Overview of Distributional National Accounts: Methods and Estimates for the United States

This post is a high-level summary of Distributional National Accounts: Methods and Estimates for the United States, a recent paper by economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman. For those interested, we will discuss the paper at the next Franklin Club event on September 24.

1. A Tale of Two Economies a. The good: (i) Dow at 22,000 as of September 2017 (ii) Unemployment near record low: 4.3% as of May 2017 (iii) Nice economic growth: 2.6% GDP growth in second quarter of 2017 b. The bad: (i) Rising economic anxiety (see 2016 elections) and increased support for populist solutions (ii) Many feel left behind 2. New paper: Distributional National Accounts: Methods and Estimates for the United States, responds to critiques of Capital in the Twenty-First Century, the Thomas Piketty masterpiece. a. In measuring income, the paper takes into account government transfer programs (mostly non-cash), household formation and changes in age distribution (per person, not per household) b. Aggregate more data into the project (tax data, investment data and more) 3. Results – reviewing the United States between 1980 and 2014 a. Pre-Tax Income: Average pre-tax income per adult grew by 61% (i) For the bottom 50%, pre-tax income stagnated entirely at $16,000. Total share of income declines from 20% to 12% (ii) For the top 1%, pre-tax income rose 205%. Total share of income rose from 12% to 20% (iii) For the top 0.01%, pre-tax income rose 636% b. Post-Tax Income: (i) For the bottom 50%, pre-tax income rose 21% 4. Takeaways: a. The bottom 50% of income earners are not doing much better than they did 40 years ago b. Main reason post-tax income of bottom 50% went up at all is due to government transfer programs c. Are these trends caused by the decline of top marginal tax rates? d. Based on this data, the rising tide is not lifting all boats 5. Central Rule: r (rate of return) > g (rate of economic growth) a. The return on capital will be greater than the growth rate, and this will inevitably lead to greater inequality b. Wealth will accumulate over time c. Since 1700, wealth globally has enjoyed a typical pre-tax return of 4%- 5% per year, faster than average economic growth d. Little correlation between the growth rate and the rise of inequality