The Summer 2013 Issue of the Journal of Economic Perspectives is now available on-line. Like all issues of JEP back to the first issues in Summer 1987, it is freely available courtesy of the American Economic Association. I've been the managing editor of JEP since that first issue, so for me, it's issue #105.
The issue has two main symposia: one has six papers with various perspectives on the top 1% of the income distribution; the other has four papers on what has happened with the euro. There's also a paper at the end about the legacy of John Maynard Keynes as a highly successful institutional investor, and my own "Recommendations for Further Reading" column. I'll post more about specific papers next week. For now, here are abstracts of the articles, with the article titles in boldface, and weblinks.
Symposium: The Top 1 Percent
"The Top 1 Percent in International and Historical Perspective," by Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez
The top 1 percent income share has more than doubled in the United States over the last 30
years, drawing much public attention in recent years. While other English-speaking countries
have also experienced sharp increases in the top 1 percent income share, many high-income
countries such as Japan, France, or Germany have seen much less increase in top income shares.
Hence, the explanation cannot rely solely on forces common to advanced countries, such as the
impact of new technologies and globalization on the supply and demand for skills. Moreover, the
explanations have to accommodate the falls in top income shares earlier in the twentieth century
experienced in virtually all high-income countries. We highlight four main factors. The first is
the impact of tax policy, which has varied over time and differs across countries. Top tax rates
have moved in the opposite direction from top income shares. The effects of top rate cuts can
operate in conjunction with other mechanisms. The second factor is a richer view of the labor
market, where we contrast the standard supply-side model with one where pay is determined by
bargaining and the reactions to top rate cuts may lead simply to a redistribution of surplus.
Indeed, top rate cuts may lead managerial energies to be diverted to increasing their
remuneration at the expense of enterprise growth and employment. The third factor is capital
income. Overall, private wealth (relative to income) has followed a U-shaped path over time,
particularly in Europe, where inherited wealth is, in Europe if not in the United States, making a
return. The fourth, little investigated, element is the correlation between earned income and
capital income, which has substantially increased in recent decades in the United States.
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"Defending the One Percent," by N. Gregory Mankiw
Imagine a society with perfect economic equality. Then, one day, this egalitarian utopia is
disturbed by an entrepreneur with an idea for a new product. Think of the entrepreneur as Steve
Jobs as he develops the iPod, J. K. Rowling as she writes her Harry Potter books, or Steven
Spielberg as he directs his blockbuster movies. The new product makes the entrepreneur much
richer than everyone else. How should the entrepreneurial disturbance in this formerly egalitarian
outcome alter public policy? Should public policy remain the same, because the situation was
initially acceptable and the entrepreneur improved it for everyone? Or should government
policymakers deplore the resulting inequality and use their powers to tax and transfer to spread
the gains more equally? In my view, this thought experiment captures, in an extreme and stylized
way, what has happened to US society over the past several decades. Since the 1970s, average
incomes have grown, but the growth has not been uniform across the income distribution. The
incomes at the top, especially in the top 1 percent, have grown much faster than average. These
high earners have made significant economic contributions, but they have also reaped large
gains. The question for public policy is what, if anything, to do about it.
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"It's the Market: The Broad-Based Rise in the Return to Top Talent," Steven N. Kaplan and Joshua Rauh
One explanation that has been proposed for rising inequality is that technical change allows
highly talented individuals, or "superstars" to manage or perform on a larger scale, applying their
talent to greater pools of resources and reaching larger numbers of people, thus becoming more
productive and higher paid. Others argue that managerial power has increased in a way that
allows those at the top to receive higher pay, that social norms against higher pay levels have
broken down, or that tax policy affects the distribution of surpluses between employers and
employees. We offer evidence bearing on the different theories explaining the rise in inequality
in the United States over recent decades. First we look the increase in pay at the highest income
levels across occupations. We consider the income share of the top 1 percent over time. And we
turn to evidence on inequality of wealth at the top. In looking at the wealthiest Americans, we
find that those in the Forbes 400 are less likely to have inherited their wealth or to have grown up
wealthy. The Forbes 400 of today also are those who were able to access education while young
and apply their skills to the most scalable industries: technology, finance, and mass retail. We
believe that the US evidence on income and wealth shares for the top 1 percent is most consistent
with a "superstar"-style explanation rooted in the importance of scale and skill-biased
technological change. It is less consistent with an argument that the gains to the top 1 percent are
rooted in greater managerial power or changes in social norms about what managers should earn.
