Aggregate Tobin's Q and Inequality: The Role of Capital Taxation and Rents
(with Lidia Brun, ECARES-ULB)
(An earlier version of this paper circulated under the title "Tobin's Q and Inequality")
Slides (presentation at Bank of England. Oct 4, 2017)
Abstract: Since the early 1980s, aggregate equity Tobin's Q has experienced a secular increase in the US, as equity wealth and corporate physical capital have followed divergent trajectories. During the same period, labor productivity and wages have significantly decoupled, leading to a decline in the U.S. corporate labor share. We build an incomplete markets model with heterogeneous agents (in the Bewley-Hugget-Aiyagari tradition) with financial assets, capital taxation and monopoly rents that explains the connection between these phenomena. Our model is consistent with several stylized facts of the U.S. economy since 1980. The joint evolution of capital taxation and the rise of monopoly rents explain the decrease in investment flows and the observed rise in asset prices. Wage-productivity decoupling is the natural response not only to the rise of rents, but also to investment sluggishness when capital and labor are complements. Our model also explains the historical upsurge of equity returns. By explicitly modelling the interaction between monopoly rents and different capital taxes, our framework sheds new light on the recent debate on capital taxation in the U.S. and elsewhere. We show that the secular increase in the relative value of financial wealth had strong effects in general equilibrium, rendering a more unequal market allocation of income. These secular trends in taxes and market structure have reduced welfare. This is because the increase of financial wealth, which is mostly experienced by the richest households, has occurred at the expense of corporate investment and labor earnings, which are the main source of income for a large portion of the population.
The Global Rise of Asset Prices and the Decline of the Labor Share (with Pedro Trivín, UAB)
PDF (new version!)
Slides (presentation at Bank of Spain. April 11, 2018)
The labor income share has been decreasing across countries since the early 1980s, sparking a growing literature about the causes of this trend (Elsby et al., 2013; Karabarbounis and Neiman, 2014; Piketty and Zucman, 2014; among many others). At the same time, again since the early 1980s, there has been a global steady increase in equity Tobin’s Q. This paper uses a simple model to connect these two phenomena and evaluates its empirical validation. In our model a raise in equity Tobin’s Q increases equity returns and, importantly, reduces corporate investment. The impact on the capital-output ratio reduces the labor share for standard values of the elasticity of substitution. Based on a common factor model, we find that the increase in Tobin’s Q explains almost 60% of the total decline in the labor income share. We highlight three different factors that operate through the same theoretical channel, namely capital income taxes, monopoly mark-ups and corporate short-termism, and we find empirical evidence for all of them, not only for the rise of monopoly power (which has been the focus of recent literature). We also find that the impact of the relative prices of capital goods on the labor share is not significant. Finally, we use the model to suggest different policies that can revert this declining trend.
Work in progress
Debt Deleveraging, Default and Credit Rationing (with Arnau Valladares-Esteban, USouthampton)
(draft coming soon)
Abstract: We model an heterogenous-agents economy with financial intermediation where a single negative shock to the borrowing capacity of households induces a simultaneous fall of the demand and supply of credit. As in Lorenzoni and Guerrieri (2011), the unexpected shock forces constrained consumers to deleverage whereas unconstrained consumers increase their precautionary savings, depressing the aggregate demand of credit and the savings interest rate. In our model, some consumers decide to deleverage by defaulting on their debt, transferring the debt burden to the financial intermediary. If the wave of defaults is sufficiently large, the financial intermediary becomes capital constrained and is forced to rise the credit spreads and to cut the supply of credit. The resulting credit rationing prevents firms from increasing the labor demand. The result is a single-shock crisis episode driven simultaneously by the shortage of demand and supply of credit. We argue that this is the kind of credit crisis that, in the aftermath of the financial crisis, countries like the U.S. or Spain have suffered.
Imperfection Competition, Secular Stagnation and Asset Prices (with Gabe Mathy, AU)
(draft with preliminary results available on request)
Abstract: Secular stagnation is a term coined to describe the last 30-year period of lower economic growth and declining interests rates. Among the potential causes of secular stagnation, the rise of monopoly rents has gained increasing attention in the current policy debates (Furman and Orszag, 2015; Summers, 2016; CEA, 2016). We build a growth model with a corporate sector and imperfect competition and we show that the rise of monopoly power in the labor and the goods market is indeed consistent with phenomena that have characterized the post-1980 U.S. economy, namely, the rise of asset prices and corporate prots, the slowdown of output and investment, the stagnation of wages and the decline of the labor share. All of this, along with empirical indicators of increases in monopoly power, might be taken as evidence that increasing market power is a central argument to explain the evolution of the U.S. economy during the last three decades.