Archive for the ‘Distribution’ Category

A Recovery for the Top 10%

Michael Stephens | October 7, 2014

Pavlina Tcherneva was interviewed on the Real News Network about what’s behind the numbers in her chart (below) showing the increasingly inequitable distribution of income growth in US economic expansions–and what we can do about it.

Tcherneva_Distribution of Income Growth_Levy OP 47


Related: “Growth for Whom?


The Implications of Flat or Declining Real Wages for Inequality

Michael Stephens | July 24, 2014

by Julie L. Hotchkiss, a research economist and senior policy adviser at the Atlanta Fed, and Fernando Rios-Avila, a research scholar at the Levy Institute

A recent Policy Note published by the Levy Economics Institute of Bard College shows that what we thought had been a decade of essentially flat real wages (since 2002) has actually been a decade of declining real wages. Replicating the second figure in that Policy Note, Chart 1 shows that holding experience (i.e., age) and education fixed at their levels in 1994, real wages per hour are at levels not seen since 1997. In other words, growth in experience and education within the workforce during the past decade has propped up wages.

Chart 1_Actual and Fixed Real Wages

The implication for inequality of this growth in education and experience was only touched on in the Policy Note that Levy published. In this post, we investigate more fully what contribution growth in educational attainment has made to the growth in wage inequality since 1994. continue reading…


Stiglitz, Galbraith, and Milanovic on Inequality

Michael Stephens | July 3, 2014

From Columbia University’s Heyman Center for the Humanities:


Inequality, Unsustainable Debt, and the Next Crisis

Michael Stephens | June 18, 2014

In The Guardian, Dimitri Papadimitriou warns that the combined forces of persistent inequality, shrinking government budgets, and the US trade deficit are setting the stage for another private-debt-driven financial crisis:

Right now, America is wrestling a three-headed monster of weak foreign demand, tight government budgets and high income inequality, with every sign that these conditions will continue. With that trio in place, the anticipated growth isn’t going to be propelled by an export bonanza, or by a government investment boom.

It will have to be driven by spending. Even a limping recovery like the one we’re nursing along today depends on domestic demand – consumer spending not just by the wealthy, but by everyone else.

We believe that Americans will keep consuming at the same ever-rising rates of past decades, during good times and bad. But for the vast majority, wages and wealth aren’t going up, so we’re anticipating that the majority of Americans – the 90% – will once again do what was done before: borrow, and then borrow more.


The more – proportionally – that the top 10% has prospered, saved and invested (naturally, the gains found their way into the financial markets), the more the bottom 90% has borrowed.

Look at the record of how these phenomena have travelled in lockstep. In the first three decades after the second world war, the income of the 90% rose at the same pace as its consumption. But after the mid-1970s, a gap formed – the trend lines on earning and outlays spread apart. Spending continued apace. Real income, meanwhile, stagnated. It was lower in 2012 than it had been forty years earlier. That ever-increasing gap between income and consumption has been filled by borrowing.

Papadimitriou also points out that corporations, which pulled back after the recession, are once again increasing their debt (this began in 2010), and the expectation is for non-financial corporations to add some $4 trillion in debt between now and 2017.

If these debt-fuelled spending dynamics (on the part of corporations and the bottom 90 percent households) don’t come to pass, then we’re looking at a period of low growth and high unemployment–“secular stagnation”–instead.

There are a number of lessons here, but I’d like to highlight two, in case they aren’t obvious. First, even if you aren’t persuaded that income inequality needs to be addressed for reasons of fairness, then financial stability concerns alone should suffice. Second, in the absence of some impending export boom, continuing to reduce the budget deficit at a record pace is the height of recklessness.

Read the Guardian piece for more. The underlying macroeconomic research comes from the Levy Institute’s most recent strategic analysis: “Is Rising Inequality a Hindrance to the US Economic Recovery?