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"The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes," by Josh Bivens and Lawrence Mishel
The debate over the extent and causes of rising inequality of American incomes and wages has
now raged for at least two decades. In this paper, we will make four arguments. First, the
increase in the incomes and wages of the top 1 percent over the last three decades should be
interpreted as driven largely by the creation and/or redistribution of economic rents, and not
simply as the outcome of well-functioning competitive markets rewarding skills or productivity
based on marginal differences. This rise in rents accruing to the top 1 percent could be the result
of increased opportunities for rentshifting, increased incentives for rent-shifting, or a
combination of both. Second, this rise in incomes at the very top has been the primary
impediment to having growth in living standards for low- and moderate-income households
approach the growth rate of economy-wide productivity. Third, because this rise in top incomes
is largely driven by rents, there is the potential for checking (or even reversing) this rise through
policy measures with little to no adverse impact on overall economic growth. Lastly, this
analysis suggests two complementary approaches for policymakers wishing to reverse the rise in
the top 1 percent's share of income: dismantling the institutional sources of their increased
ability to channel rents their way and/or reducing the return to this rent-seeking by significantly
increasing marginal rates of taxation on high incomes.
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"Income Inequality, Equality of Opportunity, and Intergenerational Mobility," Miles Corak
My focus is on the degree to which increasing inequality in the high-income countries,
particularly in the United States, is likely to limit economic mobility for the next generation of
young adults. I discuss the underlying drivers of opportunity that generate the relationship
between inequality and intergenerational mobility. The goal is to explain why America differs
from other countries, how intergenerational mobility will change in an era of higher inequality,
and how the process is different for the top 1 percent. I begin by presenting evidence that
countries with more inequality at one point in time also experience less earnings mobility across
the generations, a relationship that has been called "The Great Gatsby Curve." The interaction
between families, labor markets, and public policies all structure a child's opportunities and
determine the extent to which adult earnings are related to family background -- but they do so in
different ways across national contexts. Both cross-country comparisons and the underlying
trends suggest that these drivers are all configured most likely to lower, or at least not raise, the
degree of intergenerational earnings mobility for the next generation of Americans coming of
age in a more polarized labor market. This trend will likely continue unless there are changes in
public policy that promote the human capital of children in a way that offers relatively greater
benefits to the relatively disadvantaged.
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"Why Hasn't Democracy Slowed Rising Inequality?" by Adam Bonica, Nolan McCarty, Keith T. Poole and Howard Rosenthal
During the past two generations, democratic forms have coexisted with massive increases in
economic inequality in the United States and many other advanced democracies. Moreover, these
new inequalities have primarily benefited the top 1 percent and even the top .01 percent. These
groups seem sufficiently small that economic inequality could be held in check by political
equality in the form of "one person, one vote." In this paper, we explore five possible reasons
why the US political system has failed to counterbalance rising inequality. First, both
Republicans and many Democrats have experienced an ideological shift toward acceptance of a
form of free market capitalism that offers less support for government provision of transfers,
lower marginal tax rates for those with high incomes, and deregulation of a number of industries.
Second, immigration and low turnout of the poor have combined to make the distribution of
voters more weighted to high incomes than is the distribution of households. Third, rising real
income and wealth has made a larger fraction of the population less attracted to turning to
government for social insurance. Fourth, the rich have been able to use their resources to
influence electoral, legislative, and regulatory processes through campaign contributions,
lobbying, and revolving door employment of politicians and bureaucrats. Fifth, the political
process is distorted by institutions that reduce the accountability of elected officials to the
majority and hampered by institutions that combine with political polarization to create policy
gridlock.
