Nonhuman Wealth Research Articles

US Inequality and Fiscal Progressivity: An Intragenerational Accounting

This study measures inequality and fiscal progressivity. It differs from prior such analyses by measuring inequality based on remaining lifetime spending rather than particular resources, like wealth and current income, that only partially determine lifetime spending, and by considering inequality and progressivity within generations. To estimate the distribution of remaining lifetime spending, we run the 2016 Federal Reserve Survey of Consumer Finances (after imputing missing data from other surveys) through The Fiscal Analyzer (TFA), a life-cycle consumption-smoothing program that incorporates remaining life-time resources, borrowing constraints and all major federal and state tax and transfer programs. We find that inequality in wealth and income dramatically overstate inequality in remaining lifetime spending. For example, the richest 1 percent of forty year olds, where resources are measured as the sum of human plus non-human wealth, have 34.1 percent of the cohort’s total non-human wealth, but account for only 14.5 percent of the cohort’s total remaining lifetime spending. The poorest quintile of forty year olds own just 0.6 percent of the cohort’s wealth, but account for 7.3 percent of its remaining lifetime spending. We also find that within-cohort inequality differs considerably from inequality across the entire population, regardless of age, and that, for particular age cohorts, current-year net tax rates substantially understate the degree of progressivity. Finally, as we illustrate by for the 2017 Tax Cuts and Jobs Act, the progressivity of tax reform may be significantly misstated using conventional current-year analysis.

Pure rent taxation and allocation of capital in a two-sector open economy: A long-run analysis

In this paper, the long-run incidence of a tax on pure rent is analyzed in an OLG two-sector small open economy, in which one sector produces a capital good and one sector a consumer good. Contrary to what is obtained in a one-sector closed economy, a land rent tax does not necessarily foster nonhumam wealth accumulation and capital formation. The accommodating scheme for the government budget plays a crucial role for the effects of pure rent taxation. A rent tax stimulates nonhuman wealth if distortionary taxes on wealth or on income from nonland inputs are alleviated. The mechanism spurring capital formation is brought into action, instead, only when the rent tax is matched by a fall in capital taxation or, if the capital sector is capital intensive, by an increase in government spending on the capital good.

Eight Centuries of Global Real Interest Rates, R-G, and the ‘Suprasecular’ Decline, 1311–2018

With recourse to archival, printed primary, and secondary sources, this paper reconstructs global real interest rates on an annual basis going back to the 14th century, covering 78% of advanced economy GDP over time. I show that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been ‘stable’, and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6–1.6 basis points per annum has prevailed. A gradual increase in real negative-yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis. Against their long-term context, currently depressedbsovereign real rates are in fact converging ‘back to historical trend’ — a trend that makes narratives about a ‘secular stagnation’ environment entirely misleading, and suggests that — irrespective of particular monetary and fiscal responses — real rates could soon enter permanently negative territory. I also posit that the return data here reflects a substantial share of ‘non-human wealth’ over time: the resulting R-G series derived from this data show a downward trend over the same timeframe: suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record.

Eight Centuries of Global Real Interest Rates, R-G, and the ‘Suprasecular’ Decline, 1311–2018

With recourse to archival, printed primary, and secondary sources, this paper reconstructs global real interest rates on an annual basis going back to the 14th century, covering 78% of advanced economy GDP over time. I show that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been ‘stable’, and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6–1.6 basis points per annum has prevailed. A gradual increase in real negative-yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis. Against their long-term context, currently depressedbsovereign real rates are in fact converging ‘back to historical trend’ — a trend that makes narratives about a ‘secular stagnation’ environment entirely misleading, and suggests that — irrespective of particular monetary and fiscal responses — real rates could soon enter permanently negative territory. I also posit that the return data here reflects a substantial share of ‘non-human wealth’ over time: the resulting R-G series derived from this data show a downward trend over the same timeframe: suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record.