The Supposed Decade of Flat Wages Was Worse Than We Thought

Michael Stephens | June 12, 2014

It’s well known that the wages of US workers have become disconnected from productivity growth, with real wages growing much more slowly than advances in productivity over the last several decades. This is a key part of the story of widening income inequality.

But these observed trends actually understate the degree to which working people have been left behind. New research reveals that the US economy is doing a worse job passing on productivity gains to workers than the wage growth (or even stagnation) numbers suggest.

The Levy Institute’s Fernando Rios-Avila and the Atlanta Fed’s Julie Hotchkiss looked back to 1994 and tried to see what proportion of real wage growth since then can be accounted for by key changes in the demographic profile of the labor force: principally, the fact that the average worker has become older (i.e., more experienced) and more educated.

What they found is that over 90 percent of real wage growth between 1994 and 2013 was due to demographic shifts. And the 2002–13 period, commonly referred to as the decade of flat wages, is more accurately described as “a decade of declining real wages within age/education worker profiles.” If we control for demographics, wages are back to where they were in 1998. That’s what you’re seeing in the red line below:

Real Wages vs Fixed Real Wages_Levy Institute

Of course, generally speaking, the fact that we have a more educated workforce is good news. But we also want to know the extent to which workers with a particular demographic profile—workers with a given level of experience and/or education—are seeing increases in compensation as labor becomes more and more productive. “When describing the evolution of well-being in the population,” Rios-Avila and Hotchkiss suggest, “an official index for a ‘fixed’ wage trend might be more appropriate for policymakers.” Such an index would paint a disappointing picture of the last decade.

Since 2002, wages have fallen for workers at all levels of educational attainment (this is true whether or not we take ageing into account). And as you can also see in the next figure, when we control for changes in the age/experience profile within each educational grouping, workers without a college diploma are being paid less than they were in 1994 (the gradual erosion of their wages over 2002–08, combined with the recession and unimpressive recovery, have wiped out all the gains these groups at the lower end of the educational scale made from 1994 to 2002).

Fig4B_Wages by Education_Age Fixed

The authors also find that gender and racial wage gaps have shrunk by less than it may appear over the last decade, once we account for demographic changes. Controlling for shifts in the average age and educational attainment within each group allows us to disentangle reductions in pay inequality between male and female workers that are due to, say, women’s educational advancements outpacing men’s, from other sources of progress (or lack thereof) in gender-based wage inequality.

To see the full results, download their new policy note.


Bubbles and Piketty: An Interview with L. Randall Wray

Michael Stephens | May 29, 2014

L. Randall Wray appeared on Thom Hartmann’s radio show yesterday for a lengthy and wide-ranging interview:


Is Inequality Holding Back the Recovery?

Michael Stephens | May 21, 2014

“The biggest obstacle to a sustainable recovery,” according to the Levy Institute’s newest strategic analysis of the US economy, “is the inequality in the distribution of income.”

In their latest, Dimitri Papadimitriou, Michalis Nikiforos, Gennaro Zezza, and Greg Hannsgen begin with a familiar point: the Congressional Budget Office has been predicting fairly rosy economic growth rates for the coming years (rising to 3.4 percent in 2015 and ‘16)—rosy, that is, given the CBO’s expectation that government budgets will remain tight, and get even tighter, over this period (with the federal budget deficit shrinking to 2.6 percent of GDP by 2015).

As Papadimitriou et al. point out, the only way to make these growth and budget forecasts both come true, assuming there are no significant changes in net exports (a safe assumption), is if the private sector substantially increases its indebtedness. There really isn’t any other option. If we don’t see a return to ballooning private debt-to-income ratios, then either government budgets will have to be loosened or we won’t get the growth rates the CBO is telling us to expect.

Now, there are reasons to think that the reappearance of accelerated growth in private debt is unlikely (a theme the authors dealt with in their last US strategic analysis), but if it does happen, rising private debt ratios—which played the starring role in the financial crisis from which we’re still recovering—might destabilize the financial system. This is one sense in which maintaining tight government budgets over the next several years should not be portrayed, as it all-too-often is, as the “prudent” course of action.

