Laurence Kotlikoff
INEQUALITY – MEASURING THE
FUNDAMENTALS
Festival of Economics 2017
June 1- June 4
Inequality
– Measuring The Fundamentals
Laurence Kotlikoff
Professor of Economics, Boston University
President, Economic Security Planning, Inc.
Trento Festival, June 2017
Economics’ Bottom Lines
• Inequality Is About Differences in Expected Lifetime Utility
• Utility Depends on Consumption and Leisure
• Leisure Is Hard To Measure
• Focus On Consumption (Including Healthcare)
• Expected Lifetime Utility Depends On Risk
Two Fundamental Types of Inequality
Intergenerational Inequality
– Compares Lifetime Spending and Net Taxation Across Generations
– Comprises Fiscal Gap, Generational Accounting, and Dynamic OLG CGE Simulations
– Relatively Well Researched, Huge Intergenerational Injustice In Many Countries
– Needs to Incorporate Production/Transmission of Risk, e.g., Nuclear Proliferation and Climate Change
– Capacity to Simulate Intergenerational Inequality Is Advancing Rapidly
Intragenerational Inequality
– Compares Remaining Lifetime Spending and Net Taxation Within Cohorts
– Intergenerational Accounting Is In Its Infancy
– Auerbach, Kotlikoff, Koehler (2016), “U.S. Inequality, Fiscal Progressivity, and Work
Disincentives,” Kotlikoff.net Is First Intragenerational Accounting Study
Conventional Inequality Analysis
Confusing Inter- and Intragenerational Inequality
Static, Treats Households As If They Will Die Next Year
Compares Current Income or Wealth Across People of All Ages
Ignores Fiscal Redistribution
Example – Piketty’s Analysis of Wealth Inequality
Focus Today
Measuring Intragenerational Inequality
also called
Intragenerational Accounting
Intragenerational Accounting
Works Off Lifetime Budget Constraint C = R – T
R=H+W
R -- Remaining Lifetime Resources
H -- Human Wealth
W -- Non-Human Wealth
T -- Remaining Lifetime Net Taxes (Includes Government-Provided Healthcare)
C -- Remaining Lifetime Consumption
Intragenerational Inequality Is About Inequality In C, Not Inequality in H, W, or T Per Se
Inequality In W or H Can Be Huge, But Inequality In C Can Be Small If T Offsets Inequality In R
Inequality In U.S. Remaining Lifetime Spending
Versus Inequality In U.S. Wealth 40 Year Olds, 2013
Net Wealth and Lifetime Spending by Resource Percentile Range
Ages 40 - 49
69,3%
51,0%
41,4%
25,9%
14,0%
2,5%
6,3%
Lowest
9,2%
15,6%
19,5%
19,0%
11,5%
8,7%
3,9%
Second
Third
Share of Net Wealth
Fourth
Highest
Top 5%
Share of Lifetime Spending
Top 1%
U.S. Fiscal Progressivity, Average Remaining Lifetime
Net Tax Rates, 40 Year Olds, 2013
Average Lifetime and Current Year Net Tax Rates by Percentile Range
Ages 40 - 49
30,6%
26,6%
20,4%
12,1%
37,0%
28,2%
39,0%
30,7%
39,7%
33,9%
18,8%
4,3%
-22,8%
-52,7%
Lowest
Second
Third
Average Lifetime Net Tax Rate
Fourth
Highest
Top 5%
Top 1%
Average Current Year Net Tax Rate
A Closer Look At Inequality
Share of Wealth, Lifetime Labor Income, Lifetime Transfers, and
Lifetime Taxes by Resource Percentile Range, Ages 40 - 49
80,0%
70,0%
60,0%
50,0%
40,0%
30,0%
20,0%
10,0%
0,0%
Lowest
Second
Third
Fourth
Highest
Top 5%
Share of Net Wealth
Share of Lifetime Income
Share of Lifetime Transfer Payments
Share of Lifetime Taxes
Top 1%
A Different Look At Progressivity
and Work Disincentives
Median Marginal Lifetime and Current Year Net Tax Rates by
Percentile Range, Ages 40 - 49
42,9%
37,4% 35,4%
34,8% 33,7%
36,7% 35,3%
Lowest
Second
Third
44,8%
40,1%
Fourth
50,7%
47,2%
38,9%
Highest
Median Marginal Lifetime Net Tax Rate
Median Marginal Current Year Net Tax Rate
41,3%
Top 5%
43,6%
Top 1%
U.S. Remaining Lifetime Spending and U.S. Wealth Inequality
20 Year Olds, 2013
Net Wealth and Lifetime Spending by Resource Percentile Range
Ages 20 - 29
61,2%
44,7%
40,9%
31,6%
22,0%
5,6%
11,5%
9,3%
Lowest
13,1%
16,4%
16,8%
15,9%
5,5%
4,2%
Second
Third
Share of Net Wealth
Fourth
Highest
Top 5%
Share of Lifetime Spending
Top 1%
U.S. Remaining Lifetime Spending and U.S. Wealth Inequality
60 Year Olds, 2013
Net Wealth and Lifetime Spending by Resource Percentile Range
Ages 60 - 69
75,3%
57,0%
48,9%
32,5%
25,0%
6,0%
1,3%
Lowest
8,3%
3,7%
Second
11,1%
13,6%
17,7%
15,9%
6,0%
Third
Share of Net Wealth
Fourth
Highest
Top 5%
Share of Lifetime Spending
Top 1%
Misclassification Based on Current-Year Income
Share In Each Current Income Percentile
Lifetime Resource
Percentile
Lowest
Second
Third
Fourth
Highest
Top 5%
Top 1%
Lowest
82.2%
13.9%
1.1%
2.8%
0.0%
0.0%
0.0%
Second
15.4%
62.6%
18.7%
2.2%
1.1%
0.0%
0.0%
Third
0.6%
21.9%
57.3%
16.3%
3.9%
0.0%
0.0%
Fourth
0.0%
1.7%
21.5%
67.2%
9.0%
0.6%
0.0%
Highest
0.3%
0.3%
1.6%
7.6%
90.1%
46.2%
20.1%
Top 5%
0.0%
0.7%
0.0%
0.0%
99.3%
89.0%
43.2%
Top 1%
0.0%
0.0%
0.0%
0.0%
100.0%
100.0%
92.1%
* Highest percentage in each row is green.
What Projected Spending Misses
Risk
Example
If the U.S. Eliminates Health Insurance For 23 Million People As
Trump Proposes, 23 Million More People Will Face Lives of
Incredible Financial and Health Risk.
Computer Simulation Needed To Measure This Loss in
Expected Utility
So As With Intragenerational Accountingm the Path Ahead for
Intergenerational Accounting Is Analyzing Expected Utility
Differences Within Detailed, Large Scaled OLG RBC CGE models