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What We Read Today 24 May 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • Yellowstone has a 50 square mile "Zone of Death" where you can get away with murder (Dylan Matthews, Vox) The letter of the law provides that no one can be tried by a jury for a crime committed in the 50 square miles of Yellowstone National Park that lies within the state of Idaho. The only eligible jury members are required by state and federal judicial boundaries to reside within those 50 square miles and there are no human residents there. Perhaps a jury of bison or elk could be convened?
  • State unemployment, 2004 to 2014 (Bureau of Labor Statistics) Hat tip to Barry Ritholtz, The Big Picture. In April the state with the highest unemployment was Rhode Island (8.3%) - the lowest was North Dakota (2.6%). Click on map below for interactive graphic at the BLS:


Today there are 11 articles discussed 'behind the wall'. The final 3 articles are about a new debate concerning the way data was used by Thomas Piketty in his new book, Capital in the Twenty-First Century.

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  • It Wasn't Household Debt That Caused the Great Recession (Heather Boushey, The Atlantic) But it was caused by the way that household debt was distributed. Loss of buying power in lower income communities because of excessive mortgage debt taken on because of private label securitization of mortgages. A new book, House of Debt by Atif Mian (Princeton) and Amir Sufi (University of Chicago) presents an exhaustive data review that pins the cause of the Great Financial Crisis on the failure to regulate private banking which became predatory toward lower income borrowers because they were compensated for selling mortgages for which they suffered no penalty for default. This article will upset some because it lays no blame on the Community Reinvestment Act (CRA) so hated by conservatives and no blame on Fannie and Freddie which ended up supporting the predatory lenders after the fact, especially as the housing bubble peaked and burst.
Teaching Econ 101 students theory after theory after theory leaves them with the impression that they could have just been fed a line of bull. And in fact, they're right -- they could have. Instead, teach them to be skeptical, look at the evidence, and think for themselves.
  • World Trade Suddenly Slumps (Just Forget 'Escape Velocity') (Wolf Richter, Testosterone Pit) World merchandise trade has suffered the the most negative three months since 2008, and we still remember all too well what happened that year. If this plunge is not reversed within a month or two the significance is ominous.


  • Bee-Killing Pesticide More Dangerous Than Previously Believed (Michelle Schoffro Cook, Care2) The class of insecticides known as neonicotinoids is apparently the leading cause of the colony collapse disorder which has been decimating bees for decades. These chemicals are persistent in plants and soils and could lead to widespread insect effects. These chemicals have already been banned in Europe but not in North America.
  • Fed's experimental reverse repo program ramps up (Walter Kurtz, Sober Look) The taper is underway. The Fed is still buying securities every month, just fewer than previously, so the expectation is that the bank reserve balances should still be growing. But the fast few weeks there has been a decline. This corresponds with an uptick in the Fed reverse repo volume, where the Fed "buys" securities from a member with a contract to sell it back at some time in the future (often in 24 hours). So this becomes a tool for "draining" cash from the banking system for short periods of time. If might be one of the causes of the decline in bank reserves at a time when the Fed is still adding money with QE purchases. For reverse repo details see FAQs: Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise (New York Fed)


  • Did Piketty Get His Math Wrong? (Neil Irwin, The New York Times) Hat tip to John O'Donnell. Has Thomas Piketty had his Reinhart and Rogoff moment? Irwin discusses the new debate - he calls the contentions over Picketty's work a "blockbuster". However, he examines the details of the allegations (see next article for details) and Piketty's response (see the second article following for that). Neil doesn't think serious challenge to Piketty's work will come from what he has e=seen thus far but, based on the Reinhart and Rogoff experience, he says "it would be unsurprising [...] if they get significant attention". At another point Neil suggests that the challenge might contain a "damning conclusion [... that] would undermine the case Mr. Piketty mounts".

[W]hen writing an article on the distribution of wealth in the UK, I noticed a serious discrepancy between the contemporary concentration of wealth described in Capital in the 21st Century and that reported in the official UK statistics. Professor Piketty cited a figure showing the top 10 per cent of British people held 71 per cent of total national wealth. The Office for National Statistics latest Wealth and Assets Survey put the figure at only 44 per cent.

This is a material difference and it prompted me to go back through Piketty's sources. I discovered that his estimates of wealth inequality - the centrepiece of Capital in the 21st Century - are undercut by a series of problems and errors. Some issues concern sourcing and definitional problems. Some numbers appear simply to be constructed out of thin air.

When I have tried to correct for these apparent errors, a rather different picture of wealth inequality appeared.

  • Piketty response to FT data concerns (Chris Giles, Financial Times) Piketty says "if the FT produces statistics and wealth rankings showing the opposite [of my conclusion], I would be very interested to see these statistics, and I would be happy to change my conclusion! Please keep me posted." The following is a worthwhile excerpt:

As I make clear in the book, in the on-line appendix, and in the many technical papers I have published on this topic, one needs to make a number of adjustments to the raw data sources so as to make them more homogenous over time and across countries. I have tried in the context of this book to make the most justified choices and arbitrages about data sources and adjustments. I have no doubt that my historical data series can be improved and will be improved in the future (this is why I put everything on line). In fact, the "World Top Incomes Database" (WTID) is set to become a "World Wealth and Income Database" in the coming years, and we will put on-line updated estimates covering more countries. But I would be very surprised if any of the substantive conclusion about the long run evolution of wealth distributions was much affected by these improvements.

For instance, my US series have already been extended and improved by an important new research paper by Emmanuel Saez (Berkeley) and Gabriel Zucman (LSE). This work was done after my book was written, so unfortunately I could not use it for my book. Saez and Zucman use much more systematic data than I used in my book, especially for the recent period. Also their series are constructed using a completely different data source and methodology (namely, the capitalisation method using capital income flows and income statements by asset class). The main results are available here:

As you can see by yourself, their results confirm and reinforce my own findings: the rise in top wealth shares in the US in recent decades has been even larger than what I show in my book.

In the attached graph, I compare their series with the approximate series that I provide in the book. As you can see by yourself, the general historical profiles are very similar. This is exactly what I expect as we collect more data in other countries as well: we will certainly improve upon my series and adjustments (some of which can certainly be discussed), but I don't think this will have much of an impact on the general findings.

(see also this paper pp. 91-92 of pdf:

Finally, let me say that my estimates on wealth concentration do not fully take into account offshore wealth, and are likely to err on the low side. I am certainly not trying to make the picture look darker than it it [sic].


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