Rising Inequality in the United States

Gabriel Zucman and Emmanuel Saez released a paper today tracking rising inequality in the United States (slides here). Unfortunately, the inequality-related development that sucked up most of the day's coverage was an Institute on Global Markets poll of prominent economists on the topic of "Piketty and Inequality." More on that in a moment.

Zucman and Saez is a far more detailed empirical investigation of wealth inequality in the US than appears in Capital in the 21st Century. It documents several facts:

1. The wealth distribution has become significantly more skewed, with the top 0.1% owning in excess of 20% of total wealth. That number was between 5 and 10% in the 1970s.

2. Wealth concentration is due to several phenomena:

• High labor incomes. Saez and Zucman document that a much larger share of labor income is accruing to households in the top 0.1% of the wealth distribution than was true in the 1960s. 
• High savings rates by the wealthy. The authors provide further support for the declining asset position of the bottom 90% of the wealth distribution, including savings rates that dipped into negative territory for the entire boom of the 2000s. At the same time, the savings rate for the top 1% was around 40%.
• Returns on wealth that increase in the stock of wealth. Saez and Zucman link individual capital income data with total wealth in each of nine asset classes from what's known as the Flow of Funds data. That enables them to determine a rate of return for each asset class. Because fractiles of the wealth distribution differ by their exposure to different asset classes, the authors are able to say that on average, the wealthier you are, the higher the return you enjoy on your wealth.

Crucially, all of this additional data Saez and Zucman bring to bear on the case of the United States confirms the analysis and predictions in Capital in the 21st Century. My paper responding to the book's critics divided the so-called capital channel for rising inequality into two arguments: that the overall wealth-to-income ratio in the economy would rise, and along with it capital's share of income, and that within the wealth distribution, savings rates and rates of returns would become increasingly stratified by household wealth.

Piketty spends a great deal of time analyzing the supposed anomaly of the US, where inequality has skyrocketed due to measured labor, not capital, income. His explanation for the "Rise of the Supermanager" is that executives have been increasingly able to ensure that the surplus earned by the firms they run accrues to themselves, and perhaps their shareholders, but certainly not to their employees. What Saez and Zucman tell us is that, to a surprising extent, these supermanagers are the same people as the very wealthy, and to the extent that today's wealth inequality is due to yesterday's labor market inequality, now and in the future, inequality will be driven by the very different wealth dynamics of different parts of the wealth distribution.

A few further points about Saez and Zucman: it absolutely puts the lie to supposed flaws in Piketty's reasoning. The rise of the wealth-to-income ratio is thanks to a housing bubble? Here's their Figure 2:


 The return on capital adjusts down as capital is accumulated, ensuring a constant factor share?


 The saving rate of the representative household will decline to zero as the economy-wide growth rate declines?

It's abundantly clear that in a world where the top 0.1% controls 20% of the wealth, a model of capital formation premised on the assumed behavior of a consumption-smoothing representative agent is a hopeless anachronism.

 So if the facts are so friendly to Piketty, what's up with that IGM poll? It asked thirty or so economists whether the rise of wealth inequality in the US to date is due to the empirical inequality r > g, what Piketty calls the Third Law of Capitalism. Emmanuel Saez said it wasn't. So did nearly everyone else. So is it Piketty against the world, or at least the economics world? No, or rather, not exactly. Piketty himself doesn't argue that r > g explains the dynamics of wealth in the US to date. What he argues is a less detailed version of the story Saez and Zucman tell in their paper. And in that story, what dominates the future is accumulated, inherited wealth and r > g, with inequality of savings rates and rates of return on wealth layered on top.

Some of the respondents to the poll understand both Piketty's argument and the facts, and could only disagree with the cartoonish version of Piketty's argument contained in the poll question. But many didn't, and predictably, the headline result that "no one agrees with Piketty" was picked up as a sort of death blow to the faddish theory du jour from some radical Parisian dilettante and the mindless t-shirt-wearing throngs who worship him. Many poll respondents offered up their own empirically-vacant, faddish theories: that biographies of the super-wealthy show they didn't get it all from Daddy, that fancifully-named-residual "technology" explains rising inequality, even that wealth inequality hasn't increased (!!). Caroline Hoxby decried Piketty's "negligible empirics," a subject she knows intimately.

So what to make of the dichotomy between a brilliant new working paper that brings tons of additional empirical insight to bear on the question of why inequality has risen so much in the US and a poll of economists that reveals, at best, ignorance of the facts, and at worst, an ideologically-motivated, dangerously groupthinking desire to close this debate as soon as possible? Simply that rising inequality and its causes poses a challenge to the economics profession at the deepest level, a challenge that isn't simply going to go away when all the t-shirts are sold out.