And the widening of income inequality over the last few decades makes these dynamics even more problematic. As the authors point out, the trend of rising inequality has gone hand-in-hand with mounting indebtedness among households in the bottom 90 percent of the income distribution:

[O]ver the last 30 years not only was there a sharp increase in the level of household debt but a disproportionate share of this debt was incurred by the middle class and the poorest American households. Moreover, there seems to be a strong correlation between the two variables: as the disposable income of the top 10 percent of the population increased relative to the disposable income of the bottom 90 percent, the gross debt of the latter rose relative to the debt of the former.

Fig 10_Ratios of Disposable Income and Gross Debt_Levy Institute Strategic Analysis

Going forward, the current stance of public policy (including, but not limited to, tight fiscal policy) de facto requires a rise in household debt—borne entirely by the bottom 90 percent of households—as the only path to modest economic growth rates (in the range of CBO’s 3.1–3.4 percent). If, on the other hand, the bottom 90 percent of US households continue to “deleverage,” lowering their debt loads, then the authors show that we’re more likely to see economic growth fall to a piddling 1.7 percent by 2017, with unemployment rising to 7.6 percent.

In other words, absent a change in policy aimed at loosening the government budget or increasing net exports (perhaps through targeted R&D investment), the US economy is facing one of two outcomes: “a prolonged period of low growth—secular stagnation—or a bubble-fueled expansion that will end with a serious financial and economic crisis.”

“The only way out of this dilemma,” they conclude, “is a reversal of the trend toward greater income inequality. A change in the income distribution is a necessary condition for sustainable growth in the future.”

Read the report: Is Rising Inequality a Hindrance to the US Economic Recovery?


Phillips Curve Still Alive for Compensation?

Greg Hannsgen | May 13, 2014


On reading a recent post by Ed Dolan at Economonitor with some evidence of the lack of a strong Phillips relationship for consumer-price inflation in US data, it occurred to me to try a measure of total compensation per hour with recent data. The wage relationship estimated over all available quarters, using averaged monthly observations for the civilian unemployment rate, is shown above, with a scatter plot and an estimated regression line. Like the relationship estimated by Dolan, the regression line above suffers from a rather loose fit (constant: 6.87; slope coefficient: -.29; R-squared = .02). A complete explanation of inflation is complicated and of course also involves other costs, including raw materials such as fuel. The latter costs are subject of course to “cost-push”-type inflation at times, as are wages. Exchange rates of course affect these costs.

A time series graph below displays both series over the entire sample period, 1948q1 to 2014q1. As some have observed, the exceedingly high unemployment rates of the post-financial-crisis era (blue line) have resulted in very weak or negative compensation growth rates (red line). The latter are not adjusted for inflation in the figures, since we are focusing on nominal data in this post.  The downward trend in nominal wage growth in the right side of the figure (red line) helps to explain recent declines in the so-called wage share, which measures the fraction of national income going to labor costs. (However, see this New York Times article for some evidence that falling unemployment is beginning to bring some inflation-adjusted wage growth to parts of the US.)

wage-Phillips time series

By the way, if inflation were to become a large problem (and it seems well-contained now), non-recessionary methods exist to try to alleviate it. Even where the Phillips-curve relationship is strong, the human costs of using it to combat inflation are usually very high, given the existence of alternative policies that could perhaps be given a try in the US.


Distribution, Stagnation, and Macro Policy in an Interactive Model

Greg Hannsgen | April 21, 2014

The funny-shaped surface in the Wolfram “CDF” below (software download link) depicts excess demand for goods. The flat one represents the zero line where supply and demand are equal. On each axis is a variable that affects the degree to which demand outpaces or falls short of supply: (1) firms’ share in the price of goods, after paying wages, which equals the pricing markup m divided by (1 + m); and  (2) the income and production generated by the private sector, measured by capacity utilization. The height dimension measures excess demand for goods.

