their luggage from the curb and were shuttled by carts to the houses assigned to them, our and your and Fan's forebears among them, their gasps were not of trepidation or disappointment but of gratitude and relief.

Indeed, it's difficult for us to understand how genuinely grateful they were; we glance around B-Mor now and it's impossible to imagine how our people could have felt that way (how time and safety and a filled belly rapidly evolve us!), to be presented with so depleted a cityscape and still have a heart-surge of excitement. The legendary Wen Shurbao, who would be our first and only mayor, reportedly exhorted his brethren by invoking the classic proverb: "Our generation will plant the trees. The next will enjoy the shade."

Surely there were the discontented among those originals, but which of them could deny the promise of this place? Here was an entire community, ready for revitalization. Yes, the houses were basically shells, but in fact many still had roofs and walls and sturdy stairs; yes, few had any boilers, but the majority had salvageable wiring and plumbing; yes, the floors had to be scraped and sanded and refinished, every cabinet and counter scrubbed and disinfected of the leavings of birds and vermin and insects, and yet what activity offers more immediate, honest gratification than shining up a seemingly ruined surface back to the distinctive grain of its essence?

... We should concede that unlike the experience of most immigrants, there was very little to encounter by way of an indigenous population. There were smatterings of them, to be sure, pockets of residents on the outskirts of what is now the heart of B-Mor, these descendants of nineteenth-century African slaves and twentieth-century laborers from Central America and even bands of twenty-first-century urban-nostalgics, all of whom settled the intimate grid of these blocks and thrived for a time and, for reasons that history can confidently trace and identify but never quite seem to solve, inexorably declined and finally disappeared. Our predecessors had the unique advantage of being husbanded by one of the federated companies, rather than the revolving cast of governmental bodies that overreached in their efforts or were disastrously neglectful, all of them downright clueless. The originals were brought in en masse for a strict purpose but with their work- and family-centric culture intact, such that they would not only endure and eventually profit the seed investors but also prosper in a manner that would be perpetually regenerative.

... Perhaps it was the same with our originals, though in a different circumstance. They went about their first labors, renovating the row houses in the same way, it turns out, that certain antique American communities used to do, the foreman or forewoman of each block marshaling all its residents to converge on one address and revamp, say, the bathrooms or kitchen, the museum clips just like a science class vid of hundreds of ants tugging a sourball-sized rock. You can picture it now. They'd go from one house to the next, right on down the block, this mobile, instantly adaptive assembly line, each person assigned a function, with the children passing beach pails of dust and rubble in a brigade, the elderly offering sips of cool chrysanthemum tea from canteens, even the unwell propped up in chairs close by or even inside the site, so that they might lend moral support or learn by watching. ...

Julius Caesar, Act 4, Scene 3,

BRUTUS
Under your pardon. You must note beside,
That we have tried the utmost of our friends,
Our legions are brim-full, our cause is ripe.
The enemy increaseth every day.
We, at the height, are ready to decline.
There is a tide in the affairs of men,
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves
Or lose our ventures.

Conspicuous consumption in the new gilded age

See also Credentialism and elite performance.

NYTimes: ... A silver spoon is no longer a mark of elite status. Take the nation’s top 10 percent of households. The top 1 percent — those making more than $394,000 annually — are today’s version of Veblen’s leisure class in terms of wealth, but they are not the biggest buyers of silver flatware. Instead, households in the rest of this high-earning cohort — those making between $114,000 and just under $394,000 — take the silver prize.

... Of course, when it comes to luxuries that can’t be faked, the top 1 percent are fervent spenders. Compared with the rest of the top 10 percent, they spend twice as much on college tuitions, three times as much on private elementary and high school tuitions and three times as much on tutoring to get their children into elite institutions. [ Italics Mine ]

... Veblen would recognize a profound difference between his leisure class and today’s top 1 percent. In his time, conspicuous consumption was largely frivolous. Buying silver spoons did not change a person’s life prospects; it only signaled high social rank. A university degree, another marker of social standing, was possible only for those with plenty of leisure time.

The conspicuous spending of today’s top 1 percent, by contrast, is purposeful. It affects one’s life chances. Most wealthy people work long hours, and the goal of much of their spending is to save time or make more money.

They spend heavily on education to ensure their children will have a sizable advantage in the future job market. A degree from an elite university, rather than connoting leisure time, is seen as an important career step. ...

Inside the vampire squid

NYTimes Dealbook interview with the Goldman elevator tweeter (GSElevator).

Q. Why did you start this thing?
A. Again, I wanted to amuse myself during the summer lull and while market volatility keeps capital markets transactions to a minimum. I also thought that despite the disdain out there that exists for Wall Street professionals, people still really have no idea really how bad it is — and how shallow the industry really is, and frankly, how unimpressive 98 percent of the employees are.

Q. Are you really a Goldman employee?
A. Yes. However, I cannot really elaborate on this in terms of team or location, other than to say that I am a career banker. And to preemptively clarify, I am in a front-office, revenue-producing, client-facing role. Apologies for the aggressive clarification, but it is quite pathetic to see back/middle office employees telling people (women in bars) that they are “investment bankers.” If people are at all skeptical about my employment status, it doesn’t bother me. I am doing this for my own amusement.

Q. How many of the submissions are actually yours?
A. The first few were either conversations that I have overheard directly, or that have been told to me by colleagues. Having said that, I have avoided tweets that would be too closely connected to me or any of my friend/colleagues. Once it started to get some attention, I started to receive some good submissions.

Q. Overall, what are your thoughts on your Goldman colleagues?
A. They are obsessed with working for Goldman Sachs. They seem to define themselves by their jobs/firm, as opposed to who they are as people and what their interests are.

Sample tweets:

“You can’t spell genius without a G and a S” (not said in jest)

Work hard. Eat right. Exercise. Don't drink too much. And only buy what you can afford. It's not rocket science.

#1: The Cheesecake Factory looks like a restaurant poor people think rich people might eat at. #2: Same with anything Trump.

Starbucks needs a separate line for people who have their shit together.

From my experience, most people really should have lower self-esteem.

Advice for a daughter depends almost entirely on how attractive she is.

Kids should know that Chris Paul's twin brother, Cliff, only makes $32,000 a year

As a shareholder, I have to ask... Is having a book section really the best use of Walmart shelf space?

In 50 years, no one will watch baseball. It was invented when there was absolutely nothing else to do.

Being single at 40 is perfect. Divorcées chase me. Sweet spot for 30-somethings. Rich enough to get girls in their 20s.

I don't read fiction. Unless you count an Indonesian bond offering memorandum.