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Volume 15, Issue 1

December 2021

Table of Contents

Recent Research on Income Distribution: An Overview of the Field
By Gerald Auten
The distribution of income in the United States has long been of interest to economists. Using
data on tax returns, Piketty and Saez (2003) concluded that top income shares had more than
doubled since 1980. This paper helped trigger broader public concerns about rising inequality
and stagnating incomes for lower- and middle-class households. But this paper was criticized
by academics for using a narrow definition of income that failed to account for the dramatic
growth of Social Security, Medicare, and other transfer programs and for ignoring the effects
of declining marriage rates and smaller household size. More recent work by Piketty, Saez, and
Zucman (2018) addressed some of these issues using a broader income measure based on
national income but still found dramatic increases in top income shares. Their new analysis
has also been criticized for overstating top income shares due to certain assumptions used to
allocate income not reported on tax returns. This paper examines these issues in measuring
the distribution of income, compares the analysis and results of recent studies, and presents a
more nuanced view of income inequality over time. While there is always uncertainty about
distributional analysis, the best available evidence suggests that top income shares are lower
and have increased less than some have claimed and that real incomes have increased over
time for all income groups, though not necessarily for every household. Click here to read the paper.

Markets and Regulation in the Age of Big Tech
By Kaushik Basu, Aviv Caspi, and Robert Hockett
The digital revolution, along with the growth of the companies known collectively as Big Tech, is transforming the global economy and giving rise to novel policy challenges. This paper analyzes the microeconomic foundations of this change, particularly how the natures of competition and oligopolistic equilibria are changing as a result of the large returns to scale and the global connectivity made possible by these new technologies. We then discuss how these changes fit into the existing regulatory landscape and argue that, for certain kinds of large digital-platform firms, existing antitrust laws may not be adequate. We conclude by considering more radical reform, such as requiring certain platform firms to be organized as nonprofits or public utilities.
Click here to read the paper.

The Pursuit of Coherence in Mainstream Macroeconomic Methodology
By Sheila Dow
The coherence of mainstream macroeconomics is threatened by inconsistency between the core theoretical model and the empirically grounded models used for policy advice. The field has evolved in response to policy demands in the wake of the 2008 financial crisis. But this evolution has been constrained by the emphasis of the core theoretical approach on a particular representation of microfoundations. Yet the notion of internal consistency by which this microfoundations project is justified is challenged by a broader philosophical notion of consistency. The long-running expression of opposition in mainstream macroeconomics between logical and empirical coherence (or between rigor and realism) accordingly requires further examination of how real economic systems are understood and how knowledge about them is to be built and assessed. If mainstream macroeconomics is to continue to deviate from the core model by virtue of open-system ontology, then in order to ensure coherence, the characteristics of that system need to be articulated, and their implications for methodology worked out.​​ Click here to read the paper.

On the Economics of Economic Knowledge
By Dominique Foray
In this paper, we argue for building a research agenda to analyze economic knowledge as an
economic good and explore the socioeconomic institutions that can be relied upon to produce,
distribute, and use economic knowledge in an efficient manner. In our opinion, the benefits
of such an approach, as well as the value of its future contributions to the understanding of
the foundations of the economic dynamic, are obvious. Click here to read the paper.

When New Immigrants First Go to an American Supermarket
By Roya Hakakian
When newly arrived immigrants first glance into an American supermarket, shock may well be
their first reaction. So writes Roya Hakakian, author and poet, in her new book A Beginner’s
Guide to America for the Immigrant and the Curious (2021), which walks the reader through the
immigrants’ first moments on American soil to the final ceremony of hard-earned
naturalization. In those early days after the immigrant first arrives, the tiniest details can
register at great magnitudes, from the head-spinning varieties of cereal to highway signs.
According to Hakakian, these are the things that make the newly arrived so keenly aware of
the contrasts between their lives before and after immigration. She draws a portrait that
showcases America as a land of abundance, while unpacking the meanings behind the plenty.
Click here to read the paper.

