High-end inequality colloquium at NYU, week 6: Morse & Bertrand, Trickle-Down Consumption

This past Monday, Adair Morse of Berkeley presented her paper (coauthored with Marianne Bertrand of U Chicago), Trickle-Down Consumption.

The paper is a nice, compressed job of empirical research, published recently but of particular interest to us given its relationship to my co-convenor Robert Frank's interest in expenditure cascades, whereby rises in market consumption at the top triggers attempts to keep up via increased consumption just below, then again just below that, and then continuing until it has radiated far down the distributional chain.

The two main explanations for the Frank story are (1) positional externalities, whereby my having a bigger house requires you to get a bigger one, too, just to restore our relative positions to what they were before, and (2) context, whereby my bigger house simply triggers you (without necessarily having competitive motives) to need a larger house in order to feel that yours is big enough.  These two views are closely related and can be hard to tell apart, although (2) is framed in such a way as to sidestep criticisms to the effect that one should not give social weight to "envy" (a criticism that I consider wide of the mark in any event).

In the Bertrand-Frank study, state-level data suggests that, when the consumption of the top 20% in the income distribution in a state increases, those in the bottom 80% start consuming more even if their current and expected future income are flat.  Hence, their savings rates fall and they experience increased rates of bankruptcy and financial distress.

With respect to types of consumption, the effect is not greater for what seem to be positional or status goods than for other types of consumer outlays.  This might tend to rebut viewing the issue as status competition via positional goods, although how it affects the context view is less clear.

Based on meticulously testing various alternative explanations, the authors suggest that the methodology might involve a rise in well-off consumers in a neighborhood triggering an increase in appealing high-end goods and services that the others then start consuming without due regard for their budget constraints.  (But they manage to rule out mere price level changes for the same goods.)

To me, this seems to invite (as a plausible explanation) what I call the chocolate chip cookie or temptation problem.  When there are more nice things around, I tend to buy them, just as I might gobble chocolate chip cookies left on the seminar table. [I actually don't do that these days, but never mind that.]  So I'm inclined to view it as an internalities problem, in which consumers who are tempted by what might actually be nice things (from which they do indeed derive utility) get themselves into worse spots overall.

It's not as obvious why a preference for positional goods or the influence of context on consumer choice would necessarily involve irrationality.  But Bob Frank, in terms that he once nicely explained in an NYT column, invoked the work of James Duesenberry, a Harvard economist whose model for how people make consumption choices dominated the economics field & textbooks, because it nicely explained actual observed behavior, until Milton Friedman's permanent income hypothesis wholly supplanted it.  To paraphrase the old joke, Duesenberry's account worked in practice but not in theory, whereas Friedman's worked in theory but not in practice, so the economics profession unanimously voted for Friedman.

Friedman views people as rationally and farsightedly allocating consumption opportunities across their lifespans in order to equalize its marginal utility in all periods, as judged when one decides, and hence one's total lifetime utility.  (If bequests are added to the picture, a common move is to model the multigenerational household as if it were a single infinite-lived individual.)  But he can't readily or convincingly explain, e.g., why rich people generally save higher percentages of their incomes than poor people.  A smoothing rationale alone, for example, might tend to apply equally to each.

Friedman also had trouble explaining the fact that, as societies grow richer, their savings rates generally don't increase.  But, to quote Frank's NYT column:

"Mr. Duesenberry's explanation of the discrepancy is that poverty is relative. The poor save at lower rates, he argued, because the higher spending of others kindles aspirations they find difficult to meet. This difficulty persists no matter how much national income grows, and hence the failure of national savings rates to rise over time.

"To explain the short-run rigidity of consumption, Mr. Duesenberry argued that families look not only to the living standards of others, but also to their own past experience. The high standard enjoyed by a formerly prosperous family thus constitutes a frame of reference that makes cutbacks difficult, which helps explain why consumption levels change little during recessions.

"Despite Mr. Duesenberry's apparent success, many economists felt uncomfortable with his relative-income hypothesis, which to them seemed more like sociology or psychology than economics. The profession was therefore immediately receptive to alternative theories that sidestepped those disciplines."

Whence the shift by universal acclaim to Friedman's model, even though it was psychologically less realistic and also a worse fit with the key data points noted above.

This phenomenon has much in common with what I say about public economics and optimal income tax theory in my recent U Miami Law Review article on the "mapmaker's dilemma."  I too call there for more sociology, and less exclusive reliance on rational choice-based economic models.

In any event, once one adds the Duesenberry view to the positional and context models, they can join the temptation / chocolate chip cookies model in positing that a rise in high-end consumption may trigger planning failures that we might describe as involving internalities from people in lower income tiers.  This might be viewed either as further ground for deeming high-end inequality injurious to those below, or else simply as providing support for the use of policy instruments that focus on increasing private saving where it appears to be suboptimal, and/or on addressing the misuse of consumer credit.

Music for car trips

Being now newly technologically equipped to play Spotify via my phone through a car stereo, my musical options on long trips are now broader, or at least more flexible and less in need of advance planning, than they used to be.

Thanksgiving-related and other driving the last few days offered an occasion to play through Fiona Apple's 3 classic albums (I'm not counting her first one, Tidal, as at that point she hadn't really found her voice yet).  Then there was time for one more, by Mark Mulcahy, the former frontman of Miracle Legion who recently reemerged after an 8-year hiatus that apparently was triggered by a family tragedy.

The Mulcahy album is really good - witty, clever, literate, tuneful, sharp, catchy, etcetera.  But playing it right after a Fiona Apple-fest doesn't show it off to best advantage, because it's a bit like taking a scenic trolley right after a rollercoaster ride that was loaded with free falls and loop-the-loops.  Against that background, even very good songs can sound too contained by their conventions and form, whereas Fiona Apple's songs, even though she's a classicist who does all the standard things (verse, chorus, build to the climax, etc.) sound like they are trying to fight free of any such constraints.

