Tuesday, April 29, 2014

Tyler Cowen — Accounting for U.S. Earnings and Wealth Inequality

In other words we already have a theory which does quite well in explaining U.S. wealth inequality, and it isn’t based on the total centrality of a comparison of r and g, as you find in Piketty. And no one in the current debates is citing this piece, Piketty included....

So much of the current Piketty debate is simply forgetting that…science exists and has already offered a wide range of insights on these topics, as well as having rendered some of the more extreme claims unlikely....

Update: Piketty did cite the main piece discussed here in 2010.
Marginal Revolution
Accounting for U.S. Earnings and Wealth Inequality
Tyler Cowen | Holbert C. Harris Chair of economics at George Mason University


Dan Kervick said...

Note this footnote (footnote 10) in the paper Cowan is discussing:

Note that throughout this article our definition of earnings both for the U.S. and for the model economies includes only before-tax labor income. Consequently, it does not include either capital income or government transfers. The sources for the data and the definitions of all the distributional variables used in this article can be found in D´ıaz-Gim´enez, Quadrini, and R´ıos-Rull (1997).

The authors' model assumes there is no capital income or government transfer income, only labor income.

And how did the authors obtain their estimates of these earnings form labor? Well, they don’t like the estimates that are provided by the available sources. So they use the estimates that generate the results they are seeking to predict:

To get around these problems, instead of using direct estimates from earnings data, we use our own model economy to obtain a process on the endowment of efficiency labor units that delivers the U.S. distributions of earnings and wealth as measured by the SCF.

So you could call the results “science”. But if I understand those parts of the paper correctly correctly, then what this paper produces is similar to the result you could get if you attempted to model the muscle mass distribution of American adults by assuming a model in which there is no protein ingestion via meat consumption, but an adjustable parameter for protein ingestion via legume consumption. You might discover that if you then assume the right value for bean production, you can generate the observed muscle mass distribution. An interesting exercise, but one that would quickly be dismissed as an explanation of the actual phenomena, since its assumptions are clearly unempirical.

Unknown said...

lol Dan,

creating toy models which are designed to confirm your political beliefs is what Cowen refers to as "science".

Dan Kervick said...

I just posted a slightly revised and extended version of that comment over at Rugged Egalitarianism


Tom Hickey said...

Thanks, Dan. I posted a link.

Dan Kervick said...

Thanks Tom