Econ 133 Global Inequality and Growth. What is Income? Gabriel Zucman

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1 Econ 133 Global Inequality and Growth What is Income? 1

2 Roadmap 1. Income = domestic output + net foreign 2. Income = labor + capital 3. Functional vs. personal distribution 4. Factor vs. pre-tax vs. disposable - 2 -

3 1 Income = domestic output + net foreign National Y of a country = net domestic output Y d + net foreign At world level: Y = Y d 1.1 Net domestic output Y d Net domestic output Y d = F (K, L) Net domestic output Y d = GDP minus capital depreciation - 3 -

4 GDP = gross domestic product = economy-wide value-added = the value of all goods and services sold to final users = C + I Depreciation: loss in the value of capital due to passing of time Depreciation is 10-15% of GDP 2-3% of capital stock K Depreciation varies with asset mix (buildings vs. software) Depreciation varies with geography harder to accumulate K in humid countries, exposed to cyclones. See Hsiang and Jina (2015) - 4 -

5 1.2 Net foreign Net foreign = net foreign labor + net foreign capital Net foreign labor : wages of cross-border workers. Typically negligible (except in tiny countries like Luxembourg) Net foreign capital : dividends, interest, rents generated by cross-border assets. Can be large (and either > 0 or < 0) - 5 -

6 Net foreign / national -6% -4% -2% 0% 2% 4% 6% JPN USA CHN CAN AUS Year Data source: World Bank's World Development Indicators

7 Net foreign / national -20% 0% 20% 40% KWT CHE GAB IRL Year Data source: World Bank's World Development Indicators

8 1.3 What determines net foreign? Net foreign capital = F A r A F L r L FA FL = foreign assets minus foreign liabilities = net foreign asset position (NFA) FA, FL: depends on stage of development; demography; home bias; financial account policies r A, r L : depends on composition of external assets; exorbitant privilege; tax avoidance. See Gourinchas and Rey (2007) - 8 -

9 2 Income = labor + capital Y = F (K, L) + net foreign = Y K + Y L Y K = capital (domestic + foreign) = corporate profits + rents + interest + K component of mixed Y L = labor (domestic + foreign) = wages + supplements to wages + labor component of mixed α = Y K /Y = share of capital in national 25-30% 1 α = Y L /Y = share of labor in national 70-75% - 9 -

10 Capital shares in factor-price national % 35% 30% 25% 20% 15% USA Japan Germany France UK Canada Australia Italy 10% Source: Piketty and Zucman (2014)

11 3 Functional vs. personal distribution Functional distribution: distribution of Y = Y K + Y L across factors of production K and L What classical economists were mostly interested in Lecture 6 Personal distribution: distribution of Y = i y i across individuals i What today s economists are mostly interested in Lecture 7, and parts II and III

12 Both are related, since y i depends on: Distribution of y Li across individuals i (part II) Distribution of y Ki across individuals i (part III) Relative size of Y K = i y Ki and Y L = i y Li (Lecture 6) Correlation between y Li and y Ki (part III)

13 4 Factor, pre-tax, disposable So far we abstracted from the intervention of the government in the economy If no gov., personal y i = y Ki + y Li = that derives from the ownership of factors of production = factor With government intervention, the actual that people can spend or save can be different from y Ki + y Li Two types of government intervention affect : social insurance and redistributive taxation

14 4.1 Pre-tax Pre-tax = after social insurance but before redistributive taxation Main form of social insurance = retirement Other form of social insurance: unemployment insurance If pay-as-you-go pensions, then on aggregate pre-tax = factor But very different at individual level (think about retirees)

15 Table A7: Personal pre-tax (narrow definition) billion current $ % of personal pre-tax (narrow definition) Personal pre-tax (narrow) Personal pre-tax / personal factor Equals: Personal factor Minus: pension contributions (SS + DC + DB + IRA) Minus: investment payable to DB + DC + IRA pensions Plus: Pension distributions (SS + DC + DB + IRA) Personal pre-tax (narrow) Personal pre-tax labor Personal pre-tax capital ,026 92% 13,134 1,378 1,114 1, % 71% 29% ,694 92% 13,744 1,345 1,154 1, % 71% 29% ,508 93% 14,532 1,379 1,195 1, % 70% 30% ,774 93% 14,855 1,509 1,217 1, % 71% 29% Source: Piketty, Saez and Zucman (2016)

16 4.2 Disposable Disposable = after all taxes have been paid and all benefits have been received = people can consume or save Disposable cash : includes monetary transfers only Augmented disposable : includes in-kind transfers (health, education) Full disposable : includes monetary value of collective expenditure

17 Table A9: Personal disposable billion current $ % of national Disposable (cash ) Equals: Pretax (broad) Less: Taxes on production Less: Taxes on and wealth Plus: Social assistance benefits in cash Disposable (cash ) Disposable (cash + in-kind transfers) Disposable (cash + in-kind transfers + collective exp.) ,102 12, , % 87% 107% ,499 12,794 1,018 1, % 86% 105% ,038 13,588 1,049 1, % 86% 104% ,073 13,817 1,073 2, % 83% 101% Source: Piketty, Saez and Zucman (2016)

18 References Gourinchas, Pierre-Olivier, and Helene Rey, From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege, NBER, 2007 (web) Hsiang, Solomon M., and Amir S. Jina, Geography, Depreciation, and Growth, American Economic Review, 2015 (web) Karabarbounis, Lukas and Brent Neiman, The Global Decline of the Labor Share, Quarterly Journal of Economics, 2014 (web) Piketty, Thomas, and, Capital is back: wealth- ratios in rich countries , Quarterly Journal of Economics, 2014 (web) Piketty, Thomas, Emmanuel Saez, and, Distributional National Accounts: Methods and Estimates for the United States, working paper, 2016 (web)