Instantaneous Wealth Distribution in a Perpetual Youth Model

The Perpetual Youth model is widely used in macroeconomics to assess the intergenerational effects of fiscal and monetary policy. Little attention has been devoted to the effects in terms of instantaneous wealth distribution. In this paper, the instantaneous non-human wealth distribution that characterizes the steady state equilibrium of a Perpetual Youth model is assessed and, for this scope, a Generalized Lorenz Curve of wealth distribution at the steady state equilibrium is derived. I find that: i) an increase in interest rates increases financial wealth concentration; ii) economies with a higher population turnover rates exhibit lower financial wealth concentration.

Equities, liquidity and consumption: does the stock market matter?

A relatively strong performance of the North American stock markets during the last two decades, notwithstanding the sharp decline experienced in the year 2000 and beyond, has set the stage for an empirical investigation of the possible effects that stock wealth, among other variables, can have on the consumption patterns of Canada and the United States. We employ quarterly data to test for the wealth effect hypothesis using the stock wealth variable. Our comprehensive theoretical model is based on the life cycle consumption function and includes both human and nonhuman wealth. Based on the dynamic Ordinary Least Squares (OLS) method employed, we confirm that part of the increase in aggregate consumption in our sample countries is explained by the stock wealth variable, thus providing further support to the wealth effect hypothesis.

The Economic Progress of American Jewry: From 18th Century Merchants to 21st Century Professionals

This paper tracks the economic status of American Jewry over the past three centuries. It relies on qualitative material in the early period and quantitative data since 1890. The primary focus is on the occupational status of Jewish men and women, compared to non-Jews, with additional analyses of earnings, self-employment, and wealth. The Jews in Colonial America, many of Sephardic origin, disproportionately lived in the east coast seaports and were engaged in international trade and finance. The mid-19th century German Jewish immigrants settled throughout the country; often beginning as itinerant peddlers, they advanced to small businesses, and some to not so small businesses in the retail trade. The Yiddish-speaking Eastern European and Russian Jewish immigrants, who arrived primarily in the four decades starting in 1881, are the ancestors of most contemporary American Jews. Starting in operative, craft and laborer jobs in small scale manufacturing or in retail trade in the northern and midwestern industrial cities, they experienced rapid economic advancement. Over the course of the 20th century their descendants achieved very impressive improvements in earnings and occupational status, attaining significantly higher levels than those of the non-Jewish white population. By the year 2000, 53 percent of Jewish men compared to 20 percent of white non-Jewish men were in professional occupations. Among working women in 2000, 51 percent of the Jewish women and 28 percent of non-Jewish white women were in professional jobs. Differences by gender were smaller than differences by religion. Other determinants of earnings the same, including schooling, American Jewish men earned about 16 percent more than other white men, an advantage that is about 8 percent when major occupational group is also held constant. American Jews, from the earliest period to the present, have had high rates of self-employment compared to the non-farm white population of the United States. The nature of this self-employment has changed over time, and currently includes many self-employed professionals. The high level of human wealth of contemporary American Jews is not at the expense of non-human wealth. Overall, and even when other variables including schooling are held constant, Jews have higher levels of wealth and higher rates of wealth accumulation than other religious groups. In summary, over the 350 years since the first Jews settled in what is now the United States, American Jews have consistently demonstrated a very high level of economic achievement.

Understanding Tourist Beaches as Eco-Social Landscapes: Seeking Sustainability through Integration of Human and Non-Human Wealth Production

Introduction Now coral reefs are not merely pretty, of much greater consequence is their vital importance of protecting our shores, this may not be generally realised. We had a nice example of this in Barbados recently when a certain hotel, in order to improve its beach facilities, bulldozed a certain piece of inshore reef to make a “white hole” for bathing. Although the area removed was perhaps only 20 x 30 yards, the consequent change in wave action resulted not only in the removal of the s...

