Hence we seemingly get the lesson – albeit, not one that Zwick et al are peddling; they’re simply being scientists here – that things aren’t as bad as all that. Whereas an alternative take would be: Mightn’t vertically heterogeneous returns be a part of the story around rising high-end inequality, rather than a ground for adjusting downward our estimates of it? After all, ignoring for the moment the question of why there might be vertically heterogeneous returns, one might be inclined to say, or at least snark: I like the $100 bills that earn 5% returns more than those that merely earn 4%. Please gimme some of the former, not the latter.
Before going more deeply into this particular “why” question, however, I believe that it’s useful to zoom out, for a moment, rather than in, in the sense of going meta, as follows
What is wealth, and why does it matter? – The paper starts by noting that the measurement of high-end wealth concentration is relevant to addressing “public concern over rising inequality, whether the distribution of resources is fair, and how policy ought to respond.” Might the nature of these concerns affect how we ought to measure it, or adjust / apply the definition insofar as it’s already become semantically specified without full reference to them? Let’s turn to a couple of main issues here.
1) Relevant to wealth tax revenue estimates – While I’ve certainly been interested by public debates about this, such as the recent Summers versus Zucman twitter war, as a practical matter it may not be the most important piece. After all, even if one were to assume that Senator Warren is elected president with both House and Senate majorities, I’d still place a very low subjective probability on the likelihood that the proposed wealth tax will be enacted, much less allowed to take effect.
But if it were to pass, then the Zwick et al adjustment for vertically heterogeneous returns seems logically correct, as a matter of predicting the actual wealth out there that would be subject to the tax, assuming successful implementation in spite of both avoidance and evasion opportunities. One could put the point this way, in terms of my very simplified hypothetical:
Suppose again that both a plutocrat and a peasant (so to speak) are reporting $5/year of interest income from particular financial instruments that they have placed in strongboxes on their desks. The estimator’s job is to guess correctly what’s in the strongbox, which the authorities will get to look inside once the tax is in place. If the plutocrat earns 5 percent while the peasant earns 4 percent, this suggests that in fact the former’s strongbox contains a $100 bond, while the latter’s contains a $125 bond. Any thought that the former’s money is actually “better” because it earns a higher rate of return is ruled out semantically by the question we have asked ourselves, which is how much wealth the strongbox holds with respect to this particular financial instrument. (I’m assuming, of course, that each bond actually is worth, and would sell, for the indicated amounts despite their different returns, surely reflecting other differences between them such as in riskiness, term, or ready marketability.)
Insofar as one thinks that a wealth tax might in fact be implemented in the U.S., notwithstanding my skepticism regarding its likelihood, the question of how much a reduced revenue estimate should affect a potential proponent’s normative assessment depends on the reasons for favoring it. Reduced revenue might lower one’s assessment under a standard revenue and distributional gains versus efficiency cost assessment (unless the lower wealth subject to the tax commensurately reduces expected deadweight loss from behavioral responses). But if one views the wealth tax as akin to a pollution tax, reducing negative externalities associated with high-end wealth concentration, revenue might be a smaller part of the motivation even though still relevant.
2) Relevant because wealth distribution can have important societal effects – Wealth tax or no, we should be interested in the degree of high-end wealth concentration because it can have important societal effects.
Saez and Zucman assert in their latest piece that high-end wealth concentration undermines democratic institutions and corrodes the social contract. There’s a vast literature, in both the hard and soft social sciences further exploring how it might have concrete adverse consequences. But these will vary with the broader social context, suggesting that two societies with identical wealth distributions might have very different negative externalities (both qualitatively and quantitatively) from their shared degree of high-end wealth concentration.
Going back to the strongbox metaphor for an illustration, suppose that in each of two societies the super-rich have large amounts of cash locked up in the vaults behind their desks. But in the first society – let’s call it the 1960s U.S. – the money tends to just stay there. It’s used surprisingly little for giant, ostentatious houses, Lear jets, Caribbean islands, and so forth, and it also is not much used to buy political influence or drive propaganda campaigns in such media as there then were. Indeed, this extra cash almost mightn’t be there, so far as its discernible effects on daily of behavior are concerned – e.g., its owners don’t seem to be smoothing lifetime or dynastic consumption, so much as, in Keynes’ famous phrase, “satisfy[ing] pure miserliness.”
In the second society – let’s call it the current U.S. – the strongbox funds are being used a whole lot to pay for conspicuous consumption, conspicuous leisure, and other such Veblenesque display, as well as to fund political and media dominance (without thereby depleting high-end wealth, since using it politically results in its replenishment).
High-end inequality seems likely to cause far greater problems, of multiple kinds, in the second society than the first. Yet the two societies might conceivably have identical high-end wealth concentration, as measured within the term’s apparent semantic limits.
It’s only through the reasoning suggested by this sort of hypothetical example that I can find it at all plausible that high-end wealth concentration HASN’T in fact vastly (not just marginally) increased in the U.S. since the 1960s. Or to put it another way, if wealth concentration DID uniformly translate into the social ills that I have in mind, I would be inclined to conclude that Saez and Zucman just had to be closer to the truth than proponents of downward adjustment, however technically appealing the latter’s arguments about particular measurement questions might be. But given the lack of a precise relationship, the evidence of one’s own eyes is not dispositive here.
In this example, the definition of wealth for measurement purposes was too fixed semantically to allow for adjusting it to better track our reasons for caring about high-end wealth inequality. But there are also instances in which the purpose might influence the definition, at least insofar as we were using a particular measure to help us get a handle on the underlying social problem. I will address this aspect in a third and final blog post concerning the Zwick et al paper, to follow shortly.