rising wealth inequality's "snowball effect."

See the Bernstein link below about the decoupling of productivity and compensation for the wage class.

If not r > g, what’s behind rising wealth inequality? By Nick Bunker

The Initiative on Global Markets at the University of Chicago yesterday released a survey of a panel of highly regarded economists asking about rising wealth inequality. Specifically, IGM asked if the difference between the after-tax rate of return on capital and the growth rate of the overall economy was the “most powerful force pushing towards greater wealth inequality in the United States since the 1970s.” 

The vast majority of the economists disagreed with the statement. As would economist Thomas Piketty, the originator of the now famous r > g inequality. He explicitly states that rising inequality in the United States is about rising labor income at the very top of the income distribution. As Emmanuel Saez, an economist at the University of California, Berkeley and a frequent Piketty collaborator, points out r > g is a prediction about the future. 

But if wealth inequality has risen in the United States over the past four decades, what has been behind the rise? A new paper by Saez and the London School of Economics’ Gabriel Zucman provides an answer: the calcification of income inequality into wealth inequality.

“Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data,” their new working paper, is firstly an impressive documentation of the significant changes in wealth distribution in the United States. 

Saez and Zucman create a data series using tax records to measure wealth inequality going back to 1913. The trend is similar to the one for income inequality in the United States: a high level of inequality at the beginning of 20th century that declined substantially during the mid-century only to climb starting in the late 1970s and reaching high levels again in recent years. 

Rising wealth inequality since the late 1970s has been a case of the top of the distribution pulling away from everyone else. Specifically, the rise of the 0.1 percent is the dominant story. In 1979, the top tenth of the top 1 percent held 7 percent of the wealth in the United States. By 2012, the share held increased threefold to 22 percent. (An earlier version of this data was highlighted at Equitable Growth’s annual conference in September.) In fact, almost half of the total increase in wealth from 1986 to 2012 went to the top 0.1 percent of wealth holders. The increase is dramatic and brings wealth inequality to a level around that prevailing in 1929. 

What caused this increasing concentration of wealth? In short, an increase in income inequality coupled with rising savings inequality. As income flowed upward to those at the top, rich individuals increased the rate at which they saved income. Saez and Zucman refer to this phenomenon as the “snowballing effect.” And Piketty does consider the calcification of top incomes into wealth inequality in “Capital in the 21st Century.” 

This effect certainly isn’t the well-known r > g phenomenon. But Saez and Zucman’s research shows that there’s more than one way for wealth inequality to arise.

Baker on housing wealth effect

The basic story is straightforward. The run-up in house prices created by the bubble created $8 trillion in housing bubble wealth. Standard estimates of the housing wealth effect suggest that this would increase annual consumption by 5-7 percent of this amount, or $400 billion to $560 billion a year. This would have been equal to 3-4 percent of GDP.

Loose macroprudential policy gave the economy about a $500 billion / year stimulus which filled the output gap left by inadequate demand from trade and government spending. It was unsustainable.

The Problem Is Not Debt: Consumption Is High Not Low by Dean Baker

Economists and economic reporters continually try to make the problem of the weak economy and prolonged downturn appear more complicated than it is. After all, if it is very simple then these people would look foolish for not having seen it coming and figuring out a way around this catastrophe. Fortunately for us, if unfortunate for them, it is simple. 

One of the efforts to make it more complex than necessary is to assign an outsized role to the debt associated with the collapse of house prices. This is the argument that we heard on Morning Edition this morning. The argument is that when house prices plunged after the housing bubble burst in 2007, homeowners were left with large amounts of debt, pushing many of them underwater. This debt supposed discouraged them from spending, leading to a sharp falloff in consumption. 

There is a big problem with this story. Consumption is not low, it is actually still quite high. The graph below shows consumption as a share of GDP. It is actually higher than during the bubble years and essentially at an all-time peak. That makes it a bit hard to explain the downturn by weak consumption. (Some folks may recall hand wringing about inadequate savings for retirement, as in this NYT column by Gene Sperling yesterday. Too little savings and too little consumption are 180 degree opposite problems, sort of like being too heavy and too thin.) 

There would be a modest decline in consumption from the peak bubble years if it was shown as a share of disposable income (tax collections are lower today than in 2004-2007), but it would stiill be unusually high by this measure. The basic story is straightforward. The run-up in house prices created by the bubble created $8 trillion in housing bubble wealth. Standard estimates of the housing wealth effect suggest that this would increase annual consumption by 5-7 percent of this amount, or $400 billion to $560 billion a year. This would have been equal to 3-4 percent of GDP.
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