Can Free Trade Be Part of Green, Resilient, and Inclusive Development?
By Mari Pangestu and Enrique Aldaz-Carroll
Trade has been a means to development by generating jobs, spurring economic growth, and reducing poverty. However, the gains from trade have shown to be less than equally distributed, hurting at times some localities and segments of countries’ populations. The COVID-19 pandemic has also shown that global value chains (GVCs) are susceptible to serious disruptions. The climate crisis has raised attention on carbon emissions from the transportation of merchandise exports and imports. If trade is to remain a driving force for growth, job creation, and poverty reduction and part of countries’ effort to set a new path towards green, resilient and inclusive development, understanding how the gains from trade are distributed and how the impacts of trade can be better managed is of critical importance. This paper reviews the evidence bearing on these concerns and considers policy responses that could enable trade, and particularly GVCs, to contribute more to a green, resilient, and inclusive recovery for developing countries. What is needed is the combination of old policies like trade facilitation, business environment, and skills with new and green policies including a new treatment of carbon, emphasis on diversification, social-protection measures, and improvements in the international trade order. Click here to read the paper.

The Quest for Economic Freedom in India
By Shruti Rajagopalan
This paper studies the 1991 reforms, as the beginning of the transition towards a market
economy from the socialist policies in the first four decades of the Indian republic. Tracking
the major reforms in the three decades since 1991, I argue that economic control and statist
policies are the norm and that reforms enhancing economic freedom are the outliers. After an
excellent start by the Rao-Singh team in 1991, and a gaining of momentum during the Vajpayee
government (1999-2004), India’s liberalization and reform process has slowed down
considerably in the last decade. The slowdown in the reform process, ad hoc regulation, as
well as disastrous policies like demonetization, have become the new trend in Indian economic
policy. Simultaneously, India’s high rates of growth post-liberalization have also slowed down,
especially in the last five years, a trend that was visible before the pandemic. The reason is that
Indian policymakers pursued socialism for the first four decades after independence and never
fully committed to the pursuit of economic freedom after the initial set of reforms in the 1990s
and early 2000s. The main lesson from the history of India’s reforms is that the problem is
systemic and structural and requires a deeper commitment to markets to fix its upside-down
state-market relationship. Click here to read the paper.

An Equilibrium Model of Corporate Environmental and Social Governance
By Richard Robb, Vinay Viswanathan, and Martin Sattell
We develop a formal model to study the consequences for firms of adopting environmental and social governance (ESG) constraints. In the presence of information asymmetries, we find that a firm may reduce earnings variability by binding itself to ESG rules, thereby lowering the interest rates that creditors charge and raising expected profits. The gains are likely to be far greater when ESG constraints not only reassure creditors but also limit the ability of self-serving managers to work against the interests of shareholders. For most parameter values, though, we find that adherence to ESG lowers returns and increases risk.

The predictions of our model contrast with those of two influential studies by Morgan Stanley. In the first, Morgan Stanley (2015) claims that ESG systematically raises investors’ returns. In the more recent, it claims that ESG reduces investors’ downside risk (Morgan Stanley 2019). We summarize our earlier critique (Robb and Sattell 2016) showing that the results of the first Morgan Stanley study cannot be replicated, and we go on to show that the results of the second study arise from two errors: (1) Morgan Stanley uses the default benchmark (S&P 500 Total Return Index) supplied by Morningstar Direct rather than the benchmark appropriate to each fund, and (2) the conclusions drawn from median returns are an artifact of microfunds, many with less than $10 million under management. Upon correcting these errors, we arrive at the opposite conclusion, one consistent with the literature: ESG investors sacrifice a small amount of return for any amount of risk.

A great deal remains to be done to determine whether ESG is effective or ineffective in addressing social concerns. Our contribution here is to propose a versatile, tractable model that can start to address vital questions in a more rigorous framework than we find in the literature. In particular, we show how ESG might raise social welfare by multiples of the private costs and how our model can quantify the trade-off. Click here to read the paper.

Three Myths about US Economic Inequality and Social Mobility
By Xi Song, Michael S. Lachanski, and Thomas S. Coleman
Income inequality has increased dramatically in the United States since the 1970s. However, we argue in this paper that many common perceptions about causes and consequences of rising inequality are misleading or even false. Using first-hand empirical analyses and meta- analyses of previously published work, we present and demystify three key facts about the rise in US inequality that have been given too little attention in recent debates. First, inequality has risen throughout the distribution. Post-tax and transfer income levels have grown in the middle and bottom of the distribution, not the top alone – the top 1% does not take all. Second, the trend in intergenerational social mobility has remained largely stable over the last four decades. The relative gap in mobility opportunities between children from poor and rich families has barely changed – the “Great Gatsby curve,” which predicts a general negative relationship between income inequality and intergenerational mobility, does not apply to the US. Third, changes in the return to human capital caused by shifts in the supply and demand for educated and skilled labor have played a crucial role in the rise in income inequality since the 1970s – rising corporate concentration and employer market power (monopsony) do not appear to be a key culprit. Click here to read the paper.