High-end inequality colloquium at NYU: My "mapmakers dilemma" paper

Today at NYU Law School, at session 5 (out of 7) at our Colloquium on High-End Inequality, I presented my paper, The Mapmaker's Dilemma in Evaluating High-End inequality.  The version we discussed at the session is available here.  As noted in prior posts, an alternative version, longer by about 20 pages since I discuss at length the Diamond-Saez optimal income tax work that proposes a 70 percent top marginal income tax rate, was just published by the University of Miami Law Review, and is available here.

I don't usually discuss my own work at my colloquia these days, because I learn more from discussing other people's work, but I thought it made more sense to do this here.  Since I and my co-convenor comment on other people's papers, I thought it was only fair play to have an outside commentator comment on this one, and my colleague Liam Murphy ably filled the role, discussing broader philosophical issues that I touch on in the piece but don't really try to resolve.

It's a bit of an odd piece, I feel, although I do mainly like it these days.  The thing is, rather than trying to resolve or take a firm stance on most of the issues it raises, the aim is simply to show that we need a broader discussion of the issues around high-end inequality than standard economic analysis (and the optimal income tax or OIT literature in its most common form) really are prepared to handle.  But the aim in a way is simply to open the door for complementing not only OIT with other hard social science, but also hard social science with the soft social sciences, such as sociological and psychological inputs on how high-end inequality affects people's sense of wellbeing (and how that concept of wellbeing should be conceptualized to begin with).  These inputs presumptively include my focus on literature, without there being any claim on my part that that is one of the most important pieces of the puzzle from a narrowly answers-related framework.

So the piece starts a lot of hares without trying to run them to ground (so to speak).  And also, as I noted in an earlier post, I am no longer planning to use it in my inequality and literature book, except for a couple of the best bits (relating to the Gini coefficient and to the "mapmaker's dilemma" itself) that I have imported into the literature book's chapter 1.  So while it used to be chapter 2, now it's just a freestanding law review article.  What a comedown, eh?

Sitting by the dock of the bay

OK, I’m actually not exactly sitting by the dock of the bay, but I am fairly close to the Golden Gate Bridge.

Yesterday I gave a talk at the University of San Francisco Law School concerning U.S. international tax policy, generally in light of my 2014 book on the subject, Fixing U.S. International Taxation.  My aim in the talk, as often, was to work on several levels at once, the idea being to combine comprehensibility to students who are new to the field with having something interesting to say for the experts who were also in the room.  Today I’m staying in San Francisco for an extra day – it’s odd how rarely I’ve been in SF, although a frequent traveler to the Bay Area (I used to have extensive family in Berkeley) – and hoping it doesn’t rain. 

I’ve been thinking for some time that I should write a second edition of Fixing.  I had two reasons, but maybe now there are four.  Reason 1 is that I have an altered and perhaps clearer sense of how to make many of the book’s main points.  (Also, some of my main targets in it, such as the CEN / CIN / CON welfare norms, appear to me to have receded to the point that focusing on them is now less necessary.)

Reason 2 is that a lot has happened internationally since I wrote the book.  I finished the manuscript at a point when OECD-BEPS was just starting.

Reason 3 is that I’m teaching U.S. international tax law for the second straight year, whereas I hadn’t taught it for several years before writing the book.  Without getting too deep into the weeds in a general policy book, there’s a lot of interesting detail that I could use in discussing the various tradeoffs and ambiguities that dot the field.

Reason 4 is that it’s possible U.S. international tax law will change significantly on the ground next year.

But first I have a long way to go on my book on literature and high-end inequality.  Major progress in the last two days, I think, towards nailing down my chapter on E.M. Forster’s Howards End.   But on the other hand it’s trickier than it usually is for my books to figure out exactly what the market is and how best to reach it.  I do think there’s something potentially there.  But judging quality in a project of this sort is so much more subjective than in the things I am more used to.

A big step forward, I think was deciding to eliminate from the book 90+% of the material that appeared in my University of Miami Law Review article from last week, The Mapmaker’s Dilemma in Assessing High-End Inequality.

I like the piece OK, and will be discussing a shortened version of it (minus the in-depth discussion of the optimal income tax literature, Diamond-Saez, etc.) this coming Monday at my high-end inequality colloquium.  But probably too little readership overlap between the details of that sort of academic trawl and my literature chapters.

I've resumed my boycott of U.S. political news, simply because in light of the great risks our country faces I find it too upsetting these days.

High-end inequality colloquium, week 4: Alan Viard

Yesterday at the Colloquium on High-End Inequality, Alan Viard from the American Enterprise Institute discussed portions of his recent book (with Robert Carroll), Progressive Consumption Taxation: The X-TaxRevisited.

Here are summaries of my thoughts regarding the first two topics that I aimed to discuss.  As it happened, we never got to Topic 2 (which shows that we had plenty to talk about).

1.         For / against the progressive consumption tax

My two colleagues in leading the colloquium discussion both support shifting from the existing income tax to a progressive consumption tax – but for very different reasons! I had been thinking that their reasons for supporting it were wholly inconsistent – but upon reflection (and discussion) have concluded that they are instead merely entirely distinct, and potentially complementary.

Alan Viard: He starts from assuming that we need a general revenue system founded on ability to pay, and that this might be either an income tax or a consumption tax. Both burden work, but income taxation also burdens future consumption relative to current consumption. It thereby inefficiently deters saving.  Plus, in practice enormous complexity (and undermining of objectives) results from the full playout of the realization requirement.

In evaluating a consumption tax, Viard emphasizes that, in principal, deferral of the tax (via saving instead of immediately consuming) does not reduce the expected liability in present value, so long as tax rates are constant.

To illustrate, say we have a flat 30% (tax-exclusive) consumption tax that will remain in place indefinitely.  Adam and Barbara each consume $100K this year, so each pays $30K of current-year consumption tax,   But Adam also has $100M of savings (Barbara has none).

