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April 26, 2009
David Warsh, Proprietor


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The U-Turn

Emmanuel Saez, 36, a public economics expert teaching at the University of California at Berkeley, was awarded the 2009 John Bates Clark Medal last week. Nobody has done more to describe the broad changes in income distribution in the United States that have taken place during the last ninety years.

 

His most striking finding has been to confirm the widespread intuition that income inequality has been increasing – that one of the key regularities of post-World War II economics had fallen apart.  It was in 1955 that Simon Kuznets, then of the Johns Hopkins University, observed that  inequality in developing countries tended to describe an “inverted-U,” rising substantially for a time as workers moved from farms into industrial cites, then steadily diminishing as output grew and gains from increased productivity were more evenly distributed.

Saez demonstrated that the “U” had decisively turned right-side up – that inequality has been rising steadily for thirty years instead of falling. Working backwards from tax data to infer household income back to 1913, when the income tax was established (modern government income surveys came into being only in 1960), he found that families making up the top ten percentile of the income distribution had been steadily increasing their share of all income since the 1970s. This best off decile of earners had one heyday in the “Roaring 1920s,” when their share reached nearly 45 percent of national income.  There they remained until about 1940, when norms associated with the conduct of World War II apparently knocked them down to around 33 percent of the total. Their share remained remarkably stable for the next three decades, at around a third of national income, until the mid-1970s. Then the top decile’s share began to climb again, hitting 49.7 of national income in 2006, higher than any year since 1917 and surpassing its level in 1928, Saez found. It took $104,700 in market income for a family to make the top 10 percent in 2006.

Moreover, most of that improvement owed to record gains for families in the top one percent of income (earning more than $382,600).  It was the very rich whose fortunes seemed to have been at the center of the story of income distribution, Saez wrote in Striking It Richer in the Stanford Center for the Study of Poverty and Inequality’s Pathways Magazine – from nearly a quarter of the whole in the late 1920s, to less than 10 percent in the 1960s and 1970s, before climbing back to nearly a quarter by 2006.

 

(Matt Yglesias has a picture of this.)

 

Saez, a French citizen, was born in 1972, meaning that he is only slightly older than “the tax revolt,” a phenomenon which, in the United States, as in much of Europe, can be said to have begun in the mid-1970s. He is emblematic of a new generation that takes public finance seriously, devising more explicit and efficient tax codes, and measuring behavioral responses to tax changes about which political activists and their think-tank acolytes previously have only argued. (Do people work less or leave town when their taxes go up?). Much of his work has been done in collaboration with his countryman Thomas Piketty, of the Paris School of Economics; the two are co-directors of Public Policy program of the Centre for Economic Policy Research, the European counterpart of  the National Bureau of Economic Research in the US.

 

The American Economic Association citation accompanying the award stated, “Unlike many others who work in this area, Saez straddles the great divide between theory and empirics and brings the two noticeably closer together. His work usefully illuminates questions concerning issues such as the appropriate marginal tax rate for high income taxpayers, the structure of income transfer programs, the treatment of capital income, and the taxation of married couples.”

 

For all the emotional impact of the tax debate, however, there are clearly additional reasons for the increase in inequality of the past thirty years.  They include technological advances, increasing globalization, changing theories of compensation and altered public expectations of economic growth. It will be a long while before any of it is pinned down. But Emmanuel Saez and others of his ilk have dramatically raised the level of the debate from the days when the price of entry was no higher than a curve sketched quickly on a cocktail napkin and insistently reproduced in newsprint.

 

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The annual meeting of the Royal Economic Society is an ad
vantageous window through which to view recent developments in mainstream economics. The preponderance of these developments unfold in North America, so the program committee flies a handful of lecturers across the Atlantic (or the Channel) every year to showcase the latest styles.