Equilibrium portfolios in the neoclassical growth model

This paper studies equilibrium portfolios in the standard neoclassical growth model under uncertainty with heterogeneous agents and dynamically complete markets. Preferences are purposely restricted to be quasi-homothetic. The main source of heterogeneity across agents is due to different endowments of shares of the representative firm at date 0. Fixing portfolios is the optimal equilibrium strategy in stationary endowment economies with dynamically complete markets. However, when the environment displays changing degrees of heterogeneity across agents, the trading strategy of fixed portfolios cannot be optimal in equilibrium. Very importantly, our framework can generate changing heterogeneity if and only if either minimum consumption requirements are not zero or labor income is not zero and the value of human and non-human wealth are linearly independent.

Sequential Optimization, Front-Loaded Information, and U.S. Consumption

In an overlapping generations maximization framework with consumers, whose information on uncertain future income realizations is front-loaded, a closed form aggregate consumption function with CRRA preferences is derived. To have a closed form solution we assume that consumers solve their intertemporal optimization problem sequentially. First they assess risk-adjusted life-time wealth and then the optimal consumption path. The derived model captures precautionary saving, which is dependent on the human to non-human wealth ratio. On aggregate level, after accounting for habit formation, the model is able to explain both the short-run (e.g. the excess sensitivity and the excess smoothness puzzle) and long-run stylized facts of the U.S. consumption data.

The dynamics of aggregate UK consumers' non-durable expenditure

The short-run dynamics and long-run relationship of and between non-durable consumption, non-asset income, wealth and the relative price of durable goods are examined. From the intertemporal budget constraint, non-durable consumption expenditure cointegrates with income and wealth and with the relative price of durables and non-durables. The resulting equilibrium correction need not be through consumption. It is found that much of the adjustment towards the long-run common trend comes from changes in wealth. One possible implication is that the consumption cointegrating residual may predict asset returns, and this is the case. At least 30% of fluctuations in non-human wealth are transitory, decoupled from permanent consumption.

Empirical proxies for the consumption–wealth ratio

Using a log-linearized approximation to an aggregate budget constraint, it is possible to show that the ratio of consumption to total (human and non-human) wealth summarizes agents' expectations concerning both future labor income and future asset returns. In a series of recent papers, Lettau and Ludvigson construct an empirical analogue to the consumption–wealth ratio by approximating total wealth with a linear combination of labor income and observable non-human wealth. If valid, this framework suggests that consumption, assets, and labor income will be cointegrated. We demonstrate, however, that standard tests fail to reject the hypothesis of no cointegration once one employs measures of consumption, assets, and labor income that are jointly consistent with an underlying budget constraint. We also show that deviations of consumption, assets, and income from an estimated common trend are unable to predict future excess returns on stocks out of sample once theoretically consistent measures are used.

The incidence of a tax on pure rent in a small open economy

This paper analyzes the effects of a land rent tax on capital formation and foreign investment in a life-cycle small open economy with endogenous labor-leisure choices. The consequences of land taxation critically depend on how the tax proceeds are used by the government. A land tax depresses capital formation, crowds out foreign investment and increases national wealth and consumption when the land tax revenues are distributed as lump-sum payments. If the proceeds from land taxation are used to finance unproductive government expenditure, the land tax will be neutral in its effects on the capital stock, nonhuman wealth and labor. When the tax revenues are used to reduce labor taxes, the land rent tax spurs nonhuman wealth accumulation and ambiguously affects the capital stock and labor.

The Dynamics of Consumers' Expenditure: The UK Consumption ECM Redux

Simple intertemporal consumption theory implies that non-durable consumption is a random walk, but that consumption cointegrates with income and wealth. By the Granger representation theorem, there must be a (vector) error correction mechanism ((V)ECM) representation of the data; but from the theory, the equilibrating ECM cannot be in consumption. Instead, even with generalisations such as habit persistence, this equilibration should take place via income or wealth. Furthermore, unless the relative price of durables and non-durables is constant, the relative price needs to be taken into account in modelling. In this paper, the short-run dynamics and long-run relationship between non-durable consumption, non-asset income, wealth and the relative price of durable goods are examined. A cointegrating relationship is found to exist. Estimating VECMs, it is found that the adjustment towards the long-run common trend does indeed occur partly via changes in wealth, consistent with forward-looking behaviour on the part of agents. The result implies that consumption will predict asset returns, and this is confirmed by a regression of excess equity returns on the lagged disequilibrium term. A decomposition of shocks hitting the system reveals that between 30% and 90% of fluctuations in non-human wealth are transitory. Even if the lower figure applies, this means a substantial part of short-term fluctuations in wealth is decoupled from permanent consumption.