A current-year-focused income tax advocate might ask: How can it be fair to charge both of them the same tax, when Barbara’s ability to pay is so much greater?  But a consumption tax advocate might respond: Adam would have paid an additional $30M of tax if he had consumed all his savings this year.  But by not doing so, he merely deferred it at the market interest rate, whatever that might be.  Thus, the present value of the tax on this wealth is $30M whether he saves it for a year, a century, or a millennium. So the consumption tax does require him to pay more, as it should based on ability-to-pay – one simply needs a longer time frame to make the appropriate comparison.  All we need to assume, to reach this conclusion, is a constant tax rate and realization at some point – or that indefinite deferral is effectively no better than realization at some point.

An income tax is likely to be more progressive than a consumption tax if they have the same rate structure, because higher-income individuals generally save a higher percentage of their resources than poorer individuals.  But we can replace the lost progressivity from changing the tax base from income tax to consumption by making the new tax rates nominally higher and more progressive.

Again, all this is what I take to be the Viard view (although I agree with most of it); now on to the Robert Frank view.

Robert Frank: He questions the need for an ability-to-pay tax until we’ve exhausted all taxes on negative externalities.  For example, we might meet at least a portion of our revenue needs by properly taxing pollution, carbon, congestion, etc.

But the taxes on negative externalities that Frank favors include a luxury tax for the high-end.  The aim here is to address expenditure cascades, addressed in this paper, which we discussed at the High-End Inequality Colloquium on October 28.

In effect, he wants a high-end luxury tax, on the same grounds as pollution or congestion taxes.  But since it’s a hopeless task to try to figure out all the items that ought to be on the luxury tax list, he proposes instead to start levying the tax at very high annual consumption levels.

This might even be an add-on to the current income tax, although it also could come out of a personal expenditure tax (PET) – i.e., an individual-level progressive consumption tax.  The very high rates just at the top would presumably require thinking about multi-year inclusion of consumer durables such as a home, and one might also debate whether averaging should be allowed.

Could a general consumption tax at lower rate brackets be justified on externality grounds, rather than just under ability to pay principles?  For Frank, the answer is potentially yes, but this would require a separate critique of keeping-up-with-the-Joneses style lateral positional wars via consumption.

Frank also posits that the luxury tax wouldn’t greatly reduce high-end labor supply, and does not posit adverse effects from unequal wealth-holding.  His target is unequal current consumption, based on the analysis of expenditure cascades from the top on down.

My comments & concerns:

1) Bob Frank posits negative externalities from high-end inequality solely via the consumption pathway.  But what if there are also negative externalities from high-end wealth-holding?  Suppose that Wilkinson-Pickett adverse effects on health and on social gradient ills were found to be increased by wealth inequality alone, even controlling for current consumption levels.

2) As a matter of political economy, will progressive consumption tax rates (whether under the Bradford X-tax or the PET) be high enough? The political process sometimes over-focuses on marginal rates, without regard to the tax base or actual effective rates.

3) Is savings, reached by the income tax but not the consumption tax, a tag of ability?  If so, then under standard optimal income tax theory, including it in the tax base can improve the available tradeoff between distributional gain and efficiency loss.  

4) On more of a technical point, is the personal expenditure tax (PET) more administratively friendly to highish rates than the  X-tax?

2.         Inheritance

The conventional wisdom holds that, if you favor consumption taxation, then logically it’s at least against the grain to favor estate and gift and/or inheritance taxation.  But I disagree.

The above logic is inescapable if one thinks of multi-generational family dynasties as if they were extremely long-lived individuals.  But they aren’t – parent and child, bequestor and bequestee, are not in fact the same person.

Henry Simons famously argued for double-taxing gifts and bequests.  No deduction to the donor, full inclusion for the done (leaving aside administrative arguments re. small items, and perhaps set of internal transactions within a household). 

This was an argument about consumption, not income.  And whether or not one buys his result, the logic of saying it triggered consumption by both was clearly correct.  If I make a gift, including an altruistically minded bequest, then clearly I get utility from it, no less than if I had instead spent my $$ on vacation travel or a restaurant.  (Accidental bequests are different, but there it’s efficient to tax them if we posit that they were precautionary saving, but the owner had no bequest motive and ended up not needing them precautionarily.)

So as a matter of judging individual welfare in ability-to-pay terms, if I give a $1M gift to my kids, this is $1M worth of consumption by me and by them.  Double-taxing it would merely match the fact that there was double consumption.

Why wouldn’t we want to adopt the Simons solution?  Not because it is logically wrong in defining ability to pay – but rather because we don’t like the policy outcome.  As the literature discusses, there is an “altruistic externality” here.  I valued my enjoyment of the kids’ consumption at $1M, but I didn’t value their enjoyment at a separate $1M.  By contrast, if I bought a standard consumption item for $1M the total welfare gained would be just $1M.

This suggests tax-favoring gifts and bequests for policy reasons, relative to the Simons baseline.  Taxing them “just once” is a salient, prominent, intuitive, and relatively simple way of getting to this result, but it doesn’t inherently get the incentive exactly right.

Now suppose we are worried about unequal wealth-holding when there is extreme high-end inequality.  One might consider addressing this through a wealth tax, but one is in the ballpark if one does this periodically, such as by targeting gifts and bequests. So now, where there’s impact on high-end inequality, we might want to move towards taxing gifts and bequests less favorably than under the “tax it once” baseline.

True, in that scenario it’s really just a mechanism for a periodic wealth tax, with the tax on gifts needing to accompany that on bequests so it can’t be avoided via transfers to younger or healthier individuals.  Basing it on gifts and bequests as such would merely be opportunistic.  But now suppose that one’s high-end inequality concerns are triggered by dynastic wealth transmission, unequal opportunities in life, etc.  Then the gratuitous transfer, not the wealth-holding, might indeed be worthy of direct focus.

My point here is not to sketch out the policy upshot, but just to suggest that (a) there is really no logical tension between favoring enactment of a progressive consumption tax to replace the income tax, and wanting to tax gifts and bequests, plus (b) if one is uneasy about the prospects for a progressive consumption tax to be progressive enough, a tax on gifts and bequests may help to address that problem.