The sliding levers at the top of the CDF allow one to change (1) (“chi”) the percentage of disposable income spent by the wealthy households who own most stock, as well as all government-issued securities; (2) the rate of production by the public sector, which hires workers to produce services; and/or (3) the annual compound real interest rate (yield) on government securities. All of the other parameters are held constant as you move the levers. Click on the “plus” sign next to a lever, and further information appears.

[WolframCDF source=”” width=”331″ height=”361″ altimage=”3D-excess-demand-graphN5.png” altimagewidth=”309″ altimageheight=”351″]

Click here for a much larger, easier-to-read version of this CDF on a webpage of its own.

At the curved line where the two surfaces intersect (the edge of the dark blue region when viewed from above), aggregate demand is just equal to private-sector output, and there is no tendency for capacity utilization to change. Finding this intersection gives us the set of combinations of output and the distributional parameter at which all newly produced units are being sold, and no new goods orders are stacking up unfilled. Experimenting with the CDF, one finds that capacity utilization is usually higher: (1) when the share of the “K-sector”, or capital-owning sector, (m/(1 + m)) is lower, (2) when that sector spends a greater percentage of its disposable income, or (3) when government production and payrolls are larger.

One should keep in mind the simplification required to construct such a “small” model, which in graphical form represents only an imaginary economy; the numbers are not intended to mirror those of any particular country or data set–but the economic  system portrayed in the CDF is meant to be similar in many of its essentials to that of large industrialized nations with their own currencies, huge companies, liquid securities markets, floating exchange rates, etc. Another possible way to interpret this highly “stratified” industrial system is as an entire global economy in a mere 3 sectors: workers; firms/wealthy households; and government/central bank.

A larger version of the model featured an unemployment benefits system. To come: a discussion of the movements over time that may or may not bring the economy closer to the line where excess demand just reaches the flat surface and no higher. The model still has only a rudimentary financial system, with no private borrowing. Hence, the interest rate lever acts upon the economy solely by changing the amount of interest payments from the government to households–a distributional and fiscal variable in its own right and an MMT insight. (Business investment depends on capacity utilization and the gross after-tax profit rate.) The model is drawn more or less directly from Levy Institute working paper 723 (see this previous post) as revised recently for the academic journal Metroeconomica.


Galbraith on Piketty’s “Capital”

Michael Stephens | March 27, 2014

From Senior Scholar James Galbraith’s review of Thomas Piketty’s much-discussed Capital in the Twenty-First Century:

Although Thomas Piketty, a professor at the Paris School of Economics, has written a massive book entitled Capital in the Twenty-First Century, he explicitly (and rather caustically) rejects the Marxist view. He is in some respects a skeptic of modern mainstream economics, but he sees capital (in principle) as an agglomeration of physical objects, in line with the neoclassical theory. And so he must face the question of how to count up capital-as-a-quantity.

His approach is in two parts. First, he conflates physical capital equipment with all forms of money-valued wealth, including land and housing, whether that wealth is in productive use or not. He excludes only what neoclassical economists call “human capital,” presumably because it can’t be bought and sold. Then he estimates the market value of that wealth. His measure of capital is not physical but financial.

This, I fear, is a source of terrible confusion. […]

Piketty wants to provide a theory relevant to growth, which requires physical capital as its input. And yet he deploys an empirical measure that is unrelated to productive physical capital and whose dollar value depends, in part, on the return on capital. Where does the rate of return come from? Piketty never says. He merely asserts that the return on capital has usually averaged a certain value, say 5 percent on land in the nineteenth century, and higher in the twentieth.

The basic neoclassical theory holds that the rate of return on capital depends on its (marginal) productivity. In that case, we must be thinking of physical capital—and this (again) appears to be Piketty’s view. But the effort to build a theory of physical capital with a technological rate-of-return collapsed long ago, under a withering challenge from critics based in Cambridge, England in the 1950s and 1960s, notably Joan Robinson, Piero Sraffa, and Luigi Pasinetti.

Read the rest at Dissent magazine.