Evaluating Threshold Effects in Consumer Sentiment

1. IntroductionThe Consumer Sentiment Index published by the University of Michigan (hereafter the UM index) is one of the two most commonly monitored measures of consumer sentiment in the United States (the other one being the Consumer Confidence Index issued by the Conference Board). Sentiment indexes, which are constructed from answers to survey questions, are popular with the media; newspaper articles and commentaries abound following their release. The analysis often confers a primary role to consumer sentiment in determining economic fluctuations. The view among economists, however, is more equivocal. As early as 1965, Adams and Green found that the information contained in the UM index encompasses the information included in standard government statistics on employment and financial conditions. Many economists think that consumer sentiment is endogenous and is a reflection of current macroeconomic conditions. Other economists, in line with Keynes' notion of animals spirits, argue that psychological factors, which are not captured by economic variables, can influence consumers' decisions. Thus, the willingness to consume may be an important factor affecting consumption.Few studies have found that sentiment indexes have significant explanatory power once fundamental economic factors are taken into account. Garner (1991) and Throop (1992), however, performed event studies and suggested that these indexes could be helpful during major economic or political events, as they then tend to diverge from a path consistent with other macroeconomic variables. Drawing on this literature, our study provides a new evaluation of consumer sentiment as a predictor of aggregate consumer spending.Periods of high economic or political uncertainty are usually associated with increased volatility of consumer sentiment, suggesting that large swings in sentiment could influence consumption. We provide a formal assessment of this possibility by estimating a consumption function in which only large variations of sentiment affect spending. We find that consumer sentiment is a statistically important determinant of consumption in periods of high uncertainty, even after controlling for other determinants of consumption.This article is organized as follows. Section 2 describes two views of consumer behavior. Section 3 reviews the relevant empirical literature. Section 4 introduces our econometric model, data, and estimation methods. Section 5 summarizes the estimation and forecasting results. Section 6 evaluates the predictive power of the UM index within the Campbell-Mankiw (Campbell and Mankiw 1990) framework. Section 7 concludes.2. TheoryThis section briefly reviews the theory of consumer behavior and discusses possible links to consumer sentiment. The permanent income hypothesis (PIH) states that consumers' expenditures depend on their permanent income. Permanent income is defined as the present value of wealth, (Formula Omitted. See article image.) where At is the real value of the individual's nonhuman wealth at the beginning of period t; β is the discount factor; YLt is real disposable labor income; and Et is the expectation operator conditional on information available to the individual at time t.Campbell and Mankiw (1990) test Hall's (1978) random walk hypothesis by separating consumers into two groups. A proportion of households, λ (rule-of-thumbers), simply set consumption equal to income in each period, while a fraction (1 - λ) (life-cyclers) behave according to the PIH. In this framework, the only reason any lagged variable could have predictive power for current consumption growth is because that variable has predictive power for current income growth, and the λ consumers do not spend that income until it arrives. In that context, the usefulness of consumer sentiment should come from the fact that it captures information about expected future income. …

Taxing Land Rent in an Open Economy

This paper analyzes the effects of a land rent tax on capital formation and foreign investment in a life-cycle small open economy with endogenous labor-leisure choices. Differently from the previous literature, the consequences of land taxation critically depend on how the tax proceeds are used by the government. A land tax depresses capital formation, crowds out foreign investment and pulls up national wealth and consumption when consumers are lump-sum compensated for the tax. If the proceeds from taxation were used for financing un-productive government expenditure, land taxation would be neutral in its effects on capital stock, nonhuman wealth and labor. When the tax proceeds are used to reduce labor taxes, the land tax exerts ambiguous effects on capital stock and manhours, and spurs nonhuman wealth accumulation.