Ground worth thinking about in some hypothetical future, e.g., if the incoming Administration moves things in one direction distributionally, but subsequent Administrations want to move in a different direction.

New article published, discussing high-end inequality

My article, The Mapmaker’s Dilemma in Evaluating High-End Inequality, has just been published by the University of Miami Law Review. The official cite is 71 University of Miami Law Review 83-159 (2016), and it’s available here.

  

The abstract goes as follows:

“The last thirty years have witnessed rising income and wealth concentration among the top 0.1% of the population, leading to intense political debate regarding how, if at all, policymakers should respond. Often, this debate emphasizes the tools of public economics, and in particular optimal income taxation. However, while these tools can help us in evaluating the issues raised by high-end inequality, their extreme reductionism—which, in other settings, often offers significant analytic payoffs—here proves to have serious drawbacks. This Article addresses what we do and don’t learn from the optimal income tax literature regarding high-end inequality, and what other inputs might be needed to help one evaluate the relevant issues.”

The piece was adapted from what used to be chapter 2 of my book-in-progress, Enviers, Rentiers, Arrivistes, and the Point-One Percent: What Literature Can Tell Us About High-End Inequality, In effect, it serves to explain why one might want to look at contemporary literature in this regard, rather than confining oneself to tools from public economics and other “hard” social sciences.  But as it happens, I have decided not to include almost any of the material from this chapter in the book.  Instead, material from maybe 3 to 5 pages of it has been adapted to fit into the book’s chapter 1, and the book then goes straight to the fun stuff, starting with Jane Austen’s Pride and Prejudice in what is now chapter 2.  Ensuing chapters that I have written to this point address Stendhal’s Le Rouge et le Noir, Balzac’s Pere Goriot, Dickens’s A Christmas Carol, Trollope’s The Way We Live Now, and (albeit only about half-done) Forster’s Howards End.  The chapter after that will cross the Great Pond and look at Horatio Alger (to be followed by Dreiser’s The Financier and/or The Titan and then Wharton’s House of Mirth).

Aftermath

It probably comes as no surprise to readers of this blog to learn that I was not pleased, to put it mildly, by Tuesday's election results.

We all have to deal in our own particular ways with things that upset us.  Mine include resolving greatly to lessen the amount of attention that I pay to U.S. politics, at least for an interim period of time.  This is a period of great uncertainty anyway, and I am hoping that we will land within the less crazy, rather than the more crazy, range of possible scenarios.  But I don't view it as personally constructive to spend my time, as all this gets worked out, agonizing about things that I can't affect anyway, rather than going on with my life.

I am hoping not everyone will do this, but we all have different roles to play, and different personal and family needs to address.

I will pay attention to tax proposals that emerge from the new administration.  While I am bound to dislike both the distributional and budgetary effects of these proposals, it's not impossible that they will actually have structural or design virtues.  In particular, international and business taxation could be made either better or worse as a matter of basic structure and design.  We will see.

Meanwhile, I'm going on with things that interest me and/or which I can do something about.  I've had a quite enjoyable time at the National Tax Association annual meeting in Baltimore, especially socially (seeing colleagues and friends) and I may blog about the conference later today when I'm on the train back to NYC.   An article of mine that, in my final page proof read, I actually quite liked (although my reactions to rereading my own work can vary)  is going to be published and posted online by the University of Miami Law Review, perhaps as soon as today.  More on that when it happens.  It discusses high-end inequality, clearly a topic of continuing interest.  And I've made great strides, I think, in improving the structure and flow of the early portions of my book-in-progress on literature and high-end inequality.

Candide in his garden?  Perhaps.

Just a metaphor, I hope

This is what (or rather whom) I feel like today. Seen in a seafood delivery truck, right next to a local seafood restaurant.

Dealing with it

Playful version of a song about sorrow.

High-end inequality colloquium, week 3, Ilyana Kuziemko

Yesterday Ilyana Kuziemko came by to discuss her co-authored paper, Support for Redistribution in an Age of Rising Inequality. As background, here is the paper's abstract:

"Despite the large increases in economic inequality since 1970, American survey respondents exhibit no increase in support for redistribution, in contrast to the predictions from standard theories of redistributive preferences. We replicate these results but further demonstrate substantial heterogeneity by demographic groups. In particular, the two groups who have most moved against income redistribution are the elderly and African-Americans, two groups relatively more reliant on it. We find little evidence that these subgroup trends are explained by relative economic gains or growing cultural conservatism, two common explanations. We further show that the elderly trend is uniquely American, at least relative to other developed countries with comparable survey data. One story consistent with the data on elderly trends is that they worry that redistribution will come at their expense, in particular via cuts to Medicare. We find that the elderly have grown increasingly opposed to government provision of health insurance and that controlling for this tendency explains roughly half of their declining relative support of redistribution. For blacks, controlling for their declining support of race-targeted aid explains a large portion of their differential decline in redistributive preferences (raising the question of why support for race-targeted aid has fallen during a period when black income catch-up to whites has stalled)."

These are interesting and credible findings. Herewith an expanded version of my thoughts regarding the paper:

Two discussion topics.  First, as per the paper, why didn’t rising U.S. inequality from 1978-2006 prompt an increased demand for redistribution?  Second, what are the lessons learned regarding the future?

1.         Why no increased demand for redistribution?

a) Is there a paradox?

The paper notes that, under the “workhorse political economy model” in which voters simply follow their own narrow economic self-interest, it would be paradoxical to find that rising inequality didn’t trigger increased support for redistribution.  The model – which, happily, the authors, no less than I, regard as a useful strawman rather than something that is actually credible – posits that each voter’s support or opposition for addressing income inequality is simply a function of mean income minus own income, as this would determine whether symmetrically compressing income inequality would yield one a gain or a loss.