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Symposium: The Euro
"What Is European Integration Really About? A Political Guide for Economists," by Enrico Spolaore
Europe's monetary union is part of a broader process of integration that started in the aftermath
of World War II. In this "political guide for economists," we look at the creation of the euro
within the bigger picture of European integration. How and why were European institutions
established? What is European integration really about? We address these questions from a
political-economy perspective, building on ideas and results from the economic literature on the
formation of states and political unions. Specifically, we look at the motivations, assumptions,
and limitations of the European strategy initiated by Jean Monnet and his collaborators of
partially integrating policy functions in a few areas with the expectation that more integration
will follow in other areas in a sort of chain reaction toward an "ever-closer union." The euro with
its current problems is a child of that strategy and its limits.
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"Political Credit Cycles: The Case of the Eurozone," by Jesús Fernández-Villaverde, Luis Garicano and Tano Santos
We study the mechanisms through which the entry into the euro delayed, rather than advanced,
key economic reforms in the eurozone periphery and led to the deterioration of important
institutions in these countries. We show that the abandonment of the reform process and the
institutional deterioration, in turn, not only reduced their growth prospects but also fed back into
financial conditions, prolonging the credit boom and delaying the response to the bubble when
the speculative nature of the cycle was already evident. We analyze empirically the interrelation
between the financial boom and the reform process in Greece, Spain, Ireland, and Portugal and,
by way of contrast, in Germany, a country that did experience a reform process after the creation
of the euro.
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"Cross of Euros," Kevin H. O'Rourke and Alan M. Taylor
The eurozone currently confronts severe short-run macroeconomic adjustment problems and a
deficient institutional architecture that has to be reformed in the longer run. Europe's efforts at
economic and monetary union are historically unprecedented. However, the gold standard
provides lessons regarding what will and won't work, macroeconomically and politically, in the
short run, while US history provides long-run lessons regarding appropriate institutional
structures. The latter also suggests that institutional reform only happens at times of great crisis,
and that it cannot be taken for granted. The eurozone's leaders may therefore ultimately have to
take heed of the lessons of history regarding currency union breakups.
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"Downward Nominal Wage Rigidity and the Case for Temporary Inflation in the Eurozone," by Stephanie Schmitt-Grohé and Martin Uribe
Since the onset of the Great Recession in peripheral Europe, nominal hourly wages have not
fallen from the high levels they had reached during the boom years -- this in spite of widespread
increases in unemployment. This observation evokes a well-known narrative in which nominal
downward wage rigidity is at the center of the current unemployment problem. We embed
downward nominal wage rigidity into a small open economy with tradable and nontradable
goods and a fixed exchange-rate regime. In this model, negative external shocks cause
involuntary unemployment. We analyze a number of national and supranational policy options
for alleviating the unemployment problem caused by the combination of downward nominal
wage rigidity and a fixed exchange-rate regime. We argue that, in spite of the existence of a
battery of domestic policies that could be effective in solving the unemployment problem, it is
unlikely that a solution will come from within national borders. This leaves supranational
monetary stimulus as the most compelling avenue out of the crisis. Our model predicts that full
employment in peripheral Europe could be restored by raising the euro area annual rate of
inflation to about 4 percent for the next five years.
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Features
"Retrospectives: John Maynard Keynes, Investment Innovator," by David Chambers and Elroy Dimson
John Maynard Keynes made a major contribution to the development of professional investment
management. Based on detailed archival research at King's College, Cambridge, we describe
Keynes' investment philosophy, his investment performance, and the evolution of his investment
approach as the manager of a large educational endowment. His portfolios were actively managed
and unconventional. He was an investment innovator both in making a substantial allocation to the
then new institutional asset class of common stocks as well as in championing value investing.
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"Recommendations for Further Reading," by Timothy Taylor
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Notes and Errata
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