John Stuart Mill's Theories of Wealth and Income Distribution

Although he was much influenced by David Ricardo when he wrote the classical part of his Principles , John Stuart Mill was not a Ricardian when he penned his theories of wealth and distribution. They are based on a triple foundation. First, a belief that economics is a moral discipline. Second a theory of custom-driven human behavior. Third, an empirically formed conviction that the institutions of state, education and business cooperate to structure the distribution of income. On the basis of these presuppositions, Mill formulated 1) an institutional theory of the formation of human and non-human wealth and 2) an even more institutional theory of distribution demonstrating how the aforementioned institutions malignantly skew the distribution of income to the advantage of the propertied classes and to the extreme disadvantage of the working class. As a social economist, Mill recommended institutional reforms designed to eradicate the poverty of the working class.

John Stuart Mill's Theories of Wealth and Income Distribution

Although he was much influenced by David Ricardo when he wrote the classical part of his Principles , John Stuart Mill was not a Ricardian when he penned his theories of wealth and distribution. They are based on a triple foundation. First, a belief that economics is a moral discipline. Second a theory of custom-driven human behavior. Third, an empirically formed conviction that the institutions of state, education and business cooperate to structure the distribution of income. On the basis of these presuppositions, Mill formulated 1) an institutional theory of the formation of human and non-human wealth and 2) an even more institutional theory of distribution demonstrating how the aforementioned institutions malignantly skew the distribution of income to the advantage of the propertied classes and to the extreme disadvantage of the working class. As a social economist, Mill recommended institutional reforms designed to eradicate the poverty of the working class.

Consumption, Aggregate Wealth and Expected Stock Returns

This paper studies the role of detrended wealth in predicting stock returns. We call a transitory movement in wealth one that produces a deviation from its shared trend with consumption and labor income. Using U.S. quarterly stock market data, we find that these trend deviations in wealth are strong predictors of both real stock returns and excess returns over a Treasury bill rate. We also find that this variable is a better forecaster of future returns at short and intermediate horizons than is the dividend yield, the earnings yield, the dividend payout ratio, and several other popular forecasting variables. Why should wealth, detrended in this way, forecast asset returns? We show that a wide class of optimal models of consumer behavior imply that the log consumption-aggregate (human and nonhuman) wealth ratio forecasts the expected return on aggregate wealth, or the market portfolio. Although this ratio is not observable, we demonstrate that its important predictive components may be expressed in terms of observable variables, namely in terms of consumption, nonhuman wealth, and labor income. The framework implies that these variables are cointegrated, and that deviations from this shared trend summarize agents' expectations of future returns on the market portfolio.

ASSET PRICING WITH BORROWING CONSTRAINTS AND EX ANTE HETEROGENEITY

In answer to the question “Will borrowing constraints necessarily intensify aggregate fluctuations and aggregate cyclical variability?” it has been found that complete markets equilibrium displays aggregate fluctuations that may be dampened when borrowing constraints are introduced. Like others, I find that variability in the distribution of labor productivity shocks amplifies aggregate fluctuations. I also find that allowing agents to have different permanent incomes amplifies aggregate fluctuations, enriching the asset-pricing implications of the complete contingent claims model when demand aggregation is not possible. Although agents are able to equalize their intertemporal marginal rates of substitution (IMRS) of consumption state-by-state, the IMRS of labor is not equalized across agents, creating gains from specialization. To determine how frictions affect aggregate variability, two types of borrowing constraints are studied. In the first model, dividend payments are restricted and, in the second, nonhuman wealth is restricted to be positive. Either type of borrowing constraint can dampen aggregate fluctuations.