This is not a convincing model for numerous reasons.  Let’s even posit that people didn’t care about anything other than the effect on own income under the above setup.  The model would still founder on the paradox of voting – i.e., the fact that, since I cannot have any statistically significant effect on the outcome, my voting (and even informing myself about the economic stakes to me) are a total waste of time when modeled in such a framework.  People “shouldn’t” vote, and if rational “wouldn’t” vote, unless something else was going on.

(As an aside, I spent close to an hour at the polling place this morning.  Suppose that I disvalue a Trump victory at $1 billion – if I had no conscience, I might in a sci fi hypothetical accept that much from the gods, after-tax, in exchange for his winning –  and that I very generously rate the chance that my vote will affect the outcome at 1/500 million.  Then my behavior would suggest that I value my time at only $2/hour, surely below how I usually treat it.

What’s a better basic account of how voters generally make choices?  I rather like this quote from the newly published Christopher Achen and Larry Bartels, Democracy for Realists:  

“[M]ost residents of democratic countries have little interest in politics and do not follow news of public affairs beyond browsing the headlines. They do not know the details of even salient policy debates, they do not have a firm understanding of what the political parties stand for, and they often vote for parties whose longstanding issue positions are at odds with their own.  Mostly, they identify with ethnic, racial, occupational, or other sorts of groups and often – whether through group ties or hereditary loyalties – with a political party. Even the more attentive citizens mostly adopt the political positions of the parties as their own: they are mirrors of the parties, not masters. For most citizens most of the time, party and group loyalty are the primary drivers of vote choices.”

Unfortunately for purposes of explaining how rising inequality might be expected to affect voters’ political preferences regarding policies to address it, this leaves us with something of a black box.  On Election Day 2016, for example, we are seeing identity issues more than usually cashed out in straightforward terms of race and ethnicity.

b) High-end inequality vs. low-end inequality

The Kuziemko paper, reflecting the data (in the form of survey questions) on which it must rely, does not tease apart high-end and low-end inequality.  Yet I feel this issue is central to people’s attitudes, wholly apart from my arguing that the issues posed are analytically quite distinct.

“Inequality” is an abstraction.  Suppose I am in between the 20^th and 99^th percentile, whether ranked by income or wealth, and thus regard myself as “middle-class.”  What I mean by this is that I see people above me and people below me, so – aggregate statistics be damned – I place myself in the middle.  I may think something about the “rich,” and something about the “poor.”  But these are two different groups to me, and I may have particular sentiments about each.

The big rise in inequality in the U.S. since the mid-1970s has been concentrated on the high-end.  So survey questions that emphasize the low end certainly run the risk of missing respondents’ feelings about the piece that has actually moved a lot.

Consider 2 questions from the surveys that the paper analyzes.  First, what I’ll call “Question 1,” which shows up in the paper’s Figure 2:

“Some people think that the government in Washington ought to reduce the income differences between the rich and the poor, perhaps by raising the taxes of wealthy families or by giving income assistance to the poor. Others think that the government should not concern itself with reducing this income difference between the rich and the poor.” [Respondents then pick a number between 1 and 7 to reflect where they fall on the spectrum between these 2 view.]

While this question is a bit of mishmash, it does notably discuss BOTH the rich and the poor.  Kuziemko et al find little to no change in sentiment as between the polar choices in the period from 1978-2006

Then there’s “Question 2,” which shows up in the paper’s Figure 3:

“Some people think that the government in Washington should do everything possible to improve the standard of living of all poor Americans....Other people think it is not the government’s responsibility, and that each person should take care of himself.”  Once again, people are asked to locate themselves along a spectrum.

Here we find a significant decrease in pro-redistributive sentiment from 1978-2006, despite rising inequality during this period.  Why the difference between this and the flat, no-change finding for Question 1?

Unfortunately, this is not a clean comparison given the two questions’ multiple moving parts – e.g., what the government should concern itself with in Question 1, versus the role of individual responsibility in Question 2.  But the differences include mentioning both the rich and the poor in Question 1, and just the poor in Question 2.  So it’s consistent with positing, or at least speculating, that increased concern about the rich, which only Question 1 evoked, might have offset reduced concern about the poor so as to keep the overall trend in Question 1 flat rather than negative.

c) American exceptionalism

Here as so often, we have a paper dealing with American exceptionalism.  The paper’s headline finding is that US seniors have moved sharply against redistribution during this period.  Might it be a byproduct of their rising life expectancies?  The paper says no, because seniors in peer countries have not so moved despite having similar life expectancy increases.  The paper suggests that “Medicare threat” is the answer to the riddle.  U.S. seniors are worried that increased redistribution to younger Americans will come at THEIR expense, via Medicare cuts.  In effect, they’ve already got theirs, so it’s time to kick away the ladder that lifted them to safety, and make sure that others cannot benefit as they have.

To anyone who has followed, say, “Obamacare” politics from 2009 through to the present (although this falls outside the period that the paper surveys), this is wholly  plausible and credible.  We do indeed have a unique structure for government-funded healthcare that we have observed affecting seniors’ political sentiments in this way. 

But there are also other ways in which the US is unique. For example, as my colleague David Garland’s book regarding the death penalty points out, in many way the U.S. looked a lot more like Western Europe 50 years ago than it does today, and we have diverged in multiple dimensions, partly because our political elite (pre-Trumpism) split into liberal and conservative wings.  We have a far less generous social safety net, we’ve retained the death penalty, religion plays a larger role in politics than in many peer countries, libertarian and pro-market ideology are stronger here, we have racial and ethnic issues that predate contemporary immigration issues, etcetera.  So it might be interesting also to evaluate other possible explanations for American exceptionalism here.

d) Seniors

Again, the “Medicare threat” explanation for seniors’ rising hostility to redistribution in the US makes a lot of sense.  I also note that it would not be entirely irrational for seniors to be concerned that opening up the budget more to help younger people would potentially crowd out expenditures on their behalf, especially with rising healthcare costs that help put Medicare on at least the long-run chopping block.