 

Last week at the University of Surrey, in Guildford, they included David Laibson, of Harvard University; Pinelopi Goldberg, of Princeton; Gilles Saint Paul, of the University of Toulouse and Birkbeck College; Chang-Tai Hsieh, of the Graduate School of Business of the University of Chicago; Mark Rosensweig, of Yale; and Esther Duflo and Michael Greenstone, of the Massachusetts Institute of Technology.  John Vickers, Warden of All Souls College, Oxford, gave the presidential address, on differing jurisprudential approaches in Brussels and Washington to competition policy and property rights – to intellectual property rights in particular.

 

The organizers also select fifty or so paper to showcase, from among the more than 100 that are contributed, mostly by up-and-comers in European and British universities. And all the while they maintain a running commentary among themselves about how best to use the United Kingdom’s advantages to compete for graduate students in a global market.

 

So it was good news that an International Benchmarking Review last autumn deemed the nation’s economics research faculties to be in robust good health, “more prominent” than those of any other country except the United States. In a nation where so much education is centrally funded, such studies (and the recent Research Assessment Exercise) are important.  Chaired by Harvard’s Elhanan Helpman, an outside panel of experts concluded that UK faculties ought to beef up their capabilities in macroeconomics (who shouldn’t?) but that otherwise things were in relatively good shape – development studies and microeconomic topics in particular. In general, the UK was gaining slightly on the US in economic research, the committee found, at least bibliometrically, gauged by the influence of its publications, while Australia, the Netherlands, France and Germany were gaining slightly at the expense of the UK.

 

Not so in Israel. Another committee, this one appointed by the quasi-governmental Israeli Council on Higher Education, again led by Helpman, including David Kreps, of Stanford; Joel Mokyr, of Northwestern; Ariel Pakes, of Harvard; and Robert Pindyck, of MIT.  The report’s conclusion: “The state of the discipline of economics in Israeli institutions of higher education is dire. There are, without question, some bright spots in the picture. But the picture is dismal overall.”  Hebrew and Tel Aviv universities were among the twenty best departments in the world fifteen years ago. “But today, Tel Aviv’s department is collapsing, and Hebrew University’s is teetering on the brink.”

 

Not that Israel’s universities aren’t turning out plenty of economics majors; there are more than ever before.  But while they know plenty of theory, they often fail to understand its connection to the world around them. And while the best of them have long gone to the United States for their graduate education, fewer than ever are returning to teach in Israel.  Instead they remain in the US to teach. Among assistant professors in the top ten American departments, 16 percent (18 professors) received their first degree in Israel, a contingent second only to the 28 percent whose undergraduate degree was earned in the United States.

 

What’s the solution?  A recognition, the committee urged, that Israeli economics must embrace the hiring and promotion practices of departments in Western Europe and the United States, and that more money is needed at every level.

 

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The American newspaper industry has fallen on hard times, and its authority has dimmed, at least for the moment. But the conservators of its traditions quietly took an admirable stand last week. The Pulitzer Prize Board passe
d over The New York Times columnist (and Princeton professor) Paul Krugman and gave its 2009 commentary award to Eugene Robinson instead, citing The Washington Post veteran for columns on the election of the first African-American president that exhibited “graceful writing and grasp of the larger historic picture.” Krugman and Regina Brett, of the Cleveland Plain Dealer, were runners-up.

 

Krugman is an economist of considerable distinction. He deserves the Nobel Prize for his work elucidating the mechanisms of international high-tech trade (though the Royal Swedish Academy of Sciences would have done better to wait another year and to honor his co-author Elhanan Helpman as well). But there is something about Krugman’s newspaper journalism that chafes. True, he gets half-a-dozen scoops a year. He has become a columnist of enormous influence. He is an energetic blogger, too. Yet he often cloaks his claims in professional authority, overstates them, omits arguments that undermine his case, and is a bit of a bully.

 

Besides, in a year when Krugman energetically supported the presidential candidacy of Hillary Rodham Clinton, it was Robinson who got the story.

 

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