But just how rational is it?  (And again, recall that voters generally are not “rationally self-interested” as the “workhorse political economy model” irrationally posits, because it’s not worth the effort to figure out where one’s interest lies, given the voting paradox.)  And what about another threat that they have chosen to ignore?  This is the clear fact that the anti-redistributive Republicans to whom they have rushed as a voting bloc actually thirst to sharply cut both Medicare and Social Security – whereas the (relatively) pro-redistributive Democrats whom they now shun are eager to protect both programs.

True, Republicans in the Paul Ryan vein have not only tried to soft-pedal their Social Security and Medicare retrenchment plans, but also have promised that any changes would only affect younger age cohorts.  But then again, mightn’t the same thing be true of Obamacare expansions et al, especially since the Democrats like Social Security and Medicare and thus don’t want to cut them?

My point here is not that the seniors “ought” to support the Democrats, rather than the Republicans, on all this.  There are arguments of group self-interest that go both ways.  Rather, my point is that it’s plausible that they have made their choice based on group identity.  Today’s seniors may well be a group that looks younger Americans who might get government aid as different from themselves – in particular, as less white.  In short, our demographic transition from a white-dominated to a diverse multi-ethnic society may have particularly strong effects on current seniors who can see the transition happening.

So is it about group identity after all?  More on this question under Topic 2.

e) African-Americans

The paper finds that, while African-Americans are still more pro-redistributive than the overall population average, they have moved towards the average (and away from being ideological outliers) during the period from 1978-2006 – this despite lagging economic catchup with whites.  I wonder if this might have something to do with the demographic shift, which I gather William Julius Wilson and others have written about, under which middle-class and upper-middle-class African-Americans increasingly live in neighborhoods (e.g., in the suburbs) that were previously restricted to whites, but among whom these individuals can now find economic peers.

2.         Lessons learned

Here are some thoughts about what the paper’s analysis might suggest, looking back a bit and maybe forward.

a) Was Medicare a political fiasco for progressives?

Medicare proponents in 1965 were motivated in large part by the thought: Seniors first.  They wanted comprehensive national healthcare like that in peer countries, but decided to start with the politically easy part.  But then, rather than this being the leading wedge for a broader change, it turned into a game of “pull up the ladder,” with seniors organizing to ensure that no one else could get what they have.

Medicare’s deliberately adopted optics may have worsened the problem.  It’s structured to create an impression that one is paying for one’s own benefits, via the payroll taxes one pays up front and then the annual premium for Medicare Part B.  But of course it results in huge net transfers to current seniors who, in many cases, deny that it is even a government program.  So from a progressive standpoint the whole thing appears to have backfired to a degree.

b) Cognitive dissonance looking forward

The paper evaluates but rejects a cognitive dissonance hypothesis, under which, if one becomes (say) more conservative on Issue 1, one will seek to restore consistency (defined by political alliances) by also becoming more conservative on Issue 2.  So, if one moved to the right by reason of opposition to gay rights, one might then adopt one’s new bedfellows’ (so to speak) on tax progressivity as well.  The paper finds, however, that such an explanation does not account for the shift against favoring progressivity (such as among seniors) in the data set.

Might it work the other way going forward?  Suppose future seniors dislike the conservative positions on so-called social issues?  Might this influence them to adopt more progressive positions on distributional issues as well?  Obviously we don’t know, but let’s know consider the same question phrased more generally.

 c) Seniors: life cycle effects vs. age cohort effects

As the authors recognize, it’s hard in their data set to tell apart life cycle effects and age cohort effects.  The former are at work if, say, once one reaches retirement age one starts to see public policy through the lens of “Medicare threat” to one’s own benefits.  The latter are at work if, say, people who grew up under Johnson & Nixon differ from those who grew up under Reagan, who differ in turn from those who grew up under Bill Clinton, and so on moving forward.  (I use the presidents’ name to evoke the particular times, whether or not this mainly depended on their particular political adventures.)

If one were to posit the hope (or fear, depending on one’s political preferences) that seniors going forward will not be as anti-redistributive as the current cohort, even if the structural issues around Medicare remain the same, one might base that judgment on the possibility that America’s racial and ethnic transition, from white-dominated to genuinely multi-ethnic, is playing a central role.  Is it crucial to today’s seniors that they see younger age cohorts as different from themselves, given the ongoing transition, but that this perception once the transition has passed a critical stage?  As the favored cliché of news features would have it, Only Time Will Tell.

d) African-Americans

Again, the paper finds that they remain more progressive than the median voter, but have moved closer to the median position.  One question might be: How is this likely to affect political outcomes?  Under a median voter model – although admittedly this old warhorse, no less than the workhorse political economy model of narrowly conceived economic self-interest, has lost ground in recent years – it actually might not matter a whole lot.  Obviously, however, not a question that this particular paper aims to address.

e) Relevance (or not) of voter sentiments

More generally, while this is outside the paper’s scope, one should keep in mind that it is far from clear that general voter sentiments regarding redistribution have any discernible effect on policy outcomes.  Martin Gilens, for example, finds that the sentiments of the bottom 99% generally have negligible effects on policy outcomes.  While this would not eliminate one’s interest in better understanding the link (if any) between distributional changes in the economy and public political sentiments, it would indicate that the grounds for interest are mainly sociological and based on the value of knowledge for its own sake (not as an input into making political forecasts). 

On a lighter note than this horrifying election year ...

... I'll self-indulgently revive this golden oldie (from my standpoint).

Advice re. the presidential election from a fortune cookie?

Video of the EU state aid panel at NYU Law School last Friday

Video is here; my talk starts at 53:24.

Halloween horror

Not to be a killjoy, but NYC's annual Halloween parade can truly be a nightmare for locals such as myself.  Due in part, I think, to incompetent management by whomever was in charge of the police presence, it was verging on impossible to cross 6th Avenue, which New Yorkers sometimes need to do. After yesterday's colloquium, our customary small group went to dinner somewhere east of 6th, so that we could get there (and the speaker could get back to her hotel) without needing to cross 6th.  But this meant that I had to try to cross 6th at about 8 pm in order to get home.

The distance I needed to cover is 0.5 miles according to Google Maps (I had thought it was a hair less). But getting home took 90 minutes, and I was lucky to make it home at all (it involved entering the NYC subway to use their tunnels, although I didn't end up having to take a train up and back).

Meanwhile, people were actually getting groped Trump-style by mask-wearing hooligans, hardly a surprise under the circumstances.  And no police person to whom I spoke had any idea how best to cross 6th.  (More precisely, several had definite ideas that proved to be incorrect.)

High-end inequality seminar, week 2: Kate Pickett

Our two papers for this week were by Kate Pickett and Richard Wilkinson (available here and http://www.law.nyu.edu/sites/default/files/upload_documents/EJSP%20WilkPick%20final.pdf),  Pickett was kind enough to fly over from York University in northeast England to present and discuss this work.

I view the papers as raising two main topics of interest to colloquium participants.  First, how should we evaluate the papers’ main causal claim?  Second, what follows if this claim is accepted?

1. Causal claim

The papers examine evidence regarding the empirical relationship between income inequality on the one hand, and health/ behavioral ills that have a social gradient on the other hand.  (“Social gradient” means that, within a given society, they tend to be negatively correlated with income.)

The following ills are positively correlated with a society’s measured income inequality (e.g., based on Gini coefficients or the level of the 80^th percentile versus the 20^th percentile, among alternative measures that can be used): lower life expectancy, higher infant mortality, worse educational performance by children, and the frequency of teenage births, homicides, other violence, imprisonment rates, mental illness, drug and alcohol addiction, and obesity.

Likewise, measures of social trust and economic mobility are negatively correlated with income inequality.  All this, of course, is based on adjusting for income levels.  And the ills are positively correlated with income inequality even among the wealthy in a given society.

An initial question is: should we accept the correlation?  It’s based on an enormous weight of evidence from different societies and time periods (all involving recent decades, however).  It really seems to far too much evidence of correlation to ignore or reject.

Second question: how do we explain it?  When A is shown to be correlated empirically with B, we can posit either that A causes B, or that B causes A, or that something else causes both.

Wilkinson and Pickett posit that income inequality causes the social bads. They argue that this is intuitively plausible, reflecting that we are competitive social beings, equipped for both egalitarian and hierarchical relationship patterns, but happier and less anxious in the former (which seems to have prevailed in real evolutionary time from the very distant past until the rise of agriculture only a few thousand years ago).  But they also argue that it best fits the evidence.

What about the theory that the bads cause income inequality?  Among the counters to such a view is the fact that, in the data, there tends to be lag from a given society’s rise in income inequality to its experiencing greater social gradient health and behavioral ills.

What about the theory that something else explains both?  Suppose we point the figure at culture – e.g., positing that something about U.S. and U.K. culture make us prime hosts both for income inequality and for social gradient ills (e.g., from having highly competitive cultures).  Wilkinson and Pickett note, however, that the evidence fits their causal theory pretty well, whereas it’s difficult to make it work in terms of cultural fits.  For example, why should Scandinavian countries resemble Japan, and why should Spain be so unlike the (historically far more unequal) Portugal when their cultures are so different?

I am strongly inclined to accept both the claimed correlation and the causal explanation that Wilkinson and Pickett offer.  But there is going to be an ongoing social science debate about this, which I believe their side will decisively win.

2. Issues raised by accepting the causal claim

a) Is it culturally or ideologically specific to the present?

I wonder if inequality today is different from inequality in the past.  The data obviously doesn’t go nearly far back enough to test this as one might like,

Consider the medieval epoch in Europe, during which inequality and hierarchy were considered entirely natural, by analogy to the family. Familial hierarchy running from parents to children is indeed a mental module that humans appear to have.  And might it be generalized under propitious (for it) circumstances? Consider cats, naturally feral yet able to adapt their kitten-to-mother mental module to the circumstances of modern pet culture.

Not to be too whimsical here, but could today’s problems with inequality – not by any means to idealize it in the past – have something to do with the difficulty of adapting the familial module to a mass society, plus the consequences of experiencing it in a modern capitalist context where it has become intertwined with meritocratic ideology?

b) What is the “bad” that affects people?

The paper discusses “status threat.” This brings to mind nature documentaries and books about baboon society, full of violence from above and the continual need to defend oneself from rivals below.

Maybe not entirely a bad metaphor – baboon society is said to have considerable resemblances to ours – but in a modern social context, would the “bad” result more from vertical status differences, or from uncertainty and ambiguity in relative rankings?

Robert Frank would be inclined to shelve “status threat” explanations that seem to sound in bullying and resentment, in favor of positional externalities from consumption levels. There verticality might potentially make things worse, depending on how people judge the relevance for themselves of consumption levels way above their own.  But this need not be a case of either-or.

c) Different kinds of inequality

I’ve been emphasizing the differences between high-end and low-end in equality (plutocracy versus poverty).  The evidence adduced concededly does not as yet do much to address that issue.

Thus, for example, when one of the papers notes that high-inequality U.S. states have more social gradient ills than their peers, the former are a mix of the likes of New York and the District of Columbia, with the likes of Mississippi and Louisiana. These issues are important to address when one is thinking about policy responses to the negative social effects of inequality.

d) Policy implications

i) The pollution analogy.

Inequality appears to generate negative externalities, in a manner analogous to that caused by pollution.  How should this shape our responses?  Suppose we are thinking in terms of a Pigovian pollution tax.

In the canonical Pigovian case (with the full information that’s possible in a textbook example), we know what marginal disvalue, expressed in monetary terms, the people adversely affected by pollution face on each additional quantum of it.  And while of course we won’t precisely know this in any real world example, at least it gives us a useful framework for  thinking about the proper design of a pollution tax.

In the case of inequality, we don’t know which types matter the most, whether the marginal harm rises in any sort of continuous fashion, or really anything about how best to price it.  Also, whereas in the Pigovian pollution tax we have consumers whose current utility functions and circumstances determine the cost, in the inequality case we’re asking how people would relatively value their wellbeing under two completely different scenarios.  They cannot easily judge this, even in theory.

So even if one comes out in favor of fiscal measures addressing inequality due to its negative externalities, we don’t have a great model available regarding how best to do this. 

Of course, this is not the first time that we have faced such a problem in instrument design – as discussed, for example here (in an article on taxation and the financial sector that I coauthored with Doug Shackelford and Joel Slemrod).

ii) High-end versus low-end inequality

I have been arguing for some time that we need to think about high-end versus low-end to a degree distinctly.

One reason is that the policy tools one would use to address them differ.  Low-end inequality may be addressed in large part through public spending on public goods, along with consumer goods that are necessities and/or potential areas for market failure.  For example, as Ed Kleinbard and others have noted, the tax system is generally less on point here than ensuring people of good quality healthcare, education, childcare, transportation options, etcetera.

For high-end inequality, by contrast, we may be inclined to think primarily in terms of high-end marginal tax rates (and the tax base), inheritance taxation, the scope and term of IP protection, corporate governance, rules for the financial sector, etc.

A second reason for distinguishing between high-end and low-end inequality is that our rationales for wanting to address them may be quite different.

With respect to poverty, anyone equipped with basic beneficence should care about alleviating it, in order to make people better off.  But concern about plutocracy requires further motivation, since the aim is surely not to make a bunch of people worse-off. 

Under standard public economics and optimal income tax models, in which people care only about own consumption, the declining marginal utility of material resources provides the only rationale for concern about plutocracy (although there might also be ad hoc egalitarian weighting of a social welfare function).  But if harms are being caused, the analysis may change dramatically – including by rebutting the view that one would never want to set a high-end tax rate above its revenue-maximizing level.

Against this background, the Wilkinson-Pickett evidence, in my view, does more to influence how we should think about high-end than low-end inequality, even though it is pertinent to both.

Latest on Trump's tax scam

It's generally accepted that Trump appears somehow to have deducted $916 million of losses, over time, despite the fact that these were predominantly other people's losses, not his.  The question has been how he purported to do this, but the NYT appears to have advanced the ball with this story, which is based on the discovery of a 1991 opinion letter from Willkie Farr (itself available here).

At the front, the Willkie Farr opinion lists eight uncertain tax issues on which the tax plan to make other people's losses deductible by Trump depends.  One of these it describes as "more likely than not" to be resolved favorably to Trump upon a full IRS vetting.  For the others, it says that there is merely "substantial authority" for Trump's position.

The Times article says "substantial authority" means that one has about a one-third chance of being legally correct.  I have heard of its being used to describe as much as a 40% possibility of legal correctness.

One of the odd things about tax opinions generally is that they don't quite explain what the likelihood of correctness means.  After all, it's explicitly probabilistic for "more likely than not," and implicitly so for "substantial authority" even though the term appears to address the nature of support for the position. Presumably it uses a subjectivist conception of probability, based on the writer's risk-neutral assessment of zero-value betting odds. Perhaps this reflects an underlying thought experiment involving multiple repeated independent trials (in alternative universes?) or a grouping of equally plausible (albeit distinct) positions, all of which then get tested rigorously.

Another peculiarity about tax opinions with multiple issues that are assessed probabilistically is that there is no analysis of the degree of correlation between the probabilities.  E.g., suppose each of two positions "should" be correct, and that we define that as 70% likelihood correctness. Is the likelihood that both are correct 70% - the case of perfect correlation between them - 49% (i.e., not collectively even more likely than not) - the case of perfect independence - or somewhere in between?

Tax opinions generally do not address this at all.  In a typical case, however, there's almost no chance that they are perfectly correlated - the technical issues are distinct.  On the other hand, perfect independence is often unlikely.  For example, two legal issues that are distinguishable may nonetheless both be strongly influenced by the question of whether or not a given arrangement is economically meaningful.

Returning to the Willkie Farr tax opinion, if all of the issues were perfectly independent we're in the neighborhood of a 2/10 of 1 percent chance that the overall position was valid (from assuming six 40% probabilities plus one at say 55%).  With perfect correlation, it would rise to 40%.  But since perfect correlation is unlikely I imagine that reasonable views about actual correlation might place the probability of overall correctness anywhere from, say, 5% to 20%.  And that's based on Willkie Farr's judgment, even though (with all due respect to Willkie Farr) there may have been a bit of preliminary opinion-shopping on Trump's behalf to get the most favorable view that any reputable NYC law firm was willing to provide.

What about audit review?  I suspect it was not seriously reviewed, and here's why.  It involved a gigantic NOL,  having in the main a deferred impact on tax liability, while also raising many complex issues.  It would be natural for an IRS auditor, seeking immediate bang for the buck, to figure: Even if I get this reduced substantially, surely there will be something left, meaning that Trump would have NOLs for the next few years anyway (assuming no possibility of immediate cancellation of indebtedness income given the insolvency / bankruptcy issues).  And also, while this was still early in the era of the 1990s rise of tax shelters, the IRS may by that point have had more fish to fry than auditors to mind the fry pan (so to speak).

So, a bit like Dupin's purloined letter, it may have been so blindingly visible that it didn't get looked at seriously.

Back to the presidential race.  What should we make of this?  Well, for me, the fact that Trump, if he were president, would probably respond to the article by instructing his people in the Justice Department to shut down the New York Times and find some excuse for indicting the article's authors weighs a bit more heavily on the scale than the tax scam itself, as does his being a self-proclaimed sexual assaulter, a credibly accused fraudster and racketeer, and apparently a stooge (at best) in support of Russian interests at the expense of our own. So it doesn't worsen my views of Trump, although at this point there is literally